Tuesday, February 23, 2016

The State Of Market Economy

When Henry Ford began producing his Tin-Lizzy he experienced a poblem. The problem was not his car, but the affordability of it. Only middle-class and a few rich people could afford to buy it. But Ford had a global vision, with consumerism as the key to peace and prosperity. His automobile production needed to find customers in all kind of society layers. So Ford figured that if he paid high wages to his workers they also could afford to buy his car. So he started to pay high wages. And pretty soon workers were arriving at the plant in their own cars.

What is there we can learn of it today?

Well, our marked economy has diversified since Henry Ford’s days and consume is what drives our economy, and like in the days of Henry Ford it is paramount that people have enough money to participate in the economy.

Demand and supply is what regulates most of any free marked economy. If the demand is going down the general supply (or availability) is going up.  Demand is going down when money becomes scarce in huge parts of a country’s population. People have to hold back with their purchases and finally only buy the most necessary items. At the same time this consumer behaviour is leading to lesser tax revenue for the country. Lesser tax revenue again is causing cuts in public budgets. We are now in a bad economic circle.

Consequently one can say that if a huge part of the population is not making enough money, we are shooting ourselves in the foot. We are getting an economy like a 3rd.-world country.

Unfortunately, many business leaders do not understand this fundamental principle and prefer to exploit their employees by having them work for crumbs. The most used argument against higher wages is that businesses lose their competitive edge. But of course, that is not true, as a raised minimum wage to say $15/hr. would apply to all businesses at the same time. Another argument I often hear is that raised wages will lead to higher product prices. Of course that is true, but a wage raise of say 10% will not lead to a raise of the product price with 10%. Any viable business has max 10-15% of their total costs paid in wages. Now 10% of 10% does not lead to an increased product price of 10%, but maybe 1-2% increase. 
If we look at the United States, the country had a 2013 and 2014 poverty rate of 14.8% of its entire population. In cruel numbers this means 46.7mill people are living in poverty.
An alarmingly high number for the US providing a dark outlook for the future.
If only 15mill of these folks could be lifted out of poverty by getting paid decent wages, it could boost the US economy by at least 10%. The public would save on social pay-outs like f.ex. food stamps. The saved funds could be allocated to other purposes f.e.x. pay off public debt.

I chose the US as an example as the US is a western country with a high number of poverty, but modern poverty, often caused by worker exploitation can be found in any country. Some are better, some are worse. Norway, often hated as an example of socialism, has a poverty rate of 1.7% in a 4.5mill population, while their capital of Oslo is reaching 10% poverty, mostly attributed to settling of new immigrants.

This is how market economy is the thermometer of a country. When the critical temperature is reached and exceeded the patient eventually dies.

The fundamentals of this are so easy to understand that one may wonder why there is such a wide-spread problem with poverty.
If you are interested to read more about wages and the impact thereof, here’s a good article of Harvard Business Review: https://hbr.org/2006/12/the-high-cost-of-low-wages In  this case it shows the benefit for the company itself – COSTCO vs. WALMART


  1. Very interesting post, and an interesting article. I fear we are into a downward spiral.

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