Saturday, March 1, 2014

"Fordism" used to be the norm

"Fordism" is the economic philosophy that widespread prosperity and high corporate profits can be achieved by high wages that allow the workers to purchase the consumer goods they produce, such as automobiles, furniture, clothes, etc.  Named for its creator and biggest proponent the industrialist Henry Ford, who understood the paradox of workers producing goods that they could not afford themselves, which was the prevalent state of the economic system in the US when Ford started his automobile production.  Ford understood that such a system is self-limiting in that the few who had all the wealth could not possibly spend it all, thus the distribution of work product, i.e. the goods and services produced, would progressively shift to an overall inefficient application of labor and resources, and a state of perpetually high unemployment would exist.  Fordism also includes the shift to specialized mass production which made for large quantities of inexpensive goods that appeal the the worker rather than the luxury buyer.  But mass production also brought undesirable working conditions of intense concentration to the work and at the same time boredom.  Conditions which made these jobs hard to keep properly filled.

Without Fordism, there would not be the production of large quantities of middle class goods and services such as small homes, economical cars, reasonable furniture, home goods, clothes, and food.  Instead, the production would shift to small amounts of esoteric luxury items and services for a tiny fraction of the population, where each item or service took significant labor to produce.  These are things like elaborately ornate embroideries, and home finishes which require hand applied elaborate details, watches meticulously crafted by hand, extreme luxury and performance cars, exquisitely prepared meals at exclusive restaurants, and services like personal chefs, legions of gardeners, house keepers, butlers, etc. to maintain immaculately manicured homes.  In other words, fewer customers for Ford's cars and for the myriad of other mass produced goods from the factories of America.  However, Ford was no opponent of luxury and fine goods, rather he thought that there was a limit to the need for these and beyond this limit they became harmful to the greater economy.

Employers benefit from Fordism in two ways, first, with high wages the employer has the pick of the most stable and most efficient employees, resulting in high productivity, high quality work, and low turnover.  Secondly, the workers earn more income than previously, so they can purchase more goods and services at higher prices, the very goods and services which they produced, resulting in increased sales for the employer.  This results in a virtuous cycle of rising incomes, motivated workers, low unemployment, and rising consumption driving rising sales and profits.

Fordism is a formula for maximal employment and having the economy functioning at its expected potential.  Indeed, Fordism raises the expected potential of the economy faster than it would have risen otherwise because the incessant demand it creates induces producers to increase productivity through efficiency and innovation faster than they otherwise would have attempted.  Producers are forced down this path of growth because no other path is available to meet the demand.  In other systems, there is no increase in demand as efforts of employers are aimed at reducing wages which allows for a greater profits at the same price, and the belief that more workers could then be hired to meet demand at the same price.  But this reduction in wages does not increase demand as the total amount of wages is the same.  It simply means that the workers share the same amount of goods as today, but have fewer per worker.

Fordism is a nationalist system, therefore it has one problem.  It needs to be all encompassing at the national level.  All entities which interact in the system must be susceptible to the principles of Fordism for this system to work.  Fordism could be a global system, but all nations must adopt its principles for this to happen.  At the national level this can be ensured by two necessary mechanisms; first, all regions of production must come under the same rules and opportunities as existed in the Midwest manufacturing belt where Fordism started.  This is what happened all over American as production expanded through the mid-twentieth century.  Manufacturers in the West, East, and South were forced to adopt Fordism or lose their workers to those who did.  The second is to enforce a balance of trade with other nations and to provide for the protection of high wage, high tech, high value added industries.  This is what happened in America until the mid-1960s, which is coincidentally when problems in the US economy and financial situation started to occur.  And this is what Germany does today, which helps explain its thriving production economy.

Starting in the early 1970s, the US abandoned Fordism by shifting to globalization.  Globalization is by definition anti-nationalism.   This shift promoted unbalanced trade which left massive trade deficits of unsettled trade accounts, and free-floating currencies which were no longer backed by real goods and services (the abandonment of Bretton-Woods in 1971).  The result was that goods were imported from foreign nations where wages were kept artificially low compared to the US through currency manipulation and a lack of trade settlement.  US manufacturing jobs which relied on Fordism's high wages were shipped overseas.  Wages fell in the US and the standard of living of Americans with it.

Therefore, it is highly likely that resurrecting traditional American trade policies will lead to a similar resurrection of Fordism and the American standard of living.

PS  Apparently Fordism is making a bit of a comeback.  Here's a quote from a recent article by Robert Reich [1]

"For one thing, a higher minimum wage doesn’t necessarily increase business costs. It draws more job applicants into the labor market, giving employers more choice of whom to hire. As a result, employers often get more reliable workers who remain longer – thereby saving employers at least as much money as they spend on higher wages.

A higher wage can also help build employee morale, resulting in better performance. Gap, America’s largest clothing retailer, recently announced it would boost its hourly wage to $10. Wall Street approved. “You treat people well, they’ll treat your customers well,” said Dorothy Lakner [2], a Wall Street analyst. “Gap had a strong year last year compared to a lot of their peers. That sends a pretty strong message to employees that, ‘we had a good year, but you’re going to be rewarded too.’