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Book Synopsis: The New Economics

In his book entitled The New Economics, author and renowned statistician W. Edwards Deming presents arguments for better styles of management through systems thinking. He first lays out the current state of business and management by giving examples of common practices that are, in his arguments, managed the wrong way. He describes the current state of things as bleak and in decline, a trend that we can reverse through new and better knowledge. Deming describes the aim of this book as providing new knowledge. The principles described within this text include systems thinking, a system of profound knowledge, and the responsibility of management.

In chapter two, Deming describes a present practice of management by objective (M.B.O.) that is often used, where the objective of a company is divided out among different divisions or components. The common assumption is that if all divisions or components fulfill their allotted portions, then the company as a whole will reach their objective. Deming states that this assumption is generally invalid, because divisions or components almost always function interdependently. Instead, it is argued that the better practice is to think in systems; a network of various components should work interdependently to optimize the aim of the system. It is argued that many organizations and industries do not function as systems when they should be, and therefore do not function in a positive and sustainable way. Companies organized like pyramids function in an irresponsible manner, in that jobs are ranked and internal competition is rampant. As a system, individuals understand the aim of the company, the roles others, and their contribution to the end goal. Deming argues that schools, family units, and competitors in industry that do not function as systems function ineffectively because ranking and competition among pieces of a puzzle serve to be counterproductive to forming the big picture.

In order to correct our ways, Deming presents what he calls a system of profound knowledge. This system of profound knowledge serves to provide a view from the outside; a lens that we can look through to better understand the organizations in which we work. This system is composed of four parts, which include the appreciation for a system, knowledge about variation, the theory of knowledge, and psychology. The basics of systems as described in the previous paragraph show the importance of recognizing the interdependence of components. Deming places the responsibility of recognizing interdependence within an organization on the shoulders of managers. The second part, knowledge about variation, describes the fact that variation is ever present between people, in product, in service, and in output. Knowledge about variation can reveal what this variation is telling us. When a process is under statistical control, future variation is predictable, and vice versa. By having knowledge about variation, we can understand whether an outcome from a process was caused by a special cause, or whether it came from common causes of variation. It is important to limit mistakes made by reacting to an outcome as though it was from a special cause, when in reality it was from a common cause, and vice versa. By having knowledge about variation, we can begin to better understand a system. Dr. Shewart and the control charts that he pioneered are described in chapter eight, which provide a way for variations to be plotted graphically so that they can be analyzed. An example in chapter nine called The Funnel, asserts that management by results is the wrong method, that we must avoid tampering with a stable process. The third part, theory of knowledge, presents the idea that management is prediction. Knowledge comes from theory, which uses observations from the past, and through systematic revision and at risk of being wrong, predicts future outcome. With this idea, it is posited that the use of data requires prediction, in that data is simply information, and we must use our knowledge in order to make interpretations and predictions from data. It is important to highlight the distinction between information and knowledge. Information is not knowledge, in that knowledge comes from theory, and information is used by theory but by itself is not useful. The fourth step is psychology, which outlines some basics of how we can better understand people and interactions. In this step, intrinsic and extrinsic motivations are described. Some extrinsic motivation (such as money) can be positive and build self-esteem, but too much crushes intrinsic motivation (natural inclination). Taking this a step further, the phenomenon of overjustification suggests that many systems of reward that are currently in place may actually cause discouragement, and defeat people’s desire to do things for their own pleasure and satisfaction. Deming suggests that a show of appreciation given to someone could mean far more than a monetary reward. It is important to be cognizant of psychological processes and people’s motivations as a manager in order to function effectively.

The aim of this book is to provide new knowledge; knowledge that will prove beneficial to managers. The principles described are important for a manager to understand because, as described by his example with the read beads experiment, employees who are given a narrow job description have little power to change a system that may be broken – it is the responsibility of managers to recognize and fix systems because they are in the best position to do so. A few tools are described that can further help us as managers. One tool is the use of a loss function, which graphically helps us to transform from thinking in a world of specifications, to one of continual reduction of variation, and through processes of improvement. Another tool described is known as the PDSA cycle; a diagram that illustrates a process for learning, and improving of a process or product. It stands for plan, do, study, and act. With the new knowledge presented in this book, Deming gives us a new paradigm through which we can better analyze our organizations and the people within them to become better managers and increase the success for all of those involved.

This article is an adapted sample from a synopsis paper on The New Economics, written for Advanced Topics in Project Management (COM5451) at Florida State University, during the Spring of 2015.

Reference: Deming, W. E. (1994). The New Economics: For Industry, Government, Education (Second ed.). Cambridge, MA: Massachusetts Institute of Tecnology, Center for Advanced Educational Services.

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