The Ford Factor

Peter Drucker viewed Henry Ford as both a visionary and a disaster.

Ford was a disaster because he jealously forced out his brilliant right-hand man, James Couzens, and nearly ran Ford into the ground. Ford was a visionary because he brought cars to the masses and, as Drucker wrote in Men, Ideas, and Politics, “demonstrated that one could raise wages, cut prices, produce in tremendous volume and still make millions.”

Business leaders today continue to demonstrate this—except for the wage part. Median incomes have been stagnant for many years, a fact pointed out by Massachusetts Institute of Technology professor Erik Brynjolfsson in a new interview with McKinsey Quarterly.

The median household and the median worker in the United States have lower incomes today than in 1997,” Brynjolfsson noted. “It’s entirely possible for technology to advance, to make the pie bigger, and yet for some people to get a smaller share of that pie.”

But, to return to the case of Ford, what if employers simply decided to hand workers a bigger piece of the pie?

The Wall Street Journal ran an excerpt today of a new Ford biography by Richard Snow, who highlights Ford’s sudden decision to raise wages at his factories to $5 a day in 1913. “This at a stroke doubled the prevailing salary for industrial work, and it caused a sensation,” Snow writes.

Henry Ford with a 1921 Model T
Henry Ford with a 1921 Model T

One reason Ford’s decision triggered such an uproar (albeit mostly positive) is that it was not, on the face of it, necessary. There was no shortage of workers at the lower wage level, so why give an unforced pay raise—let alone a doubling? The Wall Street Journal had this very question in 1913, tut-tutting that Ford might be applying “Biblical or spiritual principles in the field where they do not belong.”

But there was more to be said for Ford’s decision—which was, in fact, based on a recommendation by Couzens—than met the eye. As Drucker explained in Management: Tasks, Responsibilities, Practices: “Before Ford changed the whole labor economy of the United States with one announcement, labor turnover at the Ford Motor Company had been so high that, in 1912, 60,000 men had to be hired to retain 10,000 workers. With the new wage, turnover almost disappeared.”

It paid off, too. “The resulting savings were so great that despite sharply rising costs for all materials in the next few years, Ford could produce and sell its Model T at a lower price and yet make a larger profit per car,” Drucker wrote.

Not to mention that it helped create a middle-class consumer who in turn could stimulate the broader economy.

What do you think: Would large, unforced wage increases for workers today actually be good for business and the economy?