I was on an email discussion this morning with some free-market economists and some economically literate fans of free markets. One of them surprised me with this statement:

I always tell my students the Henry Ford $5 a day story in 1914, a great example of management looking out for labor and a “win win” formula for success. It stopped Marxism’s two big arguments: that capitalists exploit workers and that capitalism alienates workers, forcing them to produce products they can’t afford themselves. But when Ford overnight raised workers pay to $5 a day, it was the first big example of sharing the profits — and Ford workers could buy Model T’s for the first time, thus destroying the Marxist argument of alienation.

There’s nothing necessarily incorrect in his actual statement above. But there is something misleading. It may well be the case that Ford workers could buy Model Ts for the first time because of the increased wages, but he makes it sound as if that was Henry Ford’s motive. That’s unlikely to have been Ford’s motive because the number of Ford workers was probably well under 1% of the number of potential buyers. Would it really make sense to pay more than necessary to get workers so that your number of potential buyers can increase slightly, especially when the downside is that with the higher wages come higher costs and your larger potential market is likely to shrink?

I think it was a fortunate accident that Ford’s workers were able to buy Fords. The reason I’ve read for Ford’s success is that Ford was plagued with high turnover and high absenteeism and paying above market reduced turnover and absenteeism substantially. One can imagine this being particularly important in a relatively new industry and certainly an industry with a relatively new production method–the assembly line–because there was probably a bigger gain than normal from keeping people on the job who gradually got very good at it.

If you still think the “pay them more so they can buy the product” argument makes sense, then consider what Henry Hazlitt wrote on this issue in his 1946 classic, Economics in One Lesson:

Some sponsors of the theory seem to imply that the workers in each industry should receive enough to buy back the particular product they make. But they surely cannot mean that the makers of cheap dresses should get enough to buy back cheap dresses and the makers of mink coats enough to buy back mink coats; or that the men in the Ford plant should receive enough to buy Fords and the men in the Cadillac plant enough to buy Cadillacs.

So a question for the person I quoted above, based on Hazlitt’s quote, is this: Were Cadillac workers more alienated than Ford workers?

A few years ago, I used Hazlitt as a supplement to my main text and we covered this chapter. Remember that my students are largely military officers and disproportionately Naval officers. One U.S. Navy student had a great example to make Hazlitt’s point. He pointed out it’s not a good idea to pay workers making aircraft carriers high enough wages that each of them could buy an aircraft carrier.

Here’s an earlier discussion of the issue.