Party Like It's 1914, Part II

As Vladimir Ilyich Lenin is reputed to have said, "The Capitalists will sell us the rope with which we will hang them." By proposing to sell 300 million new shares to raise capital to meet non-productive existing obligations instead of to form capital to generate profits to meet those obligations, the Ford Motor Company is selling the rope with which the company can be hanged. Not only that, this Jewel in the Crown of the capitalist system is working as hard as possible to build the scaffolding and perfect the mechanism of the trap door through which it will drop.

Lest the analogy appear too obscure, the scaffolding is the capitalist system as transformed by Keynesian economics. "The drop" (the trap door through which the condemned falls, hopefully to break his or her neck and not suffer slow strangulation) is the replacement of systemic, "internal" controls of the financial markets and banking institutions with increasing levels of government regulation down to the micro-management level. By raising capital for non-productive expenses instead of capital investment, the Ford Motor Company is simply making a bad situation worse, or (as folk wisdom puts it), trying to get out of a hole by digging it deeper.

The irony, of course, is that none of this is necessary. Henry Ford had the opportunity in 1914 to spread ownership out among his workers. This would have shifted the practice of raising pay by relying on increasing fixed wages and benefits, to variable profit sharing from the bottom line. Every accountant (and hopefully every CEO) knows that it is easier to remain in the black if you shift as many costs as possible to variable, and reduced fixed costs to the minimum.

This is because a company only incurs a "variable cost" when it produces something. A fixed cost, on the other hand, must be paid whether or not you produce anything at all. A variable cost thus has a "built in" way to pay it, assuming that what is produced can be sold. In contrast, a fixed cost is, essentially, money down a rat hole if nothing salable is produced. Using capital raised by a new issue of equity to pay expenses that didn't result in production even when they were incurred (as the Ford Motor Company proposes) is economic suicide.

To make matters worse, Henry Ford, one of the "high priests of capitalism," put the final nail in the coffin of the capitalist system in 1919 when he undermined the rights of private property of minority owners in the Ford Motor Company. Capitalism is only marginally palatable because, however distorted, it is based on the natural right of private property. By effectively taking away one of the principal rights of private property — the right to enjoy the income generated by what is owned — Henry Ford undermined the very system he helped establish and maintain . . . another example of the Ford Motor Company's orientation toward self-destruction.

Possibly because he mistrusted banks (which he believed were controlled by an international Jewish cabal), Ford decided to finance a plant expansion using retained earnings instead of selling new equity or borrowing the money. Some of the minority owners (i.e., owners with less than a controlling interest), the Dodge brothers, protested. They weren't interested in why Henry Ford refused to borrow from banks or issue new shares to finance plant expansion. They wanted the dividends to which they were entitled under the traditional rights of private property. Henry Ford refused to pay dividends, and the Dodge brothers sued.

The case, Dodge v. Ford Motor Company (204 Mich. 459, 170 N.W. 668. (Mich. 1919)), became a landmark. Among other issues, the court redefined the traditional right to receive the "fruits of ownership" (i.e., income from what is owned — dividends) for minority shareholders as limited to the power to sell their shares if they weren't happy with the dividend policy of the majority owner(s).

While unacknowledged, Dodge v. Ford Motor Company helped set the stage for the Crash of 1929 and the current financial crisis. It did this by shifting the incentive for share ownership from anticipation of a future stream of dividends, to speculation in the value per share itself. "Investment" became redefined in the popular mind (and in that of many financial professionals) as buying and selling in anticipation of a rise or fall in the value per share, not putting resources to work in a productive endeavor. The result was a near-total divorce of "investment" and share ownership from the revenue stream generated by profits of production.

The problem of financial and economic divorce is now pervasive throughout the world. Money is divorced from the production and productive capacity that necessarily backs it. Workers are divorced from ownership of the means of production other than their own labor — which is rapidly decreasing in value in competition with advancing technology and cheaper foreign labor. Academic economists, financial advisers, Wall Street magnates, and political leaders are divorced from common sense, and unable to comprehend the possibilities for reform and recovery represented by binary economics, the "economics of reality," as the subtitle of one of Louis Kelso's books puts it. (Two-Factor Theory: The Economics of Reality. New York: Random House, 1967)

What happened to the Dodge brothers? They sold their shares in the Ford Motor Company, and used the cash to start their own automobile manufacturing concern. They eventually designed what many automobile enthusiasts consider one of the greatest cars of all time, the 1926 Dodge. This not only dethroned the ubiquitous "Tin Lizzy" (Ford's Model T), it took a large market share from Ford, and cost the Ford Motor Company millions in lost sales — and then cost Henry Ford more millions to design the Model A and retool all his factories and retrain all his workers.

Unfortunately, we still haven't learned the lessons that cost the Ford Motor Company so much. Neither, evidently, has the Ford Motor Company. The problem becomes what to do about it.