Crazy Yet Immortal Economic Myths: Example #1

by Don Boudreaux on April 9, 2015

in History, Myths and Fallacies, Work

Here’s a letter to the Wall Street Journal:

To justify raising the minimum wage, Gary Jimenez alludes to the tale that in 1914 Henry Ford raised his workers’ pay to $5 per day so that he would earn more profits by dint of his workers spending their higher incomes on new Ford cars (Letters, April 9).  This tale is a myth.  Were Mr. Jimenez a better student of history he would know that Ford raised his workers’ pay in order to reduce worker turnover in his factories.

But even someone with zero knowledge of history should nevertheless, and immediately, understand that this tale makes no sense.  Jones does not become richer by gifting $X to Smith and Williams in the hope that Smith and Williams will soon return some portion of the $X to Jones.  Instead, Jones impoverishes himself by this tactic, especially if Smith and Williams will return to Jones some portion of the $X only on the condition that Jones then gives to each of them some good or service in exchange.

If Mr. Jimenez doubts the truth of this analysis, I invite him to start his own company – say, one that manufactures private jets – and pay his workers, from the receptionist up to the CEO, annual salaries that allow each of them to afford to buy a private jet.  If Mr. Jimenez’s economic theory is correct, he’ll prosper and I’ll send him a note of apology.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


At the risk of excessive repetition, it’s crucial to understand that in the Ford-pay-raise myth the higher wages are simply a gift from Henry Ford (or the Ford Motor Co.) to those people who were then fortunate enough to be his employees.  Putting aside the extraordinarily unlikely prospect that this gift-giving would have, by increasing Ford’s annual sales, enabled the Ford Motor Co. to cost-effectively scale up to capture significant economies of scale that were otherwise uncaputurable, there is no way, mathematically, for someone to profit financially by giving gifts to others in the hope that those others will send the gifted funds back to the original gift-giver.


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