Let’s revisit Wilson’s actual words. He was implying that steady, non-inflationary growth, a rising tide that lifted all economic boats, along with peace and prosperity — the phenomenon that people organize into political units to help achieve — would by definition benefit General Motors, which happened to be the biggest consumer discretionary company in North America at that time.
The 1950s taught us that sound public policy dovetails with strong economic growth.
One of GM’s rivals was AMC, the American Motor Company. Its CEO from 1954 to 1962 was George Romney. When he took the helm, AMC was floundering and there’s a compelling argument that he saved it from bankruptcy, before making it extremely profitable.
The company’s board of directors believed that he should be rewarded. Romney was making a salary of $225,000 (this was at a time when the median family income was $5,600) and they thought he deserved $100,000 on top of that (equivalent to $1.5 million in today’s dollars) — Romney refused.15 His argument was that no one needed any more money than he was already getting.
What do you think that did for morale at AMC? I’m sure there were some workers who thought, Look, the guy is already making so much money that he can’t know what to do with it! But I’m equally certain that there were more than a few who argued: “He didn’t have to turn it down. Pretty righteous thing to do, if you ask me.”
Romney was making about forty times the median family income. According to the Canadian Centre for Policy Alternatives, Canada’s one hundred top-paid CEOs make 171 times more than the average Canadian worker. By 1:11 p.m. on January 2 — the first working day of the year — members of this select group have earned more than the typical working stiff makes in twelve months.16
There has always been income disparity in North America. It is likely that there always will be. But a symbolic gesture like the one Romney made matters and was a sign of the times.
The 1950s in fifty words: Immigrants join the native-born in building the country. Massive wealth-generating infrastructure projects are initiated, even while government reduces debt. Individuals take responsibility for their own futures, saving mightily. And while Canada’s population went up by 30 percent, real GDP per capita increased at an annual rate of 2.5 percent for each year.17
And the next ten years would be even better.
Wealth Generation --- and What Makes Wages Go Up
GDP per capita went up sharply during the 1950s, which was a good thing. We want the lot of the average person to improve as time goes by.
However, as much as we crave wealth generation, there is very little systematic thought into what really drives it.
Let’s establish a few basic principles.
There is a small community that consists of three families. They have organized themselves such that one family provides basic food for everyone, another basic clothing, and the third basic shelter. They trade basic food, basic clothing, and basic shelter, and everyone’s needs are satisfied.
However, in addition to the basic clothing provided by the second family, it makes especially good clothing for itself. This means that the overall wealth of the community is higher than it was before. The other two families decide that they would also like especially good clothing for themselves.
There are several alternatives. They could illegally take the clothing. But this would mean that the community’s total wealth is unchanged — they’re better off at the expense of the first family.
Another alternative would be to organize themselves politically and “legally” expropriate it. The argument could be that this family doesn’t deserve all the good clothing itself. It should be forced to share. But this would also mean that the total wealth of the community is unchanged.
Or the families could strike a bargain: If we offer especially good food and especially good shelter, would you be willing to exchange some especially good clothing? If the answer is “yes,” wealth is being created. Everyone wins. And it illustrates the single key point about wealth generation: It is achieved through voluntary exchange.
In this example, I’ve used goods rather than services. But the framework is the same. What if the first family, in addition to providing basic food, were particularly good entertainers? And what if they were willing to put on shows to enrich the lives of the other families in exchange for especially good clothing and especially good shelter? Moreover, what if the other two families would prefer to see an entertaining show than to have especially good food? Once again, everyone wins if everyone voluntarily agrees. There is no meaningful distinction between the provision of services rather than goods: The model holds.
On the other hand, what if the first family were terrible entertainers? And what if they spent an equal amount of time rehearsing, but the other families refused to exchange clothing and shelter to see them? Just because the first family spent a great deal of time in their artistic pursuits doesn’t mean that wealth is created.
Wealth creation isn’t a function of hours worked; it’s a function of hours worked productively.
This leads us to several key understandings:
by definition, wealth-generation it is not a zero-sum game. Growing the pie benefits multiple parties;
wealth generation works only if production is directly responsive to the needs and wants of other parties. This means it is the most selfless exercise known to mankind: to the extent you provide exactly what other people crave most, you benefit the most;
wealth generation works best when executed through voluntary arrangements, allowing each party to customize the benefit it will receive.
The majority of Canadians are employed rather than self-employed. This means they rely on somebody making the voluntary decision to pay them more if they want to get ahead. Therefore, what drives real wage growth should be of acute concern.
I’m going to go back in history to demonstrate this process in action. In 1914 the average industrial wage in the United States was $1.75 a day. That year, Henry Ford shocked the business world by paying his workers $5.00 a day — almost tripling the average wage paid at the time.1
The question is why. Why did he do that?
I’m going to present two different interpretations. Just so you know in advance, one of them is mine. But I’m not going to tell you which one yet. I’ll let you read them first.
QUESTION 16
Which of the following statements provides the more reasonable interpretation of why Henry Ford paid his workers almost three times the prevailing industrial wage?
☐ Ford was neither a madman, nor a socialist, but a smart capitalist whose profits more than doubled from $25 million in 1914 to $57 million two years later.… Ford understood the basic economic bargain that lies at the heart of a modern, productive economy: workers are also consumers.2
☐ Ford was neither a madman, nor a socialist, but a smart capitalist whose profits more than doubled from $25 million in 1914 to $57 million two years later.… Ford understood that if you paid workers above-average wages, you would attract the best and they would be motivated to work hard.3
The choice couldn’t be clearer: Did Henry Ford pay his workers well because in doing so he would create a market for his products, or did he pay his workers well because he would get more work out of them?
☐ I agree with the first interpretation.
☐ I agree with the second interpretation.
I’ve tried to be as fair as I can. I’ve let you make your selection before I reveal which one of the two is mine, because there is a fundamental