Archives for posts with tag: Henry Ford

“America’s abundance was not created by public sacrifices to “the common good,” but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America’s industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance—and thus the whole country was moving forward and profiting, not suffering, every step of the way.”

Ayn Rand

OK, she borrowed this idea from Adam Smith, without mentioning him… let bygones be bygones…

A more interesting endeavor would be to learn something from all this.

‘Abundance was not created by public sacrifices’.
Makes a lot of sense. In a free market everybody gets what they are offered, ideally in close accord to what each of them had brought to the market.

‘Abundance was created by the productive genius of free people who pursued their own personal interest and the making of their own private fortunes’.
Now, whose ‘productive genius’ are we speaking about here?

About Ford’s, for instance, or about that of his workers?

At the time, workers could count on about $2.25 per day, for which they worked nine-hour shifts. It was pretty good money in those days, but the toll was too much for many to bear. Ford’s turnover rate was very high. In 1913, Ford hired more than 52,000 men to keep a workforce of only 14,000. New workers required a costly break-in period, making matters worse for the company. Also, some men simply walked away from the line to quit and look for a job elsewhere. Then the line stopped and production of cars halted. The increased cost and delayed production kept Ford from selling his cars at the low price he wanted. Drastic measures were necessary if he was to keep up this production.

Tim Worstall, Forbes Magazine

Anyway you look at it, both Ford and his workers were acting as ‘rational economic agents’. Ford was paying them the going rates in the industry and they were putting in as little effort as they could afford to.

That went on until Ford came up with a ‘new idea’. “It can indeed be cheaper to pay workers more but to reduce the turnover of them and those associated training costs.” “The point is not so as to be paying a “decent wage” or anything of that sort: it is to be paying a higher wage than other employers. That gets your workforce thinking they’ve got a good deal (for the clear reason that they have got a good deal) and if the workers think they’ve got a good deal then they’re more likely to turn up on time, sober, and work diligently.”

Again, a very reasonable attitude displayed by both parties.
An attitude made possible by the fact that both the car and workforce markets were free.
Ford could hire anybody/sell his cars to whomever had enough money to buy them while his workers were free to leave their previous workplaces and accept Ford’s offer. Or leave him if they found a better one.

And let’s not forget the fact that Ford was not alone, at that time. At the turn of the XX-th century there were hundreds of automobile producers in the US alone and this was one of the reasons for which the workers could afford to be so ‘picky’ – specially those who had some experience.

In this situation – where the market was really free, each party taking good care of their own interest yielded excellent results.
Ford had became one of the leading car manufacturing corporations.
The diligent workers continuously improved their living standards.
The society, as a whole, prospered. And learned, or should have had, the long term benefits of commitment and mutual respect.

What happened after the market was no longer free?

Meaning that instead of hundreds of car manufacturers competing for the best available workers we had for a considerable number of years only three corporations more interested in short term profiteering rather than improving their products?
And instead of diligent workers striving to improve their skills we had union members more interested in their week-end barbecues?

“The U.S. government bailout of the auto industry lasted from January 2009 to December 2013. The Big Three automakers approached Congress in November 2008. They warned that, without the bailout, GM and Chrysler faced bankruptcy and the loss of one million jobs. Ford didn’t need the funds, since it had already cut costs. But it asked to be included so it wouldn’t suffer by competing with subsidized companies.

The Treasury Department invested $80.7 billion from the $700 billion authorized by EESA. It recouped all but $10.2 billion…”

Kimberly Amadeo, thebalance.com

Some of you might tell me that the Japanese car manufacturers operate along more or less the same guide-lines. ‘Cradle to grave’ employment for the workers, a rather opaque management never held accountable until too late…
A very correct observation.
Only there is a huge difference between the Japanese work-ethos and ‘the American Dream’. The Japanese have a long history of being told to ‘fit in’ while most Americans have gradually convinced themselves that ‘getting rich’ is the only possible solution for all their problems…

Considering that both Japan and America seem to have reached two different cul-de-sacs it wouldn’t be farfetched to suggest that both are doing something wrong.

For almost 30 years now Japan has been running in circles. She hasn’t completely lost her edge but hasn’t performed as it used to.
The most worrying indicator – for me, at least, being the fact that they have given up ‘making’ children. As if the present generation doesn’t have much hope for/expectations from the future.
For almost 30 years now the American people has allowed a huge trench to grow larger and larger in their mist. The haves on one side, the have-nots on the other and the rift so wide that they are no longer able hear each-other. A present day Henry Ford would have no idea about how much to pay his workers in order to obtain similar results to those achieved at the start of the XX-th century…

Is there a ‘common cause’ that might explain what’s going on on both sides of the Pacific?
How about both cultural and economic spaces experiencing a somewhat similar decrease in individual liberty, the phenomenon having rather different causes in each of the two cases?

First of all, ‘dedication to duty’ can take you only that far. It is very useful for those wishing to ‘close a gap’ but acts similarly to an ankle weight for those who are in the position to attempt to ‘take the lead’. ‘Dedication to duty’ focuses the attention of the team to ‘obeying the rules’ while ‘taking the lead’ means leaving the ‘straight and narrow’ and venturing into the unknown.
These two situations imply completely different mind frames.

Secondly, those who venture outside the ‘safety of the perimeter’ need to follow a simple rule.

“Leave no man behind”.

” “When you have a conscript army and you can always replenish it just by adding more people, you don’t really have to care about whether they’re happy with what they’re doing,” Springer said.

Now the military had to care about its soldiers as individuals, and the idea that it would never leave them behind became something of a familial bond.

“It’s kind of a contract with the service,” Springer said. “You promise to serve us, we promise not to leave you.” “

 

You see, time and time again history has hinted to us that freer societies fared better, ceteris paribus, compared to ‘tighter knit’ ones.
For example, subjected to the same communist knut, Poland came out differently than my native Romania.

And while most people agree about Poland being in a better shape than Romania, there is very little agreement about a possible explanation.
Just as most people agree about ‘liberty is good’ while each of those people derive different meanings from the very concept of freedom.

Since it is so hard to coordinate ourselves about the meaning of a ‘simple’ word, how about taking the liberty to ‘agree to disagree’ and turn our attention to another concept?

Mutual respect.

Just think about what liberty would mean without mutual respect.

Can you imagine the liberty of someone driving a M1 Abrams tank on a highway?
Can you imagine what would happen if the driver of the tank wouldn’t treat the others with utmost respect? What would happen if the outraged others would band together and wait for the ‘mad’ driver to burn through his last drop of fuel?

You see, people who have more respect for the rules than they have for each-other end up belonging to a society so tightly knit that it has immense troubles whenever it has to cope with unforeseen situations. Adapt to change.  Confront a catastrophe…
For example, the Soviet Union, Japan and the US have a considerable number of nuclear power plants and have experienced a number of failures. The tightly knit Soviet Union and Japan have displayed commendable individual acts of heroism in the aftermath of such incidents but it was the more individualistic US who has somehow ‘ducked’ any serious experience of this kind.

On the other hand, I see potential trouble when I hear people stating that “My right to swing my fist ends where your nose begins”.
On the face of it, this sounds perfectly reasonable.
Only the whole thing absolutely depends on both individuals involved in it having comparable reach. Do you really think that a guy with twice the ‘wing-span’ of his opponent would continue to stick to this rule if the by-standers would not band together to stuff it down his throat?

My point being that no ‘market’ is really free if its freedom relies primarily on a set of rules instead of depending on a healthy dose of sincerely upheld mutual respect among the participants to that market.
In this instance ‘free’ and ‘freedom’ are perfectly interchangeable with functional/sustainable.

The communist centrally planned economies had failed abysmally  simply because the powerfuls of the day had nothing but contempt for those under their rule.
Japan’s strict set of rules about what constitutes proper behavior in each situation seems to act as a brake whenever decisive action is needed.
America’s new mantra, ‘greed is good’, has time and time again produced speculative bubbles which have inevitably ended up badly. Under its spell, the market actually looses every shred of liberty. Exactly as a hypnotized group of people think of themselves as being free while sheepishly obeying the orders of their herder.
I gather you all know what ‘herd behavior’ means…

Compare Ayn Rand’s words to Adam’s Smith original idea.

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

See what I mean?

Smith sees all ‘market goers’ as equals who freely address each other while Rand applauds “the productive genius of free men” who, in pursuit of “their own private fortunes” had the magnanimity to bestow upon “the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance”.

I, for one, fail to detect any shred of actual respect towards “the people” in the behavior so laudatory described by Rand.
And I’ll let you be the judge whether her description fits the current ‘state of the nation’.
Anywhere on the planet, not only in the US.

“and thus the whole country was moving forward and profiting, not suffering, every step of the way.”

jobless men keep going

 

It depends on the meanings we attach to these two concepts.

Yanis Varoufakis, Greece’s ex finance minister, is convinced that ‘Capitalism will eat democracy – unless we speak up.

Since he has some experience in this matter I’ll follow his line of thinking – for a while.

His point being that you can have successful capitalism in undemocratic societies – like Singapore and China – and that effective power has slowly shifted from the political sphere of the society to the economic one – which is undemocratic by definition.

Can’t say he’s entirely wrong, can we?

But we can say he’s somewhat confused…
So, he mentions Lee Kuan Yew’s Singapore and China as capitalistic success stories and then says that  the political sphere is gradually falling  under the yoke of the economic one… Well, last time I looked, in China the state was still in full control of everything that moved and the state was firmly in the hands of the politicians. Same thing was happenning during Yew’s tenure as Singapore’s good willed dictator.

Unfortunately there is some truth in his words when we look at what’s going on on the both sides of the Atlantic and that’s why I’m going to examine whether we have the same kind of capitalism in both situations.

By Google-ing the word I got two definitions for the concept.

The first definition that was offered by the search engine came from Oxford Dictionaries, “An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state” and the second one came from Merriam Webster: capitalism is “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market“.

Putting them together we have private ownership, private decision, free market and profit as a goal.

Are these enough to describe a reasonably well functioning economic system?
I’m afraid not.

Let me give you some examples.
The French state has a controlling interest in Renault and the land of Bavaria quite a sizeable one in VW. Renault is in good shape and VW was too, until very recently. So private ownership is not an absolute necessity.
In the US we had quite an interesting situation. Two out of the three big car manufacturers  had to be bailed out by the state. All three were privately owned so we must look somewhere else: the Ford family still has a powerful word in the management of the single one which didn’t had to be bailed out. In Europe the best run auto company seems to be BMW – again controlled by a single family, the Quandt’s. It seems that it helps a lot if those who call the shots have a long time interest in the well being of the company versus the situation in which the top management has (short time) profit as the single/obsessive target.
Coming back to Renault and VW, they can be compared to Singapore, China and, maybe, Spain. Singapore was able to develop a ‘capitalistic’ economy despite it being an authoritarian society simply because Lee Kuan Yew was a very special kind of ‘dictator’ – one that not only cared sincerely for the greater good of his people but also didn’t loose his head during his long stage at the helm. A similar thing happened in Spain – Franco was the sole dictator who had made preparations for a democratic evolution after his demise, while China had to wait for another good-willed dictator to grab the power – Deng Xiao Ping – before it could steer towards the present course. No other authoritarian regimes but these two have ever managed to replicate this feat – we still have to wait a little before pronouncing Vietnam as the third, and very few other publicly owned companies fare so good as Renault does.

So, we have rather strong evidence suggesting that ‘skin in the game‘ trumps blind insistence on short time profit and that a free, democratic, society offers greater chances for economic development than a authoritarian one. In fact the politicians that need periodic confirmation from the people they govern do have some skin in the game while the authoritarians are in a position that is somehow equivalent to that of the CEO’s of the huge corporations whose stock owners are so disspersed that practically don’t count much – the members of the board practically slap each-other on the back and are able to do practically what they want with the companies. Look what happened at GM, Chrysler and, for example, ENRON.

But how free should be that society in order for capitalism to thrive?

Could it be so free that a guy could come from the street and claim your house as being his own? No?

So we need a free but orderly society. One where private property changes hands only when its owner says so – or has previously entered into a contract which stipulates that in certain conditions that transfer has to take place.

Meaning that in order to have a functioning capitalist society we need not only private ownership but also private owners who have enough trust in each other to start making business together.

You see, the feudal lords of the Dark Ages did have a lot of private property but capitalism couldn’t take hold in earnest as long as the (absolute) monarch could strip a man of his property and give it to somebody else. They couldn’t enter into (longish time) contracts because the era was dominated by huge uncertainties regarding various aspects of the social and economic life.

In fact it is exactly this well tempered freedom that is the crux of functional capitalism. Enough freedom so that everybody could feel confident that he is his own master but tempered by rules enforced in a pwerfully enough manner to give everybody sufficient trust that most contracts will be executed faithfully.

In this sense for capitalism to work properly we need to have a market that is free in more dimensions that one.

It has to be free from political intrusion in the sense that the government should leave it alone as a rule of thumb but also that the same government should keep it free from becoming cornered by a single group of interests.
In fact there is no difference from a market that is run by a governmental agency or by a monopolistic corporation – no matter if the latter is private. As soon as decision making becomes concentrated in too few hands mistakes starts happening. And their effect accumulate until the system finally collapse. Or is dismantled by some ‘exasperated’ more powerful agency – as Standard Oil and  ‘Ma Bell’ were dismantled by the US government. Which, by doing so, created the premises for  the huge development of those two respective markets – oil and communications.

Only this freedom of the markets can seldom be preserved by an authoritarian regime. Yew’s Singapore and contemporary China are exceptions, not the rule. Most authoritarian regimes cannot resist temptation and start meddling in the economic life of their countries. By doing so, they introduce a lot of ‘noise’ into the system. Eventually, this noise drowns the useful signals and ‘blinds’ the decision makers.

Same thing happens – and here Varoufakis has a valid point – when economic agents become so powerful that they can dominate the policy makers. The politicians can no longer preserve a balanced stance towards the economy and give in to ‘special interests’. This way the markets loose their freedom, with all the malign consequences that come with this situation. Among them, the lack of trust that slowly creeps in the souls of those who have to do business in the no longer free markets. Which lack of trust is very bad for all those involved.

And another thing about which Varoufakis is absolutely right. A lot of money are not being moved through the ‘front doors’. Not that they are not invested at all but because they are kept somewhat hidden they do not contribute as much to the well being of the world economy as they could/should.

2.1 $ trillion have been accumulated, as of  October 2015, in off shore accounts by the top 500 American companies in order to avoid taxes and
Between $21 an $32 trillion have been hiding in 2012 in various offshore jurisdictions.

Why is that? Simply because those who are called to decide about these money do not ‘trust’ that by bringing these money home and by investing them there, after paying the taxes, will be able to generate profits equivalent to those produced by leaving them off shore?

So what should we do? Tell them ‘democratically’, by electing somebody who is crazy enough to implement such a measure, to bring them home? Or even  confiscate them, one way or another?

I’m afraid that here I part again ways with Mr. Varoufakis. And with Aristotle: the way I see it democracy is not ‘the constitution in which the free and the poor, being in majority, control government‘. That would be ‘mob rule’.
A truly democratic process starts before the vote. When every stakeholder can make its point known to those who are going to cast a ballot so they’ll be able to do that having a reasonably clear understanding about what’s going on.

Frankly I’d rather rephrase Varoufakis’ message. ‘Corporatism has a tendency to disembowel democracy and transform it into ‘mob rule’ – the situation where the poor are no longer that free simply because they are convinced through ‘unholy’ methods to vote one way or another.

What can be done? Explain, loud and clear, that if jobs disappear the same thing will happen with the aggregate demand?
Explain that by giving their workers as little money as they can in reality the results are way worse than if the wages were as high as the companies could afford?
Ford didn’t give his workers more money because he loved them but simply because he had understood that in the long run he would be better off himself by doing this, you know!

Sometimes yes.
For instance in an economy where cash is readily available some employers might be tempted to split the compensation they give to their employees in two parts. An upfront one – which gets to be reported to the IRS – and a behind the counter one, that is settled directly between the employer and the employee. If a minimum wage is enforced the state knows for sure how much will be the taxable part.
Or in a situation when enough of the employers get together, form a cartel and start lowering the wages so much that the ordinary people end up dying of hunger.

Otherwise…

In fact there are many opinions about how this concept imposes undue constraints upon the economy. Some say it discourages job creation, others say it makes it a lot harder to start a new business and so on…

While all these opinions have their merits, just as the concept itself has its own, I think the situation is a little bit more complicated than this.

For starters I’m going to introduce the concept of ‘priming’.
“Priming refers to the incidental activation of knowledge structures, such as trait concepts and stereotypes, by the current situational context. Many studies have shown that the recent use of a trait construct or stereotype, even in an earlier or unrelated situation, carries over for a time to exert an unintended, passive influence on the interpretation of behavior.”
In other words an established mind set influences both the way we see a certain situation and the decisions we make in certain circumstances.

Minimum wages do exactly that. It both sets our minds in a certain way and establishes a certain set of circumstances.

First of all it tells us that it’s OK to compensate labor as little as possible and then settles an ‘acceptable’ minimum.

I see some of you fretting: “And what’s wrong with paying as little as possible? Are you nuts? I have a bottom line to worry about here!”

Precisely. You should take into consideration the whole picture – the bottom line – instead of short-sightedly aiming your efforts towards short term cost cutting.

Henry Ford taught us a very valuable lesson more than a hundred years ago.
By paying each of the workers more you might end up lowering your aggregate labor costs on the medium time frame.
But there’s more. What Ford did created the conditions for a mentality change. Receiving more money prompted workers to start planning ahead. On $2.25 a day Ford’s workers could afford to work for 3 days a week and spend the rest drinking. On 5 bucks a day they realized they could raise a family. Things changed dramatically. They stopped skipping work and this is how the famous American working middle class was introduced to the world.

The advent of minimum wages turned back the wheels of history. Blue collar employees were returned to the condition of working beasts whose work is no longer evaluated on an individual basis but compensated according to some opaque calculations made by government bureaucrats.
The companies no longer compete among themselves for the best available talent; they just hire anonymous ‘industrial operators’ from a pool of undistinguished semiskilled, disheartened laborers.

The entire economy suffers, from lack of solvable demand and an increasing apathy that doesn’t bode well for the future.

Also, demography doesn’t help any.
I keep hearing that individuals should improve their skills if they want to live better and that mature people who see working for McDonald’s as a life-time career cannot ever expect a ‘decent’ life style since McDonald’s jobs are for students trying to earn some pocket money.
Well… things have changed a little since people who tell this story have been in college.
In those times families had three or four children and about half the jobs were in manufacturing. That meant that the father was the bread winner, mother stayed at home and the students manned the burger joints.
Nowadays most manufacturing jobs have been exported to China, father and mother are both working, part time, in the unglamorous part of the service sector and no longer venture to have more than one or two children.
That’s why McDonald’s has become a lifetime career. For lack of eligible students, first and foremost. Thirty years ago blue collar workers could afford to send their children to college and the students went to McDonald to work for pocket money. Nowadays blue collar workers no longer afford to make many children and don’t have the money to send them to college.

Increasing minimum wage won’t change much. It would only convince the people at the bottom of the society that there is no way out and the CEO’s that there is no need to make any fundamental change in the way they manage the ‘work-force’.
Until employers will start considering their employees as partners instead of adversaries things will remain just as they are now. Or get even worse.

PS. How come so many of us constantly forget that most of the clients – after all they are the ones who keep the economy afloat – are employees?

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