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Fording the Gorge Between Fiction and Fact

Here’s a letter to the Los Angeles Times:

Arguing that greater government “redistribution” of income will spark economic growth, Gloria Richards repeats the fable that Henry Ford more than doubled his workers’ pay to $5 per day so that “they themselves could afford to drive his automobiles” (Letters, Aug. 29).

Ford raised workers’ wages for two reasons, neither of which had anything to do with raising consumer demand for his automobiles.  The first reason was to reduce worker turnover.  In 1913, the year before the $5 wage was announced in January 1914, the average Ford employee quit after less than four months on the job.  A workforce so unstable and inexperienced prevented Ford’s factories from achieving peak efficiency.

Second, because the $5 wage was conditioned upon Ford’s workers learning English, as well as their steering clear of alcohol and gambling – conditions monitored by Ford executives visiting workers’ homes! – the higher wage was an incentive for workers to be more reliable and productive while on the job.

In short, Ford was something of an early supply-sider.  He understood (at least in 1914) that the key to economic growth is not in giving people stronger incentives to spend but, rather, in giving people stronger incentives to produce.

Donald J. Boudreaux

Tim Worstall recently had a very nice blog post on this matter.