Dear American Companies: Here's How to Fix the Economy

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Dear American Companies, Here's how to fix the economyBy Henry Blodget

In 1914, a business executive named Henry Ford did a startling thing: He announced that he was going to more than double the wages he was paying his employees, from $2.34 to $5 a day -- the equivalent of $120 a day in today's money.

The country was as shocked by this then as it would be today.

A powerful company voluntarily sharing some of its profits with its rank-and-file workers and paying them more than it absolutely had to? Had Henry Ford gone mad? Didn't he understand that the only goal of a business was to make money?

Didn't he realize that, as a successful business executive, he was entitled to make as much money as he could possibly make--the financial health of his employees being nobody's business but their own? Didn't he understand that smart executives pay their employees no more than "market rates" because the executive's job is to "create shareholder value," everyone in our economy gets what they deserve, and the financial well-being of employees is not something that business owners or bosses or shareholders should be concerned with?

Yes, Henry Ford understood all that.

The story you hear frequently about why Henry Ford made this decision was that he wanted to allow his workers to be able to afford to buy his cars. The wage increase certainly made the cars (and many other products) more affordable for Ford employees, but the historical consensus is that Ford actually made this decision for a different reason: To reduce employee turnover--and, in so doing, reduce recruiting and replacement cost.

Regardless, it worked.

Thousands of people immediately lined up to get jobs at Ford (F). Employee turnover plummeted, and recruiting and training costs dropped. The new wages allowed Ford employees to live middle-class lives, instead of being poor. And it presumably made Ford, Ford's senior executives, and Ford's shareholders even more proud of what they had created.

In short, instead of viewing "shareholders" and "customers" as the only two corporate constituencies that matter, Ford introduced the idea that great companies should also serve a third constituency: Employees.

And because one company's employees are another company's customers, Ford's decision helped spread the country's wealth to more citizens and expand the purchasing power of the country as a whole. And, in so doing, it helped the overall economy.

Specifically, Ford's unprecedented move also helped usher in an age in which the middle class became the driving force in the American economy, turbo-charging the nation's economic growth right up through the early 1980s, when relative middle class wages began to decline.

Henry Ford with a Model T automobileHenry Ford's story is highly relevant today.

Why? Because we are facing a very similar economic problem as the country did in the early 20th century. A glut of labor was allowing companies to pay a pittance for a day's work, leaving most of their dedicated employees destitute. Business owners and executives (the equivalent of today's 1%) did fine, but most rank-and-file workers did not. And this lack of spending power in the middle class crimped overall economic growth.

If we want to fix today's ailing U.S. economy, we need many of our large corporations to do what Henry Ford voluntarily did: Share more of their vast wealth with their rank-and-file employees.

If the companies don't eventually see the benefit of doing this and do it voluntarily, the government (an extension of the people) will likely the mandate that they do it--either through taxation or by radically increasing the national minimum wage.

And given that government solutions are often terrible solutions, it would be best for everyone if we persuaded corporations to do this voluntarily. So what follows is an initial effort to do that.

See the real problem with the economy, and how to fix it.

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Ben B. Rodríguez

My god, the economic fallacies in this (including the comments) are rampant. He paid his workers more to save money, just like you said. It wasn't to make them better off it was to cut costs. He was paying out more to train new workers than he would to just pay the current workers more. The reason the turn over was so high is because there were other companies in the area at the time competing for the workers. Competition among employers raises wages. The reason Ford was able to pay his workers more than everyone else is because of how efficient he made the company. Wages will tend toward the marginal productivity of the worker in a free market. It is not some magic thing that determines how much people make it is how productive they are. Why were they more productive, you ask? Capital. it is what makes labor productive.

And the whole he paid them more so they could buy his cars is such obvious bullshit. first there is the something for nothing problem with that. If the money from car sales is coming from the workers and the money from the car sales is going to the workers, you don't end up with anything but a guy that made himself a car. the second is the scale of it. Ford employed a few thousand workers, and sold a few million cars. Even if all of his employees bought a car from him it wouldn't make a rounding error in sales.

If you want people to get paid more you need more competition among employers, and more capital investment. The first comes from reducing regulations and making it easier for people to start companies and hire workers, the second comes from savings. Yes that is right savings it what increases the capital stock. Increased savings comes from reduced government spending and taxes.

November 26 2012 at 11:27 PM Report abuse rate up rate down Reply
fg325

I started a business in 1974 and the corporate tax rate was up to 75%. Personal tax rates could go as high as 90%. During President Obama's tenure so far--he has lowered tax rates for small businesses (up to 1500 employees in certain industries and 30+million in revenue) 18 times. Stop whining. You have never had it so good! In the mid seventies and eighties, it was impossible for a business to get a loan for a rate less than 17%, regardless of the amount and/or reason. We were successful and perhaps because we did not whine and complain--just worked and took care of business--our 60 employees enjoyed a good salary, benefits, education and training, and THEY were the reason the company grew! What has happened to the business community that thinks that after cost of doing business less deductions (tax code benefits), that if you are PAYING the 35% tax rate---GET ANOTHER ACCOUNTANT! After 38 years, we are strong as ever---because WE TAKE CARE OF OUR GREATEST ASSET---OUR EMPLOYEES!

September 08 2012 at 12:14 PM Report abuse rate up rate down Reply
TJ

I think the unions took care of this. While they take the employees money to feed the politicians that give them more power than the companies have. OK, just mad at the union that screwed my son so remark at me all you want. It happened and I don't care. If employers treated the employees better there would have not been a need for unions to begin and I know all about the history. Just some unions have made it impossible to run a company today even if there is NO profit they expect more and more. Wise up. Not every company can afford to give more when the government takes what little profits they make and the unions force them out of business by not treating their members as real people. Can't win unless they all wise up. America needs jobs. We can not compete against slave labor of communist countries.

September 07 2012 at 11:27 AM Report abuse -1 rate up rate down Reply
drlolipop2

The difference between the buffoons who are today's CEO's and the Henry Fords of the past is Henry Ford actually had intelligence and talent. Today's CEO's simply do not. Ebay's John Donahoe is just one of countless CEO's who I'm not even convinced has the skills to be an entry-level employee, let alone a CEO. Today's CEO's are grossly overcompensated and simply don't care enough to bother knowing anything about their company or their industry. It really is that simple.

September 07 2012 at 9:57 AM Report abuse +1 rate up rate down Reply
glecolli

And there it is! ...but, today's companies dont want to see it that way. That is not looking out for the their best interest. Days of companies working for the good of their country doesnt exist. It is all for one, and none for all.

September 05 2012 at 1:48 PM Report abuse +1 rate up rate down Reply
lcrowmagnum

silly, silly - just imagine if he raised it to $20/day - think of how well off the employees would have been, they would have been able to buy 3 cars, and therefore they could have given 2 cars away to the less fortunate, and others working for brutal capitalistic companies!!

September 05 2012 at 12:01 PM Report abuse -1 rate up rate down Reply
timothyjhunter

This may be possible if the government did not take so much of the profits away from these same companies you expect to bail out the economy; meanwhile the government continues to spend more than it takes in. If the government cant control spending, how are we the business owners expected to pay our employees more? Our company uses this same philosophy of Henry Ford, but each day it gets harder and harder to pay the additional taxes imposed because of the higher wages.

September 05 2012 at 11:08 AM Report abuse +2 rate up rate down Reply
Joe

The new pay rate was equivalent in today's $ to $120 a day? Let's see, $120/day x 5 days/week x 52 weeks = $31,200. That's not really "middle class" (as the article suggested) in today's $, is it? The average auto worker makes a LOT more than that today, in fact, more than twice as much, according to several sources I looked up. If you add in health insurance, pension, and similar benefits, it goes to about 4 times the new pay scale Ford paid (in today's $). What do you think the price of a car would be if the auto industry arbitrarily doubled their wages today "to help the economy"?

By the way, my wife and I are "doing our part" for the economy: We recently retired, so we created two new jobs when we vacated ours. We are spending and giving away our earned, saved retirement $ (no social security, yet), so we are directly "stimulating the economy" with $ we earned and saved. What are YOU doing?

September 05 2012 at 9:21 AM Report abuse +1 rate up rate down Reply
okrawimfry

Things were much different back then. Companies were not choked by regulation. Insurance benefits were not always offered. Unions were not formed yet. The problem with this article is, while Ford was an innovator, it wants to pull a whole different economic situation into this century.

September 05 2012 at 9:12 AM Report abuse rate up rate down Reply
jilloatmdr

Can thank good ol Wal-Mart for the pittance pay and lack of spending power to the middle class! Great company while Sam Walton was still alive, but now...most of their employees are still on some kind of government assistance while his widow and daughter shared the rank of richest women in the world!

September 05 2012 at 9:04 AM Report abuse rate up rate down Reply
1 reply to jilloatmdr's comment
fg325

I met Sam Walton in 1980 and was impressed by this man and his interaction with the employees in Opilika, AL store. This was while he was still on the "sell American made" products. I agree that the employees of Wal-Mart now are paid below living wages (for example: a relative has worked at Wal-Mart for 22 years and now makes $13/hr--with healthcare deductible at $1500.00). The people working at Wal-Mart live in fear of being fired or hours cut. They were told several years ago that longevity had no meaning to them--an employee working one year was as valuable to them as one who had worked at Wal-Mart for 20 years. So many of them cannot afford the healthcare for families and they qualify for SNAP and often Medicaid. What a disgusting company---and we are enablers! We want the lowest prices possible for everything and Wal-Mart steps up to the plate and provides what we ask for---and get---with a price to be paid by employees paid lower wages and living in fear of job loss!

September 08 2012 at 12:24 PM Report abuse rate up rate down Reply