Henry Ford may not have been a great intellectual, and he entertained some profoundly politically incorrect opinions, but he was an accomplished engineer, a brilliant manager, and a creative inventor and businessman. He is, of course, famous for implementing assembly line production of motor vehicles, but his greatest contribution, according to Lee Iaccoca, was the $5-a-day minimum wage scheme he introduced in 1914. In performing this seemingly generous act, Ford was primarily serving his own immediate interests, and only incidentally those of his workers, but he also understood that if he were to have a market for his vehicles, workers must be able afford to buy them, hence must be well paid. This axiom of market economics seems to have been forgotten during the past 30 years. An anonymous editorial in the Guardian of April 30th 2009, about the troubles besetting Detroit, pointed this out:
... Since the 1970s the average worker's pay has barely risen at all (Detroit is an exception). He or she has had to borrow ever more to enjoy economic security. All that indebtedness eventually caused this crisis. That is the high price to be paid for economic hollowing-out. They may now seem part of the problem, but Detroit's working conditions should really be part of the solution.
The truth of this assertion is supported by comparing the historical trend of inflation-adjusted US wage rates over the past sixty years with the parallel trend in the GDP per capita. It is reasonable to assume that the two trends should show some degree of correlation -- they should certainly move in the same direction, and one would expect their rates of change to be within an order magnitude of one another.
The GDP per capita of the US increased fairly consistently at about 1.8 per cent per annum from 1870 to 1995. Between 1950 and 1995 the figure was a little higher at about 2.2 per cent per annum.
The US Federal minimum wage rate provides a comparison of wage movements with this measure of wealth, albeit a rather rough one since the minimum wage is influenced by non-economic issues such as election cycles. In real terms, the mean minimum wage for the 1990s was 4 per cent lower than that for the 1950s, while the GDP per capita rose by more than 220 per cent
More revealing is the 25 per cent increase from the 1950s to the 1970s, and the subsequent 23 per cent decrease to the 90s. These were not actual wages, of course, but as any struggling employer will know, minimum wage rates are indicative of, and influence, real wages. The corresponding variations for median income were a rise of about 52 per cent from 1955 to 1970, and a fall of about 0.5 per cent from 1970 to 1995. The latter was followed by a rise of about 6 per cent in 1998, after which it remained constant through to 2007.
In the three decades since the 70s, improved productivity has both continued the trend of increasing GDP per capita, but at the same time it has displaced workers by replacing them with new technology. A few of those displaced have joined an expanded elite; most have taken lower-paid jobs; some, perhaps many, have become unemployed or make ends meet with a jumble of part-time jobs. A depressing example of the last is the proliferation of poorly-paid "adjunct" professors in North American academia -- university teachers, employed on a casual basis to front classes for minimal pay, no job security and zero prospects. The reward and status once due to these impoverished academics has been commandeered by a hoard of non-contributing "elite" university bureaucrats.
So the numbers tell us that more-or-less all of the new wealth has been appropriated by the elite, who, in spite of their best efforts, and perhaps because they still bear a remnant of the thrift of their forebears, are incapable of spending all of it. The left-over money must be recycled through the system by spending, or invested in further production. Most of it must be spent rather than invested, since the absence of market for existing products would be exacerbated by the appearance of yet more products from new investment.
The only way to spend this money is to lend it to the non-elite who have little or no disposable income. Various devices, from hire-purchase loans, to mortgages for investment, domestic dwellings and consumer finance have been used to do this. In the US, many such mortgages were predatory or downright fraudulent, implying that there were both an urgent need to get the money into circulation and substantial rewards for those who hurried it on its way.
By-products of this lending were the feeding frenzy of CDOs, short-selling and other antics of the money markets. These activities did not cause the ultimate economic problems -- it may be that financial markets are little more than bit players in the grand pageant of the economy -- although because they control large accumulations of appropriated wealth, they can cripple the economy by blocking the flow of cash, as the banks have so dramatically shown.
The outcome of all the frantic lending was, of course, what financial commentators term "economic meltdown". In fact, it was not a melting at all -- it was solidification. The flow of money froze when it dawned on at least one Wall Street financier or banker that maybe some of this money that the firm had so generously loaned might not actually be repaid, and the hard-to-sell CDOs accumulating in the strong-room might not be AA+. Even worse, perhaps the same thought might occur to other bankers, who might put on the brakes. We'd better lock up all our money, try to offload all the doubtful stuff and hope that the creditors don't come calling. But the creditors sniffed the air, smelt panic, and they went calling.
So the portcullises of the big banks lining Wall Street slid silently down, locked into place, masking the glittering atriums -- and the roller-doors fronting all the little betting shops off Wall Street clattered shut. The grand bankers and financiers clambered into their corporate jets, flew to Washington, and said to Ben Bernanke and Henry Paulson: "Money! Give us money", and the frightened little bookies crept weeping home to their wives.
It is not clear that Bernanke and Paulson had the least idea about how they should respond to the remarkable spectacle of arch-capitalists from the heart of American free enterprise begging for welfare. It has been argued that giving vast sums of money to Wall Street bankers who have efficiently demonstrated their craft by losing even vaster sums of money might be a little unwise, but it seems that the only principle guiding world-class economists is the urban myth that since the major cause of the great depression was the reluctance of governments to spend, the solution must be for governments to splash money around.
All solutions offered by economists carefully avoid mentioning the vanishing "demand side" of the economy, since the consequences, which involve paying fair (or -- gulp! -- generous) wages to the workers, are far too gruesome to contemplate. It is much better, more comforting, and less likely to cause a ruckus just to recycle all the old stuff about regulation, updated with fashionable terminology, from the last economic downturn.
If the United States economy, and by implication the global economy, more or less recover, as well they may, the cycle will repeat, since the elite will not forgo any part of what they regard as their due without an enormous fuss. The recent and continuing spectacle of British parliamentarians helping themselves to public money through a variety of rorts is testament to the sense of unlimited entitlement that infests, and paralyses the elite. The late, paralytic Parliamentary speaker's first reaction was not to address his problems, of which he, not being entirely stupid, was doubtlessly aware, but rather to seek legal means of preventing a newspaper revealing the shyster antics of his charges.
Change in societies and their economies are non-linear -- they are chaotic: long periods of stasis mingle with sudden changes of state; new departures emerge, unforeseen and surprising. It is this unpredictability that makes the art of economic prognostication so dismally erroneous and the study of history so fascinating. In spite of Ford's dismissive opinion of history, wittingly or not, he changed its course: efficient production and the application of his axiom led to the consumer society, in which goods and services, previously denied to all but the elite, became progressively accessible to the majority, at least in the developed west. What we now may be seeing, as the purchasing power of the majority fades, is the decline of consumerism and a change in the form of society.
The nature of any new order is quite uncertain, but the throttling of creativity by the deadweight make-believe managerialism observable in education, research and business; the steady formation of Kafkaesque bureaucracies in governments; the detachment of financial bodies from productive enterprise; and the absence of any means for a fairer distribution of wealth are not causes for optimism.
Ken Aldous, scientist