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Tag Archives: Model T

Henry Ford's Model-T

Responding to very different incentives, in 1908 and in 2012 Ford designed a lighter car.

The first Model-T had a unique chassis. Made of a steel alloy that no other US car maker used, the Model-T was inexpensive, relatively powerful, sturdy and user friendly. At a Florida car race, Henry Ford had seen a French racing car that was made from a vanadium steel alloy. Copying the idea in his own steel mill, he developed a durable chassis that was stronger and lighter than any on the market.

Fast forward to 2012. Ford will again market a lighter car. By using aluminum in their F-150, they expect the pickup to lose 700 pounds. The goal? Use less gasoline and maybe even a smaller engine. The reason? New fuel economy standards from the federal government. The downside? The car is more expensive and trickier to produce.

A graphic from WSJ.com estimates the weight savings:

  • Hood and fenders: 32 lbs.
  • Control arms and steering knuckles: 92 lbs.
  • Cab/passenger compartment: 190 lbs.
  • Cargo box: 114 lbs.
  • Doors and tailgate: 118 lbs.

 

Responding to the market, Henry Ford designed an affordable car that weighed less. Reacting to regulation, Ford has made a lighter F-150 pickup.

Your opinion of each incentive and the response?

Perfect for a discussion of opportunity cost, this WSJ.com article presents a wonderfully detailed discussion of Ford’s switch to aluminum for its F-150 pickups and the above mentioned graphic. And you can go here for more about Henry Ford’s cost saving innovations.

The content of this post has been slightly edited.

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lightbulb

In Boca Raton, Florida, during the early 1990s, a group of JP Morgan bankers gathered for an “offsite” weekend. Have some fun, get some sun, do some brainstorming. They had hoped to create a new product.

And they did.

Their new product involved selling the risk that a bond might default. For example, if JP Morgan owned an Italian bond, it could pay an investor to take over the risk that Italy would default. No default? Then JP Morgan pays the investor a fee. Default? Then the investor pays JP Morgan. As one journalist said, “…it was a win-win deal: JP Morgan reduced its risk, and the investors could earn nice returns.” They called it a “first to default” swap.

Just like silly putty, the aircast or the Model-T, in finance also, someone has an idea that becomes a product. At one time, the junk bond, the money market fund, checking accounts, futures options, hedge funds and adjustable rate mortgages (ARMs) were all innovations. We could go on and on. Someone invented each new financial product.

And that takes me back to JP Morgan–now JPMorgan Chase. Reporting the bank’s unexpected investment losses, yesterday, the Washington Post indicated heavy investments in an index of credit default swaps (descendants of those “first to default swaps) might have been related.

Our Bottom Line: Especially with the controversy surrounding complex financial products, we should remember that financial innovation can fuel economic growth when it moves money and credit productively.

For more about that JP Morgan Florida weekend, the evolution of credit default swaps and the source of my quote, this FT article by Gillian Tett is excellent. And, for more about financial innovation, you might want to look at this Brookings article.

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At some point, sooner or later, people get tired of black. During the 1920s, Henry Ford realized that the Model T, so very practical and affordable because it only came in black, needed some vitality.

What forced him to recognize that the Model T was becoming obsolete? The Pontiac (and Chevrolet, Oldsmobile, Buick, and Cadillac). Competing against Ford’s Model T, General Motors created a car for every pocketbook in different colors. Pontiac was second in line, as the consumer moved up the price ladder of G.M. cars.

Fast forward to 2010. 84 years old, the Pontiac has died. According to the NY Times, the cause was indifference. Pontiac will join its sibling, the Oldsmobile, which left us 6 years ago.

The Economic Lesson

Pontiac’s demise reminds us of Joseph Schumpeter. The word to associate with Schumpeter is entrepreneur. For Schumpeter, the entrepreneur is the innovator whom we find in small and large businesses. Increasingly, though, bureaucracy takes over and kills creativity. Perhaps, the Pontiac died because G.M. no longer sparked entrepreneurial passion.

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