The Ford “buy their own product” myth

Posted by Marc Hodak on May 27, 2014 under Economics, Innumeracy | 3 Comments to Read

Whenever minimum wages are being debated, as they are once again, we can count on someone bringing up the old story about Ford’s $5-a-day gambit.  It goes something like this:

Ford Motor founder Henry Ford revolutionized the industrial landscape when he doubled his employees’ wages to $5 per day in 1914. The pay increase allowed his workers to buy the Model T cars they assembled every day on the factory line.

Enabling workers to “buy their own product” supposedly enables the creation of a mass market, helping producers as well as consumers.  But is that true?  And is that how Ford benefited from his wage hike?  Let’s look at the math.

In 1914, when Ford Motors instituted the $5-a-day wage, the company had about 14,000 workers making $2.25 a day, for a total wage cost of about $32 million.  Ford was selling about 250,000 cars a year at about $500 per car.  That’s about $125 million in total revenue.  So, let’s say that ALL of the increase in wages–$2.75 per day per employee for all 14,000 employees–went toward the purchase of Ford cars.  (Why that would have been impossible is a story for another time.)  That would be sales of about 20,000 more cars (yes, more than one car per worker), yielding Ford about $10 million dollars more in revenue.  So, the “buy-their-own-product” folks are asserting that Ford benefited by doubling his labor costs in order to increase his sales by less than 7 percent.  For one year.


The buy-their-own-product rationale is as historically mistaken as it is economically ridiculous.  Ford’s stated intent in dramatically raising wages was to reduce the huge turnover his new assembly line process had created, and the high costs of dealing with that turnover.  In other words, it was a bold solution to a novel production problem.

Furthermore, far from expecting any major increase in sales (i.e., from his own workers), Ford counted on having his profits significantly reduced that year as a result of the wage increase.  In fact, he was gleefully counting on it.  Why would Ford want his profits hurt that year?  Because he was in the middle of an outrageous gambit to squeeze out his fellow investors (and new car competitors) John and Horace Dodge, and a ding to the company’s profits that year would hurt them much more than it would Ford himself.  Ford, in fact, expected to realize the benefits of lower turnover in later years once his volume was greatly expanded (which is what eventually happened).

The idea that increasing your employees’ wages to enable them to buy your product is one of those ditzy notions that requires math blinders to believe.  Yet the “buy their own product” argument will continue to be made because belief is more powerful than math.

What would Pythagoras say?

Posted by Marc Hodak on May 11, 2011 under Innumeracy | Read the First Comment

Greece is out of cash.  You would think that the land of Aristotle, Demosthenes and Euclid could do better than this:

Vassilis Theodorakopoulos, a 53-year old dental technician who works for the country’s main public health-care fund, said he was protesting a 20% cut in his salary, as well as a plan to expand the working week for public servants to 40 hours—in line with the private sector—from 37.5 currently.

“Personally, I don’t think there should be a difference between the public and private sector,” he said. “What we are fighting for is a reduction in private-sector working hours.”

He said he also objects to a plan by the government to eliminate free dental braces for children, his specialty, as part of its health-care reform.

That last part actually makes sense, at least in a world where one’s income is driven by politics.  If I were an economics professor employed by the state, I’m sure I could make an excellent case for spending big,big bucks to raise economic literacy, using quotes like the one above to support my case.

Unfortunately, you can’t spend money even on important things when you have no money left.  When that happens, then you see what is really important to those in power.

Congress will now engineer our automobiles, as well as decide which ones we can buy

Posted by Marc Hodak on March 2, 2010 under Innumeracy, Politics | Read the First Comment

The first premise of the story is ludicrous enough:  The Obama administration may require every new automobile sold in the United States to incorporate a brake override.

“We’re looking at it,” LaHood told the Senate Commerce Committee. “We think it is a good safety device.”

We?  You mean the auto designers and builders in the Department of Transportation,  that well-known bastion of quality manufacturing?  The agency that, according to Senator Rockefeller “would rather focus on floor mats than microchips because they understand floor mats?”  Those guys should be tasked with second-guessing Toyota’s engineers?  Please, please, please let me wager against any of them that the net effect of their interference on this will be a net loss of highway safety, with autos all over the nation’s highways suddenly stopping as drivers maneuver to momentarily avoid something with a van riding just a little too close behind them.

Senator Rockefeller, desperately seeking to destroy far more economic value than was created by his illustrious grandfather, began with the conclusion that every legislator draws:  “The U.S. government has to do a much better job of keeping the American people safe.”

Yes, the government of a nation that tolerates 35,000 auto deaths per year is gearing up its magnificent machinery to take on a problem that is alleged to have caused all of 5 deaths since 2007, and perhaps 52 deaths since 2000, with even that latter number being mere allegation provided by cowering agents whose funding depends on giving their congressional masters exactly what they want to hear.  That way, our legislators can studiously ignore the fact that in the trillions of miles driven per year, the average driver is far less likely to die in a Toyota than in most any vehicle made by the auto companies they directly oversee, makers of the most unsafe vehicles in the land, according to the government’s own crash testing.

And when you thought your “You can’t be serious!” clown nose couldn’t shine any brighter, the second premise of this story–that the government may restrict Japanese-made vehicles–turns it blinding red with this from Nebraska Senator Mike Johanns:

Read more of this article »

Innumeracy in two languages

Posted by Marc Hodak on February 5, 2010 under Innumeracy, Reporting on pay | Read the First Comment

It’s fairly well established that most journalists went into their profession precisely because they didn’t get along well with numbers.  They deal better with letters.  Except when those letters are numbers.  This morning’s Wall Street Journal has this at the top:

Punching the Clock on Super Bowl XLIV

The number of man hours an organization devotes to winning the Super Bowl is (M)–that’s one million in Roman numerals.  W1 and for updates.

Uh, M is one thousand in Roman numerals.  Remember those dates on movie copyrights, etc. with all those Ms?

Someone no doubt beat me to the punch because one of those updates on was to eliminate any mention of M as a million.

The real innumeracy, however, is failing to mention that it takes the same number of hours to lose a Super Bowl, and almost the same amount to not come close to reaching the Super Bowl.

How is this relevant to executive compensation?  Because you always hear about “paying for failure,” as if executives haven’t put in the work for a losing effort, as if it’s outrageous they got anything at all for competing and losing.  Granted “pay for failure” is often tagged to bonuses or equity grants when a company underperforms or fails, but that ignores the reality that (a) not every individual in a failed organization failed at their particular job, and therefore deserves no bonus, and (b) many of these “bonus” positions are like brush salesmen jobs, i.e., the bonuses are more like commissions, and even a poor brush salesman deserves a commission on what little he sells.