A Summary of The New Economics, by W. Edwards Deming

In The New Economics for Industry, Government, Education, by W. Edwards Deming, Deming argues that the current system of management in business, government, education, and healthcare is flawed – that we must learn to cooperate, rather than to compete, in order to achieve maximum effectiveness. In his eyes, the present style of management is a “prison created by the way in which people interact.” He views this “climate of competition” as being destructive to the organization. To combat this destruction, Deming devises a System of Profound Knowledge with the goal of transforming the prevailing style of management; from that of competition, to cooperation. His System consists of four parts, providing “a map of theory by which to understand the organizations that we work in.”

The following summary will discuss the main concepts of the book, the System of Profound Knowledge, and the tools Deming provides throughout this book.

The New Economics
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Introduction to the Concepts

The first chapter of Deming’s book addresses how we, in the United States, are doing relating to trade, customer satisfaction, and quality. Keep in mind this book was published in 1994, but many of the situations discussed remain valid today.

As relating to trade, Deming states that the U.S. is not doing well in terms of balance of trade – that we are importing more value added products than we are exporting. This creates a deficit that undermines the aim of the American people – to create economic prosperity and stability.  Deming argues that problem lies in education, and that we must develop a culture that places value on learning, rather than competition (i.e. grades, test scores, merit ratings for teachers, gold stars, etc.). Deming furthers his argument by saying that we must “require application of the same principles that must be used for the improvement of any process, manufacturing or service.” By this he means we should harness the cooperative, synergistic abilities of students early on and create a culture that will transform how we approach inter-business management.

As relating to customer satisfaction, Deming implies that customers learn to expect what you condition them to expect. In other words, customers do not know what they want, but look to industry to provide innovative solutions to their problems. To illustrate his point, Deming provides many examples, one of which describes the eventual obsolescence of carburetors for vehicles. To the consumer, the carburetor was an essential part of an engine, and was needed to combine the proper amount of air and fuel in any internal-combustion engine. However, in the late 1980’s a system of fuel injection was devised that provided a more efficient and reliable system. This innovation hurt manufacturers that were unable to change, and benefited those that could – primarily overseas manufacturers. This does not undermine the need for consumer research, but emphasizes its importance. Industry, especially in the United States, must not be so consumed with competition and improving process efficiencies where it cannot adapt to the changing needs of the consumer. Industry must, however, cooperate to ensure consumer needs are being met. By focusing on the win-win scenario – cooperating and developing a common goal – the manufacturers are then able to provide the best product at the lowest rate for their consumers.

As relating to quality, Deming argues that “quality is determined by the top management, [and quality] can not be delegated.” In other words, management must decide the quality of the output, since the workers should only focus on their individual activities. Deming suggests a management transformation is needed. He also suggests that quality must show consistent product improvement to be competitive, that “Zero Defects is not sufficient.” By this he means that, by simply eliminating defects, one can not guarantee jobs in the future – that the organization must focus on the future through product development.

Sources of Waste

In chapter two, Deming identifies important sources of waste, and offers suggestions for better practice. This summary will not dive into the specifics of this chapter, but a few important management recommendations arise (paraphrased):

  • Plan for the long-term and develop a long-term vision
  • Abolish ranking and incentive-based systems
  • Manage the organization as a system of interdependent parts
  • Study the theory of systems
  • Improve processes by understanding the difference between common cause variation and special cause variation
  • Understand how your costs impact the value of your products
  • Hold top management accountable.
System of Profound Knowledge

Next, Deming expands upon his idea that management must undergo a transformation. To do so, he introduces his System of Profound Knowledge. The first step of this System is the transformation of the individual – this is a re-orientation of one’s way of life and the way one sees inter-business relations. One must learn to cooperate, rather than compete for this to become a reality. Once this is complete, there are four components to the System:

  1. Appreciation for a system – knowledge about how a system works and functions
  2. Knowledge about variation
  3. Theory of knowledge
  4. Psychology.

The next four paragraphs will cover these four components.

Appreciation for a System:

The third chapter offers an introduction to a system. To Deming, a system is “a network of interdependent components that work together to try to accomplish the aim of the system.” This is an important concept to Deming, since he is suggesting that we cooperate as a system to improve business, government and education. To do this, the organization must develop an aim, or goal, in which to work toward. This is a value judgment, and should vary from organization to organization. He does, however, offer a recommended aim for every organization – “for everyone to gain.” This encompasses the concepts of cooperation and synergy, to create the ultimate win-win scenario.

It is important to note that the system determines the effectiveness of employees, as well. Especially if the system restricts one’s ability to provide input to improve the system. A great example of this is the Red Beads experiment, as described in chapter seven, where it is clear that the system determines the output of the employees.

Knowledge of Variation:

As for the knowledge of variation, Deming suggests that “life is variation,” and it is important to understand, and be knowledgeable about, the differences between common and special causes of variation. He suggests that management should focus their time on special causes of variation, rather than worrying about the common causes. To do this, Deming uses control charts to determine which processes are in control, and which are not.

Control Chart

Theory of Knowledge:

As for the theory of knowledge, Deming states, “knowledge is built on theory,” and that without theory, there would be nothing to revise, nothing to learn. Deming suggest that a good manager must use data to help predict the future, without the fear of being wrong. If one is too fearful, chance will not be taken, and there will be nothing learned. He also describes the need for operational definitions, so that organizations can be on the same page when it comes to vague wording. An example of this would be Crosby’s definition of quality – conformance to requirements.

Psychology:

As for psychology, Deming suggests that a manager must understand must understand that “people are different from one another” – and a good manager must be aware of these differences and use them synergistically. He also suggests that there are two types of motivation, intrinsic and extrinsic. Deming argues that the current system of competition favors the extrinsic motivation in someone, but that will only allow them to be satisfied to a certain level. It is important to set up our systems to harness one’s intrinsic motivation to keep them truly satisfied.

Leadership and Managing People

Finally, Deming argues that it takes a leader to transform an organization of competing silos into a system. To help do this, Deming give Shewhart’s Cycle for Learning and Improvement – also known as the PDSA cycle. A leader must use this cycle to expand upon his or her knowledge of the system and improve it.

Conclusion

Deming wishes to change the way we think about business, government, and education by thinking of these individual entities as systems, rather than competing factors. Deming argues that if we could harness our natural abilities to cooperate we, in the United States, could grow and improve at a much greater rate than currently possible.

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