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Source link: http://archive.mises.org/13430/know-the-new-deal-cold/

Know the New Deal Cold

July 30, 2010 by

Understanding the true causes of the Depression, as well as the real economic record of the United States in the 1930s, is an essential ingredient in anyone’s economic and historical education. FULL ARTICLE by Thomas Woods

{ 62 comments }

Stephen MacLean July 30, 2010 at 10:47 am

One good place to begin is with Larry Reed’s Great Myths of the Great Depression—and this recent debate on the merits of Roosevelt’s New Deal.

David July 30, 2010 at 10:54 am

A discussion of the New Deal and its effect on the American economy is incomplete without a discussion of its effect on American institutions. The administrative state–complete with independent regulatory commissions like the SEC and the CFTC, government-chartered corporations like the FDIC and the TVA, and government-owned corporations like Fannie Mae–traces its lineage to the New Deal era.

These various “federal agencies” have done great harm to the principle of separation of powers, and to the opening words of Article I, Article II, and Article III, which vest the legislative power, executive power, and judicial power in the Congress, president, and judiciary, respectively. Today, for example, the Federal Trade Commission writes regulations (legislates), and enforces those regulations (executes) at hearings where “administrative law judges” apply the regulations to particular sets of facts (adjudicates).

The highly formal model of the United States Government that we all learn in civics class has almost nothing whatsoever to do with the federal government today. Much of the change finds its seeds in the New Deal.

Eric July 30, 2010 at 11:40 am

History of the 1930′s is known only by previously written documents. So, my question is when there is more than one story being told, how does one know which story is true?

This is a matter of empirical facts, not one of the Praxeology studied by Austrians. History is not a science of axioms, theorems and proofs. History is a statement of facts with an eye towards cause and effect. Historians often differ in this last regard. But it begins with the facts, regardless.

So… my concern is where do we get the facts for the economic situation in the 1930s? I imagine that the laws written and the court decisions made were all recorded in the usual government records of the times, but where do we get the economic history from?

I know of two histories of the depression, one by Milton Friedman (and A. Schwartz) and one by Murray Rothbard. Needless to point out in this forum, these two histories are rather different.

So, if the author of this article is going to teach the history of the 1930s, and attempt to explain cause and effect, where are the facts going to come from? Whose version of history are we to believe?

For example, it’s one thing to teach that the money supply shrunk in the early 30s but it’s another thing to say that this was due to the the FEDs incompetence vs. it happened in spite of all the FEDs attempts at inflation. If I recall correctly, this is a big disagreement between Friedman and Rothbard. Friedman says “they let it happen” while Rothbard says they tried very hard but market forces prevailed.

BUT…. in any regard, where do we get the FACTS that there was in fact a reduction in the supply of money? Do we take the records of the FED itself? Or do we use the writings of someone else who claims to have kept track of this somehow? Other facts, such as the level of unemployment might also be suspect if those records came from the government. After all, we are faced with this same problem today – is the rate 9% or 22%? It depends on whose counting and how you count certain workers (e.g. do we count those who gave up looking or not).

I imagine that part of the examination will be to look at the “facts” through the lens of Austrian theory and in some case use this to refute one set of histories vs. another. But is this valid? Or is there some other “authority” available to refer to in order to decide between them?

Jonathan Finegold Catalán July 30, 2010 at 2:40 pm

Eric,

I suggest you read Ludwig von Mises’s Theory and History.

Bob Roddis July 30, 2010 at 9:38 pm

Eric,

You sound like Brad DeLong, ripped apart here by Mario Rizzo:

http://thinkmarkets.wordpress.com/2010/07/25/the-amazing-brad-delong/

HT2 Bob Murphy:

http://consultingbyrpm.com/blog/2010/07/brad-delongs-methodology.html

History is not a science of axioms, theorems and proofs.

I submit that one cannot properly understand history or economics without understanding the essential Austrian axioms. Attacking “axioms” for being axioms is typical substanceless anti-Austrian behavior, however.

Eric July 30, 2010 at 10:03 pm

I think you both missed my first point. If you are going to discuss history and

—historian 1 says A happened,

—historian 2 says A DID not happen,

Then how do you determine which is true?

What are you going to do, say that such and such never happened because it doesn’t fit with our system of economics?

Well, then, the universe is not billions of years old, because that does not fit with my axiomatic system of the universe.

It seems that there’s a lot of faith based thinking in the Austrian universe.

Bob Roddis July 30, 2010 at 10:13 pm

What alleged “facts” are we discussing that are in dispute? Are these facts in dispute?

The NY Fed discount rate in 1921 started at 7% dropping to 4.5% in the midst of an extreme case of price deflation. The depression ended quickly and the recovery was strong.

http://www.flickr.com/photos/bob_roddis/4163830637/sizes/o/in/photostream/

The NY Fed discount rate in 1931 dropped to 1.5% and the depression lasted until 1946.

http://www.flickr.com/photos/bob_roddis/4164589632/sizes/o/in/photostream/

Jonathan Finegold Catalán July 30, 2010 at 10:22 pm

What book is that?

Bob Roddis July 30, 2010 at 10:29 pm

Jonathan,

I think someone sent out a set of those documents a few years ago, I pulled out those pages and put them on my flicker page. OR, I may have just copied them from a library. I think it’s the former. I’ll hunt for the original package, but I wouldn’t hold my breath.

Bob

Eric July 30, 2010 at 11:28 pm

Ok, here’s one “fact” in dispute that is extremely important:

Ben “helicopter” Bernanke is quoted as saying he bases his ENTIRE monetary policy on one issue:

Did the FED try to increase the money supply during the depression or did they sit back and do nothing?

Rothbard says they tried, but given their tools, they were not successful. Friedman says that they didn’t even try and blames it on the “untimely” death of the Fed chairman Ben Strong. Friedman then concludes that if Strong had not died when he did, that the Fed would have been able to stop the deflation that Friedman blames for all the troubles that followed. He therefore concluded that the Depression was the Feds fault for NOT inflating enough. Rothbard blames the depression on the earlier inflation.

Bernanke is on record that he believes Friedman’s version (he said this at a M. Friedman Birthday party).

This bit of history is claimed to be the rational for Ben Bernanke’s policy of never letting there be deflation again (of which type, monetary or price I’m not sure). Quite an important little fact it would seem to me.

If Friedman is wrong in his “facts” then it goes without saying that he can’t demonstrate cause and effect – if the cause he is speaking of never even happened.

On the other hand, I’m not real confident that they had the tools in place to even KNOW if the money supply dropped or not during the time Friedman speaks about.

Now Rothbard, he also takes on face value that the money supply dropped, but he puts a different spin on it. He claims it dropped because of market pressures and that the Fed couldn’t control the money supply, at the time in question given the tools they had to work with. But he says they tried to inflate – they just couldn’t get it done.

Since this little fact is likely to determine the actions of the Fed today, I think getting the truth here is quite important.

Bob Roddis July 30, 2010 at 11:38 pm

That is not a dispute about facts. It is a dispute about what theory should be used to interpret those facts. Bernanke and Friedman say the Fed should have done something it did not do. That’s theory.

Now here’s a fact. Hayek told Bill Buckley in 1977 that Keynes told him that the “General Theory” was written to influence British policy in the 1930s so that purposeful inflation would trick British workers into accepting lower wages without realizing it:

http://consultingbyrpm.com/blog/2010/07/hayek-on-firing-line.html

That’s on the 4:44 audio clip.

This is Bob Murphy’s original post with the now dead link:

http://consultingbyrpm.com/blog/2008/12/hayek-tells-bill-buckley-that-even-keynes-was-afraid-of-the-keynesians.html

Bob Roddis July 30, 2010 at 11:56 pm

Eric,

Take Jonathan’s advice and read “THEORY AND HISTORY”.

It’s free online:

http://mises.org/th.asp

I had to pay $25 in real 1977 dollars for mine way back when.

Eric July 31, 2010 at 1:20 pm

I took a look at Mises Theory and History. I read Rothbards introduction, and looked over the book to see what Mises had to say about what one can conclude from facts that are uncertain or even wrong. That is the point I was addressing. Why?

Because the title of this article was “know the new deal cold” which implies there’s something to be learned from the history of the new deal.

But why should Austrians care at all about history if they are so convinced that their logic is perfect and that from one axiom they can derive a complete theory of economics without any need for empirical verification.

I think Austrians like to have it both ways. When the data doesn’t fit, they shrug and say, “Oh well, we never said we could predict accurately, we can only predict tendencies”. When the data does fit, then they shout things like, “Peter Schiff was Right” or that Mises predicted the great depression.

When I look over Mises and Rothbard’s writings, I see nothing that resembles the sorts of logical proofs that begin with axioms and end in theorems. I see no formal logic of any kind. What I see is many statements such as,

If A happens then there will be a tendency for B to follow, all other things being equal. But lest we forget this multitude of other things is NEVER equal and so there are many conditions that could delay B from happening in the real world. In fact, if any of these other things happen that we can’t predict, then our ability to accurately predict anything at all might just get lost in the noise inherent in our inability to know enough.

However, if it does turn out that B occurs, then we go back and say that A must have caused it, even though we have no way of verifying it. But trust us, 800 pages of informal talk is as good as gold; as good as a complete formal proof where hundreds of eyes can check our every step and verify we made no logical errors.

That’s the sort of Austrian logic that I have trouble swallowing. It’s simply too fuzzy a logic for me to accept.

And if we don’t even know for sure if the history called A happened or not, then what on earth are we supposed to learn from it?

Bob Roddis July 31, 2010 at 9:01 pm

The essence of the Austrian axioms is what CANNOT be known. They are pretty simple and obvious. This is the very short version, but the central concepts are that man acts, value is subjective and value and thus economic calculation can only be expressed in free market prices. Fiat money screws up this knowledge function. Central planning won’t work because the planners lack the necessary knowledge.

One then looks at events and history with an understanding of this reality. Where’s the proof from history or events that the statists have such knowledge? Where’s the proof from logic or history that this understanding about the lack of knowledge is wrong? The statists haven’t even the faintest awareness of the basic Austrian arguments and assume that the “economy” is a machine which won’t spin without wise governmental “stimulus” (run personally by them). Where’s the basic micro-theory to support that?

Austrians are very secure in firmly stating, “I can’t know that, you can’t know that, no one can know that.”

Bob Roddis July 30, 2010 at 10:27 pm

On page 95 of his book “Wall Street and FDR”, Antony Sutton lists the the NRA Voting Strengths in the Iron and Steel Industry Code. Is that list in dispute?:

http://www.scribd.com/doc/13285654/Antony-Sutton-Wall-Street-and-FDR

Tom Woods recites a number of facts about the 1920 depression in his great video. Are those facts in dispute?

http://www.youtube.com/watch?v=czcUmnsprQI

Isn’t the problem here that the establishment purposefully ignores historical facts that support the Austrian position and which undermine the interventionist position? And that they always refuse to debate Austrians in a serious manner. And I mean ALWAYS.

michael July 30, 2010 at 3:10 pm

The Depression history I like best is the only one that was written before it happened: Prosperity, Fact or Myth, written by Stuart Chase and published in 1929. It describes the conditions leading inexorably to a financial collapse.

And it describes a systemic failure to understand the need for markets in order to complete the circle of capital flow. Kevin Phillips, in his Wealth and Democracy, has this to say about Chase’s analysis:

“His prophetic skepticism, published as the crash was beginning, identified how the weakness of rising productivity lay in eliminating jobs and over-rewarding the wealthy. This, in turn, led to twin hazards: a greater supply of goods than underpaid Americans could long consume and speculative excesses by the wealthy.”

In other words, as illusionary wealth expanded in the financial markets, actual wealth, in terms of volume of goods sold and moneys received, was shrinking. An eventual crash was unavoidable, and occurred as the book was going to press.

Russ July 30, 2010 at 3:19 pm

So you’re saying that the path to prosperity is to lower productivity, thus making production of any given item take more people, and thus cost more for the average worker?

michael July 30, 2010 at 5:33 pm

No, that would be dumb. Parenthetically, I notice a lot of you rebut through the tactic of putting dumb arguments in the mouths of others.

What I’m saying is that standard economic history describes a manufacturing overcapacity on the part of the early industrial nations (Britain, Germany, the US) and a consequent shortage of buyers for their wares. So you can make items all you like, you just can’t sell them unless you encounter a ready buyer with cash in his pocket.

The men who built America’s industry were very good at building incredible production capacity. But they were lousy at leaving a little change in their employees’ pockets so they had someone to buy their stuff. Consequently our manufacturing always suffered from an oversupply of goods and a customer shortage.

In the 1920s, as in the 2000s, the profits accruing at the top had nowhere to go except to inflate prices in the financial markets. Meanwhile at the bottom sales were chronically slow, and we suffered from spare capacity. Ultimately, the speculative balloon popped.

mr taco July 30, 2010 at 5:48 pm

“But they were lousy at leaving a little change in their employees’ pockets so they had someone to buy their stuff.”

not this fallacy
damn you are stupid

Jonathan Finegold Catalán July 30, 2010 at 5:54 pm

Michael,

The men who built America’s industry were very good at building incredible production capacity. But they were lousy at leaving a little change in their employees’ pockets so they had someone to buy their stuff. Consequently our manufacturing always suffered from an oversupply of goods and a customer shortage.

Unfortunately, I can’t find the specific data to reference right now, but during the 1920′s workers’s wages grew at a much faster pace than did business profits, which suggests that workers were getting a larger piece of the pie as the 1920s progressed. In fact, pre-recessionary periods are usually marked by a growth in real wages, well above growth in productivity, which is one of the factors which leads to high unemployment during the bust. It’s interesting to note that the labor situation has only been falling ever since the implementation of the welfare state after the New Deal (including a steady increase in the “natural” rate of unemployment).

Meanwhile at the bottom sales were chronically slow, and we suffered from spare capacity.

No, the most damage, initially, was done in the capital-goods industry, not in the consumer-goods industry.

michael July 30, 2010 at 6:08 pm

You make the best arguments of anyone here, JFC. I’ll have to look into that observation before I can form an opinion on it.

Thanks for the actual content. To me, Henry Ford was the exception to the rule among 1920s industrialists. He knew he couldn’t sell a personal vehicle people couldn’t afford to buy. So he paid his workers generously. And they all went out and bought Fords.

“We lose money on every sale… but we make up for it in volume.” :)

newson July 31, 2010 at 4:53 am

“History offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages.”

Paul Krugman (Pop Internationalism, The MIT Press, 1997).

even he understands this.

newson July 31, 2010 at 5:07 am

“Baffled about why workers’ output had increased so little, Ford hired a researcher who discovered that, despite its technological advances, the company was being dragged down by absenteeism, shoddy work and a 370 percent turnover rate. All stemmed from long hours of monotonous tasks, combined with low wages, poor housing and working conditions, and foremen’s arbitrary management. By doubling wages, Ford figured he could increase efficiency, raise morale and retain the best workers.”

keynesians and redistributionists overlook the obvious in the search for some evidence that corroborates their theories. http://www.businessmanagementdaily.com/articles/12848/1/Why-Henry-Ford-doubled-wages/Page1.html#

michael July 31, 2010 at 12:43 pm

“History offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages.”

Newson: Perhaps that was true back in 1997. But in more recent years increases in labor productivity have not led to wage increases.

research.stlouisfed.org/publications/net/20070301/cover.pdf

In fact I can recall one long-term study, during which productivity increased 19%, where real wages only increased one percent. The balance accrued to profits.

Your second comment contains nothing in disagreement with anything I’ve said. If Ford received technical advice leading to his adoption of wage increases, more power to him.

Your final comment (“keynesians and redistributionists overlook the obvious in the search for some evidence that corroborates their theories”) lacks context. What does this have to do with anything?

michael July 31, 2010 at 6:49 am

“Unfortunately, I can’t find the specific data to reference right now, but during the 1920′s workers’s wages grew at a much faster pace than did business profits, which suggests that workers were getting a larger piece of the pie as the 1920s progressed.”

Jonathan: Here’s the chart you were looking for:

http://www.thewe.cc/thewei/_/images11/us_rich_scandal/income_inequality_us.jpe

The 1920s appear to have been a period when the gap between rich and poor was widening, as measured by income inequality.

newson July 31, 2010 at 7:59 pm

to michael:
the chart of the st louis fed showed hourly compensation tracking productivity with only slight divergence since 2003, meriting further research, as the paper suggests. as the article states, increased variable pay makes productivity measurement difficult.

i’d be interested in actually seeing the paper that showed almost all productivity gains going to equity and almost none to labour. why wouldn’t workers have left salaried work and set up businesses themselves, if such a large gap had opened? maybe you didn’t recall the conclusion correctly.

you say:
“He knew he couldn’t sell a personal vehicle people couldn’t afford to buy. So he paid his workers generously. And they all went out and bought Fords.”

you are implying that ford’s paying higher wages caused his company’s sales to rise, which is nonsensical, but plays well to redistributionists like yourself. that he raised pay for productivity reasons i’m glad to see you now acknowledge.

newson July 31, 2010 at 8:13 pm

i’d view michael’s gini chart skeptically. more information is needed.

Gil July 31, 2010 at 9:18 pm

Good question – why didn’t the unemployed start their own businesses? The same question can be asked today – why won’t today’s umemployed start their own businesses? I believe a lot of regulation (e.g. minimum wage) are avoided if people were to become self-employed.

michael August 1, 2010 at 11:34 am

I don’t recall the names of the authors, so can’t locate the study. Further, I’ve found some countervailing info about productivity increases per capita and wage increases, using a baseline of 1980-2000. So I’ll have to withdraw the comment for the moment.

However you both ask a pertinent question here: “why didn’t the unemployed start their own businesses?”

Mostly, the fact is that only a minority among us have the inclination, the drive, the specialized knowledge and the fiscal backing to start a successful business. They need a job. That’s their orientation. I suppose we could cut them off the lifeline, but they do constitute a majority of the population.

Second, most small businesses that do start fail in their first couple of years. People out of work know that, and are hesitant to flush what remains of their savings down that drain.

Third, capital for new startups is always hard to come by. And at no time more than now. Most available capital is directed at large firms with a track record, not out of work individuals with a bright, untested idea.

Fourth, There are few marketing niches left, other than in high-tech areas. Joe Smith can’t compete with the national chains any more, whether he wants to open a restaurant, a clothing store, a hardware, you name it. Economies of scale have driven small entrepreneurs out of business. They have been replaced by huge national chains. The few instances where niches still remain are filled with tiny entrepreneurs. Hair parlors, second hand stores, karate studios and the like.

And fifth, commercial real estate rates make most profitable business plans evaporate in the summer sun. The numbers just don’t work out for one person wanting to open one business. The number of pizza slices you can sell at the mall don’t justify the rents. You’d have to sell hundreds of slices each hour you were open, just to reach your break-even point.

I was able to do so successfully (transition from employment to self-employment), by finding a niche requiring little capital, one with a previously unexploited and largely untapped need. However there aren’t enough of those niches to satisfy the needs of 18-20 million people suffering from forced unemployment.

It would be nice if they all could. Imagine, a world in which 20 million new businesses could get off the ground!

Matthew Swaringen August 1, 2010 at 11:51 am

First, I’d say that it’s hardly necessary for the unemployed to get a job by making a new business. But that said, government is what stands in the way and makes it so expensive to do.

A lot of the costs of starting a business are due to government regulations (licensing, inspections, zoning laws, etc.)

Not to say that some of these wouldn’t exist to a degree in communities by contract, but I think individual choices would generally be much more free so that there wouldn’t be so much capital required to start something like a restaurant, bakery, etc. The reason you end up needing a separate store building just to get off the ground is because of government interventions in the market place.

I’m not saying those separate buildings wouldn’t exist, but competition is certainly possible by smaller businesses just based on their nearness to the customer. Product differentiation is also a strong challenge to economies of scale. Taco Bell may make cheap food but it also sucks and it’s workers tend to represent the worst who can’t even get orders right 50% of the time (no exaggeration on my particular Taco Bell).

The other reason people remain unemployed (even if they are willing to accept any wage at all) is price controls like the minimum wage. They can’t accept a lower wage because it’s illegal to do so.

Now certainly there are also those who are unemployed by choice, but only by choice because they can’t find something that pays enough to support their current obligations (debt burden on the house, etc. ) Unfortunately there is no easy answer for them.

Many of them will have to face bankruptcy and still accept the lower paying job. It is not their fault that the industry they were in existed due to malinvestment. But it is also not the fault of anyone born into a poor family that they are poor, etc. Life is not fair. And trying to make it fair is the very cause of so many situations like this.

michael August 4, 2010 at 7:35 am

Matthew: Sorry to be tardy in getting back to you. Good post.

“..it’s hardly necessary for the unemployed to get a job by making a new business. But that said, government is what stands in the way and makes it so expensive to do.

“A lot of the costs of starting a business are due to government regulations (licensing, inspections, zoning laws, etc.)”

I have some special expertise on the sand government regulations throw in one’s gears when we want to start a business. I’ve been down to Licenses and Permits many times. The fees aren’t so bad, although the paperwork’s really tedious. The big thing is that you have to take so many expenses out of an employee’s total payroll kitty. Workmen’s comp, withholding and benefits. That’s why it has become so popular to use subs. They’re classified as independent contractors, so you just give them a statement of earnings, from which they issue you a bill, and you pay them gross. They have to sign a statement for you to have on file, stating that they are independent, use their own tools, set their own hours, etc. Works fine, and satisfies The Man.

And consider the alternative. A world full of unlicensed businesses, on uninspected premises. Professionals would still offer you a measure of safety, assuming that professional licensing entities were untainted by self-interest. That is, one could be assured that accountants, say, were faithful to the job assigned them by their clients: issuing one set of books for Uncle Sam (cloudy) and another for the shareholders (rosy).

But concrete? Huge sums stand to be made from slightly jiggering the proportions of sand and cement used in the product’s composition. Countries that don’t micromanage the grades of commercial pour they allow to go on sale have one characteristic in common: their bridges and apartment buildings tend to fall apart after the first few years.

Construction contractors don’t put in rebar (which no one sees anyway). Tire mfr’s don’t add expensive annealing agents. Medical labs don’t clean their equipment. Meat packers… well, I think you know the answer to that one. No one’s responsible for what is unseen.

I pay extra for the privilege of living in a first-world country. You would too, I bet, if you thought about it.

michael July 31, 2010 at 7:55 am

Jonathan, I didn’t address these points:

“It’s interesting to note that the labor situation has only been falling ever since the implementation of the welfare state after the New Deal (including a steady increase in the “natural” rate of unemployment).”

I’d like to hear more about how you derive a “natural rate” of unemployment. I’ve read a little about the concept, and none of it appears to make much sense.

Whenever efficiency (or productivity) increases you get people laid off. That forces up the number of unemployed. And whenever your market gets saturated, that stops the creation of new jobs– there’s no unmet demand left to be satisfied. And when consumption is dropping, once again, people get laid off. Conversely, whenever incomes are rising you get increased consumption, increased profits and wider employment. It’s factors like these that influence the rate of unemployment.

The optimum rate, which we reached in 2000, would seem to be four percent. Below that you have too much upward pressure on income, and prices rise to meet it. Not good, as we saw in the 1970s.

http://www.infoplease.com/ipa/A0104719.html

Also, maybe you could define what you mean by the “labor situation”, which you say has been falling since the New Deal.

(Me): “Meanwhile at the bottom sales were chronically slow, and we suffered from spare capacity.”

(You): “No, the most damage, initially, was done in the capital-goods industry, not in the consumer-goods industry.”

That would only be logical. Capital goods (tools, dies, machinery) are only manufactured when demand is rising, and there’s a greater potential for increased sales. That would likely be the first sector to slow down production. After that, if demand continued to languish, a reduction in the production of consumer goods would follow.

Dave Albin July 30, 2010 at 6:15 pm

Why did they overproduce if they knew (eventually) that they were causing an oversupply of goods by low wages? Why didn’t production shift to meet demand? How did profits accrue at the top when workers couldn’t buy much? If profits were used to inflate financial markets, the bubble would pop, as you say – so what? That’s what happens with poor speculation. No one is forced to participate in bad speculation. You’re not making a whole lot of good points here…… Are you saying that we should get rid of, or limit, risk?

BTW, when people argue with you, I have seen your points taken out further – nothing is being put in your mouth.

michael July 31, 2010 at 7:17 am

“Why did they overproduce if they knew (eventually) that they were causing an oversupply of goods by low wages?”

That’s the right question to ask, Dave.

The standard interpretation of America’s early industrial history (as well as that of other nations, such as England or Germany) has been that our gift has been in the area of maximizing industrial capacity, the ability to produce goods cheaply and in large number.

And the response by industrialists and early commentators (the talking heads of the day) has always been to search for markets. That was the impulse that sent us across the world to try to crack China open. They began with the (accurate) assumption that the American market was saturated… but never thought once that the problem might be solved by raising incomes. What?? That would have been heresy!

A good book on the search for foreign markets is Barbarian Virtues, by Matthew Frye Jacobson. You might find it in a decent library.

“Why didn’t production shift to meet demand?”

It did, and repeatedly. Production crunched and lurched throughout the late 19th and early 20th century as industry beat its head against repeated recessions characterised by slow demand.

“How did profits accrue at the top when workers couldn’t buy much?”

Customers were bled through the nose. Farmers, for example, were the customers hoping to carry their goods to market on the railroads. Freight rates were extortionately set, right at the point where the farmer didn’t quite go broke. And the profits stemming from many, many transactions accrued in a very few pockets.

“If profits were used to inflate financial markets, the bubble would pop, as you say – so what?”

So what? We had recurrent depressions in 1873-79, 1893-98 and 1921-22, plus steep recessions at a number of other points. These events were truly ruinous, and the pain they caused at all economic levels was widespread. That’s how an economy naturally proceeds when there are no remedies available. Are you of the view that people should just ‘man up’ and take their medicine whenever their fortunes, or jobs, are lost?

“Are you saying that we should get rid of, or limit, risk?”

No.

“BTW, when people argue with you, I have seen your points taken out further – nothing is being put in your mouth.”

As a rule, people here like to exaggerate my points to absurd extremes, until they’re something I never said and don’t believe. It’s easier to rebut an exaggeration than it is to understand and respond to what I’m actually saying.

Russ July 30, 2010 at 6:18 pm

“…I notice a lot of you rebut through the tactic of putting dumb arguments in the mouths of others.”

Here is part of the quote by Phillips that you provided, which refers to Chase:

“His prophetic skepticism, published as the crash was beginning, identified how the weakness of rising productivity lay in eliminating jobs….”

You praised Phillips, who says that rising productivity weakens economies because it eliminates jobs. I concluded that you agree with this. I also followed the logic, and came to the conclusion that if rising productivity weakens economies by eliminating jobs, then falling productivity must strengthen economies by providing more jobs. And, in fact, this gibes with your previous posts stating that make-work stimulates the economy, by giving people jobs, and thus an income, and thus stimulating demand.

I wasn’t putting words in your mouth. I was just following logic to its conclusion.

newson July 31, 2010 at 5:20 am

note that michael often lapses into the royal “we” to air personal views, and then makes generalizations such as “a lot of you”. ‘shows what a hard habit to break is collectivism.

michael July 31, 2010 at 7:58 am

We are a nation, newson, and I do feel an affinity for the members of that nation. Together we stand. There’s a lot of work to be done and many hands with which to do it.

You don’t feel a part of our nation. Fine with me. Sorry you have to share the place with us.

newson July 31, 2010 at 7:06 pm

actually i’m in australia. rest easy.

michael July 31, 2010 at 7:33 am

Russ, what you’re doing is following logic to an absurd conclusion. Here:

“I also followed the logic, and came to the conclusion that if rising productivity weakens economies by eliminating jobs, then falling productivity must strengthen economies by providing more jobs.”

No, it does not follow. What rising productivity led to was increased efficiencies. Which led to fewer jobs. Which led to lower aggregate income and fewer sales. Which led to less demand for the increasing number of products being offered. It was a trap from which industry couldn’t untangle itself.

The problem was that stock touts could point to a business’s unlimited capacity and lead investors to think the stock was going up, up, up. When in fact there was a ceiling to this growth: the inability to sell more than a finite fraction of the output.

You bring up the absurdity that therefore “falling productivity must strengthen economies by providing more jobs” just because we all know it is wrong. A superior approach would have been to follow Ford.

Back in 1914 the average industrial pay in the US was $2.34 for a nine hour day. Ford raised that to five dollars for an eight hour day. To the degree that other manufacturers had to follow him to attract capable workers, this move created a large pool of people who could now, for the first time, afford to buy autos.

It was a master stroke of enlightened greed. He still made money, as he could adjust the sale price to still come out at a profit. But the profit per unit could be far smaller because he mad up for it in doing a tremendous volume.

“And, in fact, this gibes with your previous posts stating that make-work stimulates the economy, by giving people jobs, and thus an income, and thus stimulating demand.”

I have NEVER supported the thought that we should be inventing useless jobs, or, as some would have it, to pay some people to dig holes and others to then fill them up. Instead I have stated very clearly that there’s a lot of work in this country that needs to get done. Bridge and dam repair, for instance, or reclamation of degraded land. We still have a great many Superfund sites in need of cleanup, for example.

Money spent in these areas is profitable to us all, not just the people who are able to get those jobs, because their spending enables others to sell them goods. And the money itself, being taxed at every point that it changes hands, ultimately comes back into the federal treasury after doing its work multiple times.

Russ July 31, 2010 at 7:45 pm

Russ wrote:
“I also followed the logic, and came to the conclusion that if rising productivity weakens economies by eliminating jobs, then falling productivity must strengthen economies by providing more jobs.”

michael wrote:
“No, it does not follow. What rising productivity led to was increased efficiencies. Which led to fewer jobs. Which led to lower aggregate income and fewer sales. Which led to less demand for the increasing number of products being offered. It was a trap from which industry couldn’t untangle itself.”

Yes, Michael, it does follow. If increasing the productivity of an industry leads to bad effects (e.g. fewer jobs, lower aggregate income, fewer sales, etc.), then it follows logically that going back to the situation before the increase in productivity must get rid of the bad effects, and thus make things better. The way to go back to the situation before the increase in productivity is to lower productivity by refusing to use productivity-increasing technologies.

“You bring up the absurdity that therefore “falling productivity must strengthen economies by providing more jobs” just because we all know it is wrong.”

Yes. It’s not my fault that your assumptions, when followed to their logical conclusion, lead to absurdity. (And they do; it’s not faulty logic.) This is a time-hononred method of disproving false assumptions.

“Back in 1914 the average industrial pay in the US was $2.34 for a nine hour day. Ford raised that to five dollars for an eight hour day. To the degree that other manufacturers had to follow him to attract capable workers, this move created a large pool of people who could now, for the first time, afford to buy autos.

It was a master stroke of enlightened greed. He still made money, as he could adjust the sale price to still come out at a profit. But the profit per unit could be far smaller because he mad up for it in doing a tremendous volume.”

So Ford pays out a lot of money in giving people over-market-price wages, and gets some of this money back in sales, of which he gets to keep some of this income as profit? And this makes Ford better off? Does not compute.

“I have NEVER supported the thought that we should be inventing useless jobs, or, as some would have it, to pay some people to dig holes and others to then fill them up. Instead I have stated very clearly that there’s a lot of work in this country that needs to get done. Bridge and dam repair, for instance, or reclamation of degraded land. We still have a great many Superfund sites in need of cleanup, for example.”

Yes, and we have continually responded by arguing that if the work needs to be done so horribly badly, if there is such a demand for the work, then there should be a way for a private company to make a profit doing the work. And if that is not the case, it is probably because of unfair competition from the government, or due to laws that prevent externalities from being internalized. So, your “work [...] that needs to get done” is either work that private firms could do, or it is effectively make-work.

“Money spent in these areas is profitable to us all…”

Assuming that the work is work that would make everyone better off, it would be more profitable to us all if private firms were allowed to spend their own money to get the work done, instead of our tax money!

“…because their spending enables others to sell them goods.”

For government-employed labor, their spending comes from their wages, and their wages come from taxes. So, if they were not employed, the money they are paid in wages could be kept by the taxpayers. Then others could sell the taxpayers more goods. There is no net gain whatsoever here. There is only money moved around; redistribution. It’s a shell game. This is really not so hard. If you would just let go of your prejudices for a few minutes, you would be able to understand this. Libertarians are not opposed to your preferred policy prescriptions because libertarians are heartless bastards (some are, granted, but most aren’t). They are opposed to them because your preferred policies will not have the results you think they will.

“And the money itself, being taxed at every point that it changes hands, ultimately comes back into the federal treasury…”

I ask again; And this is a good thing?! Money going into the federal treasury means money not staying in the hands of taxpayers, where it can be spent or invested by real people who pursue their own interests, not by bureaucrats and politicians who don’t necessarily care about the interests of the people.

Gil July 31, 2010 at 9:37 pm

No, Russ’s conclusion is correct. The free markets creates job destruction, for without job destruction there’d be no growth. The unemployed are supposed to create new industries and create greater technological process. Maybe the answer to the paradox is those who lost their job are the least creative and least likely to start new businesses.

Russ July 31, 2010 at 10:18 pm

“The unemployed are supposed to create new industries and create greater technological process. Maybe the answer to the paradox is those who lost their job are the least creative and least likely to start new businesses.”

Nah, that is ungenerous, to say the least. The way it’s supposed to work is that businessmen are supposed to retool their capital goods so they can match the real market’s demands, not the bubble market’s demands. Then the displaced workers can be hired again. It’s not the workers’ fault that they happened to work in market segments that existed mainly due to easy money. And in an economy based on a division of labor, expecting laborers to also be successful entrepreneurs is somewhat unreasonable.

Gil August 1, 2010 at 1:29 am

Nope. The agricultural sector has, for the past 300 or so years, been engaging in permanent job destruction. In other words, people have been losing jobs on the farms and not getting them back because of the rise of the new industries which in turn hired them. Had there been no overall job losses then we would all still be farm workers. Maybe it was the perfect storm condition: there was a crash at the same time a lot of workers were losing their jobs due to technological efficiency gains. Which is to say people weren’t willing to start businesses to hire the unemployed whilst existing business don’t need the extra workers because of their new equipment.

michael August 1, 2010 at 11:39 am

Gil: I find this comment very curious: “The free markets creates job destruction, for without job destruction there’d be no growth.”

This sounds very much like an unexamined assumption. If by growth you mean something like increases in our GDP, how does the destruction of jobs contribute to it?

We’ve recently seen the sudden destruction of many millions of jobs, in 2007-08. Did we also see a concomitant Great Leap Forward? Or, barring such a great stride being entered in the evidence, can we even come up with some theory linking this destruction of personal income on such a scale with even the potential for an enhanced GDP?

I’d look forward to your fuller explanation.

Russ August 1, 2010 at 11:50 am

Gil wrote:
“The free markets creates job destruction, for without job destruction there’d be no growth.”

michael wrote:
“This sounds very much like an unexamined assumption. If by growth you mean something like increases in our GDP, how does the destruction of jobs contribute to it?”

The canonical example is buggy whip makers. When the automobile industry started to take off, it put buggy whip makers out of jobs. There simply wasn’t much demand for whips anymore. Would we be better off if buggy whip makers were subsidized, or if automobiles were taxed to make them prohibitively expensive, so that there would still be a demand for buggies, and hence buggy whips?

New, better products that push old, inferior products out of the market necessarily displace workers, at least temporarily. This is unfortunate, but necessary, if we are to benefit from new products, and not be forced to subsidize old products that we no longer want.

michael August 1, 2010 at 11:58 am

Good dialog.

Gil: “The unemployed are supposed to create new industries and create greater technological process. Maybe the answer to the paradox is those who lost their job are the least creative and least likely to start new businesses.”

(I would agree. In fact I’ve just said so, above.)

Russ: “Nah, that is ungenerous, to say the least. The way it’s supposed to work is that businessmen are supposed to retool their capital goods so they can match the real market’s demands, not the bubble market’s demands. Then the displaced workers can be hired again.”

Businessmen can be relied on to enhance the bottom line of their company. That is their function. We can leave them to pursue that reasonable goal.

But society ends up with certain serious needs unmet, when all economic activity is left to the businessmen. One thing we found prior to 1933, for example, was that workers only made enough money to cover their families’ basic needs. So when they got too old to work, they were broke. Which meant they then had to die penniless.

So we invented something the businessmen would have had no need to come up with: a national retirement plan for wage earners. And we made that plan self-financing. Since then it has worked pretty well, throughout changing economic eras. It only needed one tweak back in 1982, and will need a second tweak sometime before 2018. Then it will continue to serve the needs of its public: those who can’t seem to be able to get ahead otherwise.

Then there’s this:

Gil: “The agricultural sector has, for the past 300 or so years, been engaging in permanent job destruction. In other words, people have been losing jobs on the farms and not getting them back because of the rise of the new industries which in turn hired them.”

That’s been the story of our whole economy. Over time, economies of scale favor larger and larger combines, and make the little guys (individual entrepreneurs) redundant. They can’t compete, by and large, and few can even make a humble living in the face of giant agricultural conglomerates. In fact they can’t even give up and get hired by such giant combines.

Which is fine, in a sense. You can’t expect businesses to hire more people than they need. That would be counterproductive. Yet it sets up a larger problem, that we have an increasingly large number of people who can’t find a space within the system. The number of workers needed to run the world keeps decreasing, while population keeps increasing. The world of tomorrow is not going to be a pretty sight. In fact, most of the world today really sucks already.

It’s not the place of business to have to find places for all these people… it’s up to society to find some other mechanism. And the one we have is the one that supplies the system with its money.

Tempting to just forget them all and let them go their own way. But that won’t work. Get them angry enough and they turn into revolutionaries (as they did in the early 20th century), and the costs of containing the consequent destruction become higher than the costs would have been to find better ways of addressing the problem.

As a beginning, I would let Bush-era tax cuts expire, put a halt to our useless wars and start bringing the budget into balance again. In other words I’d reset the economy to 1997-2000. And I’d extend direct educational and small business loans to individuals out of government money, rather than loan that money to private markets so they could either gouge or ignore their customers. I’d put the Treasury Dept. into the banking business, as necessary competition to the private banks.

The money would do far more work out on the street than it would as reserves in the vaults of our major investment banks.

Russ August 1, 2010 at 12:49 pm

michael wrote:
“One thing we found prior to 1933, for example, was that workers only made enough money to cover their families’ basic needs. So when they got too old to work, they were broke. Which meant they then had to die penniless.”

Michael, this is the way things have been for most of recording history, and certainly prehistory as well. How did this change? It changed when capital goods were advanced enough to drastically increase the productivity of labor. Then, and only then, could laborers work and expect to have more than a subsistence living. In 1933 this increase in productivity was just beginning.

“So we invented something the businessmen would have had no need to come up with: a national retirement plan for wage earners.”

Let’s say there is a high demand for the products that a business makes; let’s say it doesn’t have enough labor to keep up with demand for its products; let’s say profits are high; let’s say that there is a shortage of qualified labor at the wage they are currently paying. If these conditions are met, then the business will have to do something to attract the laborers it wants. One thing the business could do to attract laborers would be higher wages. Another could be a retirement plan. If the conditions I gave are met, then using government to pay for such a plan would be unnecessary.

Your continued error is in assuming that if businesses cannot afford such a plan, then the government could somehow implement it in a way that would not have a net negative impact on society. You assume this because you want it to be true. That does not mean that it is true. You let wishful thinking unduly influence your economic beliefs.

“And we made that plan self-financing.”

What complete and utter horseshit. Social Security was never, and is not now, self-sustaining. That would imply that the “trust fund” is real, and peoples’ payments go into it. Payments that people make today go into checks that other people receive tomorrow. SS is no more self-sustaining than any other Ponzi scheme, in the long run.

“Which is fine, in a sense. You can’t expect businesses to hire more people than they need. That would be counterproductive. Yet it sets up a larger problem, that we have an increasingly large number of people who can’t find a space within the system. The number of workers needed to run the world keeps decreasing, while population keeps increasing.”

By “the number of people needed to run the world keeps decreasing”, I assume that you mean that the labor needed to run the world keeps decreasing. That would mean that productivity is increasing, and thus prices of products are decreasing. This would mean that people would need less money to live, and thus could afford to work less hours. The labor needed to run the world will simply be spread out across more people, each of which does less labor. Working a 20 week, and still being able to afford a decent lifestyle, sounds good to me.

Donald Rowe July 31, 2010 at 9:08 pm

michael,
So, you are almost an Austrian now I see.
“The men who built America’s industry were very good at building incredible production capacity. But they were lousy at leaving a little change in their employees’ pockets so they had someone to buy their stuff. Consequently our manufacturing always suffered from an oversupply of goods and a customer shortage.”
Building that incredible production capacity likely cost a bit more than the boss could manage to accumulate just by gouging his employees on their pay. The Austrians think that the bankers, the fractional reserve bankers at least, might have had a little to do with the ability to build that incredible production capacity about which you speak. Those bankers, competing with each other to lend as much of their newly created fiduciary money as possible, effectively lowered the interest rates. And they made available the huge piles of cash to build those assembly lines. In addition to the pocket change the owners were able to squeeze out of their employees. Of course the resulting overproduction resulted in an oversupply, how could it not. Many potential customers didn’t have the needed money to buy all the new stuff, partly because they were paid too low a wage rate, but also because they never had it in the first place. It just looked that way to the businessmen because they could get all the money they wanted at the bank and at low rates to boot. Money that wasn’t saved in the first place. It seems like it is only a matter of degree, doesn’t it. Do you really still think the easy money of fractional reserve had nothing to do with the boom and the bust?
Cordially,
Don

mpolzkill August 2, 2010 at 9:29 am

Putting dumb arguments in Michael’s mouth? Come on guys, that’s *Michael’s* job, and you know he’s a protectionist.

Old Mexican July 31, 2010 at 1:22 am

Re: Michael,

In other words, as illusionary wealth expanded in the financial markets, actual wealth, in terms of volume of goods sold and moneys received, was shrinking. An eventual crash was unavoidable, and occurred as the book was going to press.

What do you think explains this illusionary wealth? If it is illusionary, it means people were suffering illusions. What was causing them, according to you?

I already know the answer to that, I just cannot see what’s your take on this.

By the way, it is not true that wealth is simply money received for goods sold, nor was productivity shrinking at that time, as your thinking suggests.

The men who built America’s industry were very good at building incredible production capacity. But they were lousy at leaving a little change in their employees’ pockets so they had someone to buy their stuff.

This is a ridiculous statement, based totally on the fallacy of just compensation. If what you say is true, then wood screw factory workers were stupendoulsy wealthy, as their wages allowed them to buy an extraordinary number of wood screws, whereas house builders were living in the muck, as their wages could not allow them to buy a house.

In fact the “just compensation” fallacy is nothing more than another iteration of Marx’s wage theory, which was thoroughly and embarrassingly debunked by Eugen von Bohm-Bawerk.

Consequently our manufacturing always suffered from an oversupply of goods and a customer shortage.

Michael, this is an old and tired fallacy. Whoever comes up with such theory understand absolutely nothing about the simple law of supply and demand. There can never be an “oversupply” of anything as long as the market is allowed to clear.

To me, Henry Ford was the exception to the rule among 1920s industrialists. He knew he couldn’t sell a personal vehicle people couldn’t afford to buy. So he paid his workers generously. And they all went out and bought Fords.

This is a myth. He did not pay his workers “handsomly” because they were his clients (he would have been a very poor businessman rather quickly if he really thought what you think); he merely offered a higher wage than his competitors in order to keep the turnover of workers as low as possible, since work in the assembly line was rather tedious and somewhat dangerous. He found that hiring and training added to the cost of doing business, but he certainly did NOT offer a wage that allowed his workers to buy Fords; he could not have sold 21 million model Ts if he only had HIS employees as clients (!)

michael July 31, 2010 at 8:22 am

“What do you think explains this illusionary wealth? If it is illusionary, it means people were suffering illusions. What was causing them, according to you?

“I already know the answer to that, I just cannot see what’s your take on this.”

Irrational expectations of performance. Whether it’s a real estate bubble, a stock bubble or any other kind, people want to believe that the thing they’ve invested in will just keep growing, and growing, and growing… that there’s no limit to growth.

There is, of course. Otherwise we’d be able to hit Dow 36,000, and starter homes would cost a million dollars. But reality puts a very hard ceiling on our dreams: the limit to what people can afford to pay.

“By the way, it is not true that wealth is simply money received for goods sold, nor was productivity shrinking at that time, as your thinking suggests.”

“My thinking” observes that productivity was increasing during that time.

Nor should there be any confusion between “wealth” and “gross profit”, which is the concept you define (money received for goods sold). Here’s my comment again:

“In other words, as illusionary wealth expanded in the financial markets, actual wealth, in terms of volume of goods sold and moneys received, was shrinking.”

“Actual wealth” would mean the aggregate of all industrial and retail activity. True, I haven’t looked at the charts closely enough to say this was actually shrinking. But it does seem apparent that it had hit a natural wall, above which it could not advance. Meanwhile, “illusionary wealth”, meaning the hopes and dreams of many hundreds of thousands of investors, continued to climb to the stars.

“This is a ridiculous statement, based totally on the fallacy of just compensation. If what you say is true, then wood screw factory workers were stupendoulsy wealthy, as their wages allowed them to buy an extraordinary number of wood screws, whereas house builders were living in the muck, as their wages could not allow them to buy a house.”

It’s only ridiculous when you purposely misunderstand, as you’ve done. Let’s leave aside “the fallacy of just compensation” as being irrelevant to my actual argument. Consider all employees in the aggregate. Consider how much purchasing power they have. They can therefore afford to buy quantity A of total industrial output.

If total potential industrial output is >A, then capacity has to be shut down, and employees laid off. If, however, aggregate purchasing power A increases, than as a direct consequence, total industrial output can increase– for the reason that they have customers for more goods. Or, to be sure, customers for the same amount of goods at higher prices– in which case production is not free to increase.

See it more clearly now?

On to Henry Ford: “He found that hiring and training added to the cost of doing business, but he certainly did NOT offer a wage that allowed his workers to buy Fords; he could not have sold 21 million model Ts if he only had HIS employees as clients (!)”

First, Ford’s advances had a ripple effect on business. It’s not like no one noticed how he was changing the game. Competitors copied his use of assembly lines and mass manufacture of a limited number of styles, and left their old business model of producing a few elegantly hand-made vehicles for the carriage trade. And they watched as his productivity increased due to slow employee turnover and retention of the best skilled help. So they also had to raise wages to compete for the better workers.

But mostly, what Ford did was to bring the unit price of his product down to a point where the average incomes of the day could afford it.

Old Mexican August 1, 2010 at 12:11 pm

Re: Michael,

Irrational expectations of performance. Whether it’s a real estate bubble, a stock bubble or any other kind, people want to believe that the thing they’ve invested in will just keep growing, and growing, and growing… that there’s no limit to growth.

Like that, Michael? Out of the blue, they expect their investment to grow exponentially? Or are they being fooled by something?

Let’s leave aside “the fallacy of just compensation” as being irrelevant to my actual argument. Consider all employees in the aggregate. Consider how much purchasing power they have. They can therefore afford to buy quantity A of total industrial output.

You would be saying that the wage level should be such that workers can buy the output of a certainl industry. Is that the case? In that case, which industry? because saying “industry A” is too vague for me.

If total potential industrial output is >A, then capacity has to be shut down, and employees laid off. If, however, aggregate purchasing power A increases, than as a direct consequence, total industrial output can increase– for the reason that they have customers for more goods.

You make the assumption that it is consumption which pulls production. It is actually the other way around – we as humans produce in order to consume, not consume do that others can produce.

Ford’s advances had a ripple effect on business.

That’s just an ad hoc explanation, Michael. YOU said he raised the wages so that HIS employers could buy Fords. NOW you bring up this “ripple effect” when the absurdity of what you said was pointed out to you.The fact is that Ford raised the wage levels to reduce employee turnaround, and not for the purpose of allowing them to buy Fords. It was the lowering of the cost of manufacture that allowed MORE people to buy Fords (i.e. increased PRODUCTIVITY), but not raising their wages SO they could buy them.

I work in the cement manufacturing business, and the wage leves are not offered to workers so that they can buy a 50lb sack of cement.

Ohhh Henry July 30, 2010 at 9:01 pm

Thanks for the actual content. To me, Henry Ford was the exception to the rule among 1920s industrialists. He knew he couldn’t sell a personal vehicle people couldn’t afford to buy. So he paid his workers generously. And they all went out and bought Fords.

He did not give them large pay increases so that they would buy his cars. If that was his thinking then he could simply move money from one of his pockets to the other and forget about all the difficult, time-consuming business of designing automobiles and building factories.

Ford gave his workers those huge raises, higher than any other automaker, because it reduced absenteeism and employee turnover and that made his factories more profitable. It was a case of the free market working for the benefit of all – capitalists, managers, workers and consumers. The story is related here and elsewhere.

Now they literally have to hold the gun to taxpayers heads to make them pay autoworkers what the workers claim they need to live. I wonder how that will end?

newson July 31, 2010 at 5:15 am

““I believe it is a disgrace for a man to die rich,” Ford declared. “Good will is about the only fact there is in life.”

he’s certainly guilty of appalling hypocrisy.

michael July 31, 2010 at 2:08 pm

Henry, you’re saying that when you pay someone more you motivate them to become a better employee?

Hard to disagree with that. How come everyone isn’t doing it?

newson July 31, 2010 at 8:25 pm

the carrot comes with the stick. there’s no guarantee that higher wages alone increase productivity (see the public sector in recent times).

Gil July 31, 2010 at 9:44 pm

There’s probably something to said about Ford’s auto company being unique at the time and quite profitable to allow him to abitrarily raise workers’ pay. After all, wages are expenses to a business and no business owner would raise his expenses for the fun of it.

Russ July 31, 2010 at 10:11 pm

There’s a diminishing margin of return. To a certain extent, raising wages will raise morale and encourage people to work harder so that they don’t lose their higher pay. But after a certain point, that will no longer work. Once people are working at or near their maximum capacity, more pay will not effect any great change; it will just be a waste of money. Also, people tend over time to adjust to the new norm and believe that they are entitled to that greater pay even for a mediocre work effort.

Also, Ford was probably not paying more just out of the goodness of his heart. That was just effective self-marketing. He was probably paying more to try to attract the better workers to his firm, and leaving other firms with the more marginal workers.

Gil August 1, 2010 at 1:33 am

Raising wages? What if there’s something to said that some workers may be uppity and think the wages are too low for the work they do but there are other unemployed workers who would be happy to work the same wages? What if Henry Ford thought to advertise his wages and conditions to a different part of town then hold on to ingrates? Would H. Ford do a facepalm?

guard August 2, 2010 at 2:59 am

Wages are an easy target for cost cutting, being much more visible than many other costs. But I have observed in some companies I have worked for that the not-so-visible costs of incompetence in employees easily outweighs the “savings” in hiring them. You get what you pay for. This is a common management error. As for Ford, it’s hard to argue with success.

Being self employed is the nobler thing, but like art it usually doesn’t pay very well. Any employment that pays well is subsidized by government violent coercion somehow whether direct government employment, employment by government contractors, employment in occupations licensed by the government, etc. Even the very use of money itself is based on government coercion in enforcing the use of money. There is no longer enough freedom for self employment to be much of anything but another form of government employment.

Jesse August 7, 2010 at 2:08 pm

I am thoroughly confused by some of the responses on this thread. Are there as many absolutes as people seem to be assuming? What role does the “individual” play within a system or corporation?

Larry Perrault August 26, 2010 at 1:28 am

I am just a 53 year-old longtime social observer who spends a lot of time communicating on the Internet.

A) What do I need to do to take or atleast audit the course?

and B) Can you explain why as much as some complain and natter, no one even considers that we ought just part ways as philosophical and irreconcilable strangers? Only Walter E. Williams has posed such a resolution, but he let it lie and did not follow up. Beyond the “little” threat of war, are there other daunting difficulties in such an idea? I’m exhausted with decades of debate with people who adhere to dogma that renders constitutional principle not even as understandable and respected as a treatise written in a foreign language.

One social debate after another would fairly dissolve if people just separated. Let the government interventionists have everything their hearts desire from single-payer health care to a command economy and everything else, without we pesky dinosaurs to hinder their progress or to blame for their failures. Have it all; just leave us out of it.

Why in the lengthening course of dramatic acceleration of unconstitutional folly and the intense reaction that it has inspired, is scarcely anyone even breathing the suggestion of so simple a solution? I have no ambition to reclaim a muddled authority to stand with our foots upon the throats of a squirming and bleating 40-49%. Just be done with it. I have used the same analogy that Williams did, comparing our situation with that of a couple that no longer agrees on or respects the terms of the marriage contract. Why is this evidently such a daunting prospect? Is it only a fear of the American military which in fact may be less than anxious to impose unconstitutionality on peaceful dissenters? We seem a far cry from the citizens who took up arms to defend creator-endowed rights, pledging their lives, their fortunes, and their sacred honor.

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