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Henry Ford's Productivity Lesson

by Bill McGaughey


"Productivity is said to be the fountainhead of economic progress. But productivity advances are not a panacea for the nation's economic problems. They can create problems of their own.

The Bureau of Labor Statistics uses the term "output per man-hour' to indicate productivity. A rise in the productivity index would mean that, compared with the level of efficiency in a base year, a greater volume of goods or services could be produced for each hour worked in the current year. Alternatively, if because of weak market conditions the volume of goods and services stayed the same or declined, then the required output could be produced with a smaller input of labor. In that case, either employment or average work hours or both might be cut.

Which of the two outcomes will happen - expanded output or reduced labor - thus depends upon a condition independent of the production process: the strength of consumer markets. Unless there is a sufficient market to purchase the goods and services that can be produced more efficiently, they will not be produced in a large enough volume to employ the present number of workers for the same weekly hours.

Of course, the condition of the market is not totally independent of production processes. There is, or ought to be, a link between the wealth generated through production and the market created through consumer purchasing power. Where much of the produced wealth is recycled to workers in the form of higher wages and benefits, that market will be strong. On the other hand, where business is only willing to spend for capital investment or buy up other companies or pay higher dividends, or where government removes an exorbitant part of the wealth through taxation, the connection between production processes and the consumer market may be weak.

A step that needs to be taken in response to improved productivity is to reduce the hours of work. Reduced work time strengthens the consumer market for two reasons. First, increased leisure sets the condition for a new pattern of living in which more goods and services and a greater variety of them can be consumed. Second, the shorter hours counteract labor displacement from the advances in productivity so that more people can be employed at a full-scale wage instead of subsisting on unemployment checks.

Lately it seems that the U.S. economy has been retreating from the ideal of an expanded middle class to a two-tiered structure of economic opportunity based on differences in occupation, sex, and age. Instead of a general rise in living standards, this has spawned a sharper division between workers at the top and bottom of the pay scales. Incomes of the more highly paid workers are increasing at a faster rate than of those who earn less. As a result, the consumer market has developed the surprising trend that more expensive products, preferred by the upper-income shoppers, often outsell the lower-price merchandise which traditionally has enjoyed greater sales volume.

For the economy to stay healthy, advances in productivity should be promptly followed by wage increases so that consumer purchasing power is maintained. Then, after the wage increases have taken effect, work time ought to be reduced, so that the rise in incomes and living standards is shared by a broad segment of the population. If these successive adjustments are made in due course, then the raised productivity will sustain a broad-based and flourishing consumer market. Otherwise, if progress is blocked at any level, then unrecycled profits will fail to work their way through to an improved standard of living for the community as a whole. Eventually the economy will stagnate.

Those who created the American economic miracle understood such processes more clearly than economists and business leaders today. None contributed more to this nation's industrial growth and prosperity, perhaps, than Henry Ford, the automobile tycoon. This great pioneer of mass production techniques recognized that improved productivity alone would not make a sound economy. The resulting profits had to be plowed back into the business - not just into production facilities, but also into the consumer market which supported sales.

Putting his philosophy into practice, Henry Ford offered employees a $5-a-day minimum wage in 1914. Twelve years later, he introduced the 40-hour workweek, giving Ford employees the same weekly pay for five days of work as previously for six.

In 1926, when this shorter workweek went into effect, Henry Ford issued a public statement which summarized his views concerning the dynamics of production and consumption in an industrial economy. Among other things, Ford said:

"The short week is bound to come, because without it the country will not be able to absorb its production and stay prosperous. The harder we crowd business for time, the more efficient it becomes. The more well-paid leisure workmen get, the creator become their wants. These wants soon become needs.

"The people who consume the bulk of goods are the (same) people who make them. That is a fact we must never forget - that is the secret of our prosperity.' "

(The Christian Science Monitor, Wednesday, December 22, 1982, p. 22)

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