Don Boudreaux has an excellent post taking on the myth that one reason Henry Ford paid the huge (at the time) daily wage of $5 was that he wanted workers to have more money to buy his cars. Don gives an alternate explanation: that Ford wanted to reduce turnover. He leaves out, however, the main reason why paying workers more so they can buy your product makes no sense. As Don points out, Tim Worstall supplies the missing reasoning. Worstall’s key paragraph:

That year [1913, when he introduced the $5 wage] his establishment of workers was some 14,000 head: his sales some 170,000 and that’s just the year that he started ramping up production through the moving assembly line (reaching 500,000 in a couple of years and near a million within a decade). The spending power of his workforce was entirely marginal.

Worstall also points out that the $5 bonus was not strictly a daily wage but was half pay and half bonus. And the bonus was conditioned on other behavior.

But back to the issue of paying workers more so they’ll buy your product. Adam Smith made the same point in another context in The Wealth of Nations. In his discussion of why imperialism doesn’t make sense economically, Smith wrote [go to IV.7.149]:

Say to a shopkeeper, Buy me a good estate, and I shall always buy my clothes at your shop, even though I should pay somewhat dearer than what I can have them for at other shops; and you will not find him very forward to embrace your proposal.

In this case, Henry Ford is “the shopkeeper” and the Ford workers are “I.” Smith goes on to point out, in one of the first public choice insights in written economics, that, of course, the shopkeepers are quite happy for others to be taxed to finance imperialism because their pro rate share of taxes is less than their benefits from having a protected market.