The Zanetti Report
January 7, 2009
This week’s missive focuses on a remarkable man from another remarkable generation…Henry Ford. There is more depth to him than most Americans know. He turned economic theory on its head 90 years ago. He was everything that Bernie Madoff wasn’t. Maybe we can learn something from the maker of the Model T.
Signed, Your Used-To-Have-Have-A-Ford-Mustang-Fastback-And-Loved-It Soldier,
Greg
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Henry Ford has been diminished in our history. He is either the guy who wanted all Model T’s to be black, or the guy who perfected the assembly line. Hearing this, most people either roll their eyes (“Only black cars?!”) or yawn (“Assembly lines? Big deal.”).
They then move on to more important national figures…like Oprah.
Of course we all know that Ford, GM, and Chrysler are on the ropes right now; so to hearken back to Henry Ford for solutions to today’s economic woes may be a bridge too far for most. But there are times to pay attention to those who speak to us from the grave; and this may be the time to hear some thoughts from one of America’ great captain’s of industry. After all, Ford Motor Company was once a resounding success.
Those who have written about Henry Ford usually come to similar conclusions. He was a good man. He had wisdom. He saw things differently. He believed in America and Americans. He thought lightly of himself and deeply of the world.
And while assembly lines and mass production were the innovations that most focus on, Henry Ford’s greatest contribution was redefining “classic” economics. Let’s refer to Christopher Quigley for some illuminating history.
“Under “normal” theory it was assumed that a corporation could only increase profits by increasing price and limiting supply. Ford did the opposite because he had a more holistic view of the role of the corporation in society. He doubled the wages of his workers, decreased the price of the Model T and remade America. How did this happen. It was axiomatic. With Ford’s workers now able to make a good living, their financial anxiety ceased and staff turnover dropped by a multiple of five in one year. This dramatically decreased management expense and increased efficiency. Workers finally had peace of mind. With the increased disposable income in the Detroit area the economy boomed. All classes of economic sectors expanded. As a result more workers, new business owners, company managers, insurance brokers, real estate brokers, bankers, salesmen, craftsmen, delivery men, builders, farmers and retailers could afford Ford cars. Demand for the model T doubled and with increased buying powers and efficiencies the profits of the Ford Company dramatically increased as a result of the innovative policy.”
What Henry Ford did was move dividends and profits from management to the workers…and counter intuitively he prospered the management, the company, and the nation exponentially. Why he did this is also instructive.
“The fact that the commercial success of the Ford Motor Company has been most unusual is important only because it serves to demonstrate, in a way which no one can fail to understand, that the theory to date is right… If I merely want money the present system is all right; it gives money in plenty to me. But I am thinking of service.” (Henry Ford, “My Life and Work”)
Now before all my gentle capitalist readers go apoplectic and start screaming, “Zanetti has become a namby-pamby, union sympathizing, soft-headed, socialist!” I want you to consider how capitalism functions without a conscious.
When CEOs and CFOs pay themselves billions (yes, billions) in bonuses while their companies swirl into the abyss of bankruptcy and workers are laid off by the thousands, capitalism becomes a destructive and not creative power.
When caveat emptor (buyer beware) becomes the mantra in the derivatives-trading world because no one tells the truth about leverage and risk, capitalism becomes a perversion that punishes the innocent and unaware as much as the sophisticated and elite.
When Gordon Gecko’s “Greed is good,” comment is received with north-south head nods indicative of the norm, capitalism has been tortured and distorted beyond all recognition.
For capitalism to succeed it must be rooted in a moral foundation. Many on Wall Street and in corporate America have lost sight of this fact…witness Enron, WorldCom, FNMA, IndyMac, Lehman Bros., Bear Sterns, Goldman, Madoff, et al.
Every system holds the seeds of its own growth and the seeds of its own destruction. Capitalism’s growth seeds are innovation, transparency, and trust. Capitalism’s destructive seeds are deceit, obfuscation, and greed. Henry Ford understood this and chose to emphasize the positive…but he also knew something else.
He knew that for his theory to work, he had to create wealth. He had to add value. He had to make the whole worth more than the component parts. He had to make an honest product at an honest price and an honest profit. And sometimes the definitions of honest-price and an honest-profit are determined by judgment and fairness and not by an often manipulated market.
But, back to my point…
The wealth creation part is key, because there are some in America who think they can replicate Henry Ford’s model via the government. Well intentioned people say, “Let’s do as Henry did! Raise everyone’s wage! Boost the minimum wage to $15/hour and prosperity will follow.” Others say, “Stimulate the economy by paying for defaulting mortgages or sending rebate checks.”
The problem is government can’t do what Henry and his employees at Ford Motor Company did. Government can print money but, government can not create wealth. Government makes no product. Government does not add value. Government can, however, redistribute wealth…albeit inefficiently.
Government can only be generous to one group by taking from another. Government can tax…but as Supreme Court Justice, John Marshall, so aptly said in 1819 in McCulloch vs. Maryland, “The “power to tax is the power to destroy.” Taxation doesn’t create wealth.
Government can borrow, but borrowing doesn’t create wealth either. Government can print money, but printing money doesn’t create wealth. Hmmmmm.
In reality, taxing, borrowing, and printing destroys wealth. It destroys wealth now and for future generations. President-elect Obama said as much earlier this week when he said our children and grandchildren would pay for his proposed stimulus package.
But, wealth destruction isn’t limited to what government can do, but how it does it.
You see, the other piece of Henry Ford’s model that government cannot replicate is the voluntary nature of Henry Ford’s vision. Henry Ford’s corporate model was uplifting and encouraging. At its root was service to, and appreciation of, others.
He chose to change the rules and was willing to accept the consequences. It must have taken tremendous leadership to get his Board of Directors to go along with such a bold and risky plan.
Government does not have to go to such lengths. Governments do things by force. It can be no other way. Taxation is always forced extraction of money from the people. Borrowing is forced extraction of future money from future revenues and future generations. Debasement is the hidden tax of inflation that fewer than one in 1000 understand. Onerous rules and regulation force behaviors that free people wouldn’t normally undertake.
Beyond this, when people do things voluntarily, and in a spirit of service, good things happen. Compulsory anything…even for the “greater good”…rarely engenders positive feelings.
Don’t misread the above. I am not an anarchist. Some taxation, borrowing, and regulation are necessary for the orderly function of society. I do believe, however as Thomas Paine believed that the government that governs least governs best…and we have drifted far from that mentality over the past 230 years.
So, as Ford Motor Company makes the news in the coming months, remember good old Henry…many Americans lived better lives because his capitalism was rooted in morality and service.
