In 1914, Ford was a privately held company. That meant that every dollar of profit went into Henry Ford’s pocket. He could pay his workers $2 a day (a slight premium to the average wage), which meant $500 annually, or $5 a day, which meant $1,250 — a premium of $750. At the time, a Model T — the company’s flagship brand — retailed for between $450 and $550.4 Let’s split the difference and call it $500.
Ford chose to pay his workers $1,250 because this gave them the extra money they needed to buy one of his autos, thereby putting $500 back in his pocket, right? Well, not exactly. Because anyone who knows the first thing about business understands that owners keep the profit, not the revenue. Let’s be generous and imagine that the profit margin on a Model T was 25 percent. Ford gets back 25 percent of $500, or $125, while he paid out an extra $750 in wages that year! And that’s the first year. Because unless these workers buy a new car every year, from that point forward it’s pure expenditure on Hank’s part, with no benefit flowing back to him.
Then there’s the second interpretation, which is not only my argument, by the way, it’s the one you’ll find put forward as the “primary” motivation on the Ford Motor Company website!5 Because it’s the one that makes sense. There’s a term for it: the “efficiency wage.”
The premise of the efficiency wage is that it is enlightened business practice to pay workers more than the bare minimum because more generous pay packages result in greater output and higher profits. If you pay someone the absolute minimum needed to get a warm body, you’ll get an untalented person who will give you minimum effort. In a market economy, wages are determined by many factors, but the value-added component is decisive. The more value added that is directly attributable to your efforts, the more money you’ll make. It’s why athletes like Sidney Crosby and LeBron James earn more than the average player; they more directly boost their team’s revenue. And if I may paraphrase the words in the first interpretation, that is the basic economic bargain that lies at the heart of a modern, productive economy.
The first interpretation should be at least a bit troubling. In place of hard analysis, we have wishful thinking. It might be nice if everyone were paid more money (because we’re all consumers, aren’t we?), irrespective of whether anyone works harder and/or smarter and adds more value. But it’s not how any economy works. Wages move in lockstep with productivity and anything that enhances productivity leads to higher wages. And the reason why wages grew so robustly in the 1950s was a combination of capital deepening and a workforce that flat-out busted its @ss.
It just occurred to me. I haven’t told you who wrote the words for the first interpretation. It was Robert Reich, who is currently Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California, Berkeley. He was formerly a professor at Harvard University’s John F. Kennedy School of Government and Mr. Reich served as Labor Secretary during the Clinton administration.6
You can’t make this stuff up.
The 1960s
John Fitzgerald Kennedy was an inspirational figure. My parents loved Canada, grateful for the opportunity it had provided them, yet they still had a small bust of JFK that sat on a living room table. If there was one person who symbolized the 1960s, it would be Kennedy, and there is one single quote that defined him above all else: “My fellow Americans, ask not what your country can do for you, ask what you can do for your country.”1
The words inspired a continent, at least temporarily. The irony is that before the decade was out, this quote had been turned on its head: North Americans were increasingly asking what their country could do for them, and expecting more and more.
JFK had a wonderful ability to turn a phrase. If the “ask not” quote is his most famous, perhaps number two was “Those who make peaceful revolution impossible will make violent revolution inevitable.”2 The years after JFK’s death were turbulent, but there was a peaceful revolution that had been going on since the middle of the Second World War, and the ripple effects were felt in both the developed and developing worlds.
It was the so-called “Green Revolution,” referring to improved agricultural practices that started in Mexico in the 1940s, and spread across the globe over the next two decades. This revolution’s George Washington was an American scientist, Norman Borlaug. He developed new, disease-resistance strains of wheat. These products, combined with mechanized farming, made the United States, a country that had previously had to import half of its wheat, a net exporter by the decade’s end.
The Green Revolution involved more than developing new and more robust strains of plants. It also crossed into fields as diverse as agronomy, soil science, and genetic engineering.3
Almost unbelievably — because of the latter in particular — there is some “controversy” around the Green Revolution. There have been criticisms levelled against it, including that increasing food production has led to overpopulation (suggesting it would be better if more people starved to death?) and that some places — specifically Africa — have not benefitted to the same extent as others because of a lack of infrastructure and corrupt governments (clearly Borlaug’s fault!).
QUESTION 17
Which do you think a critic of the Green Revolution is more likely to have?
☐ A full stomach.
☐ An empty stomach.
The Green Revolution was — and is — an unmitigated good and if there ever was someone who deserved a Nobel Peace Prize, it was Norman Borlaug, who received the award in 1970.4
Canada benefitted from the Green Revolution. One of the consequences was that fewer people actually produced more food. In 1951, 2.9 million Canadians lived and worked on farms. That number was cut in half by 1971.5 This change freed them to do other things; that is, to provide other goods and services, enabling the economy to grow even faster.
A transition was continuing. Canada, which had had an economy based on agriculture in the nineteenth century, was becoming increasingly more reliant on manufacturing, and its single most important sector was automobiles.
General Motors, Ford, and Chrysler were a tight oligopoly that controlled the North American automotive market. They manufactured on both sides of the border and all faced the same problem: there were stiff duties on both imports and exports. This meant that in order to sell Thunderbirds in Canada, Ford had to produce Thunderbirds in Canada. Otherwise, the tariffs made the cars prohibitively expensive. This hindered the economies of scale that are required to manufacture efficiently.
A compromise solution was eventually reached — the Auto Pact of 1965.
Its key points were:
for tariff-free entry of Canadian automobiles or original equipment parts into the U.S., automobiles must contain at least 50 percent North American (U.S. or Canadian) content;
for tariff-free entry of U.S. finished vehicles or original equipment parts into Canada, manufacturers in Canada must satisfy the following criteria:
manufacturers must maintain a certain ratio between the net sales value of vehicles made in Canada and the net sales value of vehicles sold in Canada;
the amount of Canadian value added for all classes of vehicles made in Canada must be at least as great as the amount achieved in the base year.6
The Auto Pact created a unified North American market that discriminated against manufacturers located off this continent. It meant, practically speaking, that if Canada accounted for 10 percent of the North American auto market revenues, 10 percent of the total value of all cars sold in a calendar year had to be built here. This allowed a company like Ford to do all of its production of one model in Detroit, and sell them across North America, as long as it did all of its production of another car in Windsor, Ontario.
This was good for both countries, but the impact was more pronounced in Canada: the productivity gap between Canadian auto plants and U.S. plants narrowed markedly in the wake of the Auto Pact.7
Geography — as well as culture — made it inevitable