Henry Ford was right!

I believe it was Henry Ford who famously said that “workers should be paid enough so that they could buy what they make”. This is actually quite a profound statement. It certainly applies today when retailers and manufactures of consumer goods are complaining that people are not spending money. And economists are lamenting the fact that the “economy” is not growing fast enough to reduce the rate of unemployment.

In business circles today wages are a bone of contention. The unhealthy imbalance between the highest paid and the lowest paid is causing concern worldwide. There is a widespread push to increase the minimum wage to a more reasonable level; fast food companies in the USA are being pressured to increase minimum rates of pay. This is being resisted by business and industry leaders as “unaffordable and unreasonable” (we hear the same argument in Australia).

Economists speak about the “economy” of a country as if it were some disembodied entity. They forget that the “economy” is made up of people – alive, breathing, hungry people. Economists develop "statistical models" that use a mythical "rational consumer" to test their theories. There is no such animal as a "rational consumer" - it doesn't exist!!

Now, as I understand what Henry Ford was getting at is that if retailers and manufactures of consumer goods want people to spend money and buy what they are trying to sell they (the people), rather obviously, have to have money to do so. Right?

But, if the economy is skewed (as it is in many countries, including the USA and Australia) with 5% very rich; with the, previously, large middle “class” shrinking in numbers because of the economic down turn and manufacturing moving “off shore”; with the current “minimum wage” kept low (at possibly a level arrived at many years ago) – where is the purchasing power going to come from? 

Who will buy the goods and what with? The wealthy don’t buy expensive items and consumer goods every day. Sure they buy food, but what they buy does not compensate for the reduced purchasing power of the rest of the population. In any country.

So to carry on with Henry Ford – pay those who are at work enough to buy what they make and Bingo, money starts to circulate. People start buying, factories are re-opened to start manufacturing again – more employment – more money – more items purchased. The housing industry picks up – more consumer goods – more money – more items purchased.

The problems are created by people who “hoard” money; people who want more than they need. This creates a “blockage” which reduces the amount of money in circulation. The less money in the economy, the more the “hoarders” resist spending and the more they try to hold on to what they have, at any cost. Employers reduce staff numbers or reduce wages and so the cycle starts all over again!

Henry Ford was right! And don’t believe the economists. Economists read statistics not the mood in the streets!