The story so far. In our last exciting installment, we argued that there are three fundamental aspects of economic life that prosper in markets are
1. the pursuit of self interest
2. the generation and utilisation of information and knowledge throughout the economy, not just at some executive centre
3. the joint production of value by feedback between economic agents and the learning it produces.
I suggested that while the first two aspects are at the centre of the neoclassical and of Hayek’s ideas of the economy (respectively), the importance of the third aspect tends to be underplayed.
In this installment I argue that feedback and interactivity in learning has progressively grown in importance and continues to do so. Here the focus is on the workplace, but a subsequent post will venture further afield. I also suggest an interpretation of modern management methods that is an extension of Hayek’s idea that engineering knowledge must be complemented by knowledge which is more localised.
Adam Smith tells us that slavery is the most expensive form of production when it seems to be the least expensive. Why? Because the abusive relationship between master and slave is one of punitive rather than productive feedback. The slave won’t propose improvements in the way he works to his master because the master will capture all the gains realised. Indeed, the slave may fear that he’ll qualify for further abuse either for not having pointed out the problem before or for being lazy in proposing some way of reducing his work-load.
Smith also looks at other forms of relationship including various kinds of land tenure stressing the way in which behaviour is influenced by incentives. He’s fairly jaundiced about employers he nominated the apprenticeship system which saw employers combine against employees as the worst abuse of the mercantile system. He concludes that labour responds well to encouragement of all kinds including pecuniary.
The liberal reward of labour . . . increases the industry of the common people. The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily strength of the labourer, and the comfortable hope of bettering his condition, and of ending his days, perhaps, in ease and plenty, animates him to exert that strength to the utmost.
But what of feedback on the production process in a large factory? Certainly large ‘Taylorist’ establishments in the early 20th century used methods like suggestion boxes to elicit productive suggestions and some went as far as prizes and other rewards for good suggestions. Piece rates were also a popular way to ‘incentivise’ workers to optimise their productivity. But at least compared with modern ‘Post-Taylorist’ management, these methods worked poorly.
The big problems are social and motivational. Monetary rewards can undermine fellow feeling between employers and so their co-operation as employees question the justice of different decisions and jockey for advantage with one another and/or collaborate to snow management. And it’s very difficult to measure a single labourer’s productivity within a highly interdependent centrally designed and directed productive system.
But from the 1950s on the Japanese under the influence of an American statistician Edwards Deming worked out a new system of production the central purpose of which was to elicit the active collaboration of the workforce, not just in the design, but in the endless optimisation of the production process. The system seeks to maximise feedback between the different productive units within a large productive system and indeed between that productive system and those that interface with it (particularly amongst suppliers and customers).
Before elaborating further, let’s segue back to our friend Friedrich Hayek. In his mid 1940s essays collected in Scientism and the Study of Society Hayek wrote of the importance of not privileging the universalist ‘scientific’ knowledge of the scientist or engineer over “the knowledge of the particular circumstances of time and place” of the trader. (This puts him well ahead of his time compared with Schumpeter and Veblin in the generation preceding him both of whom anticipated some ultimate triumph of the engineers.)
Compared with the work of the engineer that of the merchant . . . contributes a step towards the achievement now of one end, now of another and hardly ever is concerned with the complete process that serves a final need. What concerns him is not the achievement of a particular final result of the complete process in which he takes part, but the best use of the particular means of which he knows. . . . [T]hough [his special] knowledge is not of a kind which can be formulated in generic propositions or acquired once and for all, and though in an age of Science it is for that reason regarded as knowledge of an inferior kind, it is for all practical purposes no less important than scientific knowledge.
In a way that is strikingly similar to Hayek’s insistence on the complementary importance of traders and engineers’ modes of knowledge within an economy, the Japanese production methods likewise insisted on the importance of the knowledge of the shop floor complementing the engineering knowledge of the managers in a large manufacturer.
Where traders are great integrators of local knowledge in a large market, in the extended and centrally planned order of a large multinational manufacturer, Total Quality Management (TQM) * was one of the first conscious attempts to harness the value of information throughout a whole production system (rather than conceptualise it as residing exclusively amongst the managers and engineers). TQM single-mindedly focuses on maximising feedback between one employee and another, between workers and management, between one group or division and another. There’s also an enthusiasm for capturing information outside the firm, most particularly from suppliers and customers. Today the instruction given employees and also suppliers is more open, allowing them to contribute their own unique knowledge.
Under the old system managers and engineers specified (sometimes in quite fine detail) the tasks for employees, and for suppliers. Once General Motors would have designed and minutely specified the brake it wanted and then tendered out the job and taken the lowest couple of bidders to jointly supply (to limit the scope a single supplier might have to behave monopolistically). Today Japanese firms specify much broader design parameters and then get a single trusted supplier (usually from an ‘extended family’ of regular suppliers often with equity sharing between the supplier and the customer) to assist in brake design. The potential benefits through this rich interaction and feedback are obvious.
Further, where most of Hayek’s writing on the importance of the information of the ‘trader’ has a fairly static quality,** the new system focuses almost obsessively not simply on the information the productive partners have (ie employees and suppliers), but on their capacity to endlessly optimise their own productivity and the joint productivity of the entire productive unit.
TQM is not just a few tricks a technique here or there. It involved extensive and interdependent changes of approach. As Western firms discovered to their cost, technocratic cherry picking from the system, produced all sorts of disasters. The architects of TQM saw themselves as building a system which was as much social as technical.
To maximise feedback and room for ‘lateral thinking’ there were conscious attempts to reduce hierarchical thinking (with accompanying flattening of management structures). But there’s nothing like getting rid of middle managers to re-discover what they were there for in the first place. Though it relinquished the control of minutiae from the centre, production decisions were made on the shop floor supported by extremely rich data collection on the production process, to help guide the exploratory process of continuous improvement.
Hayek describes the trader’s role vis- -vis the engineer or scientist as “in a sense much more “social”, i.e., interwoven with the free activities of other people.” Intriguingly while TQM is also more social consciously so than older production methods, where Hayek would (I think) see the trader as representing a kind of individualism, a critical aspect of TQM was to move away from individual approaches towards social collaboration.
TQM arranges the workforce into well trained, multi-skilled teams giving the production line great flexibility and capacity for innovation. Though teams undoubtedly have ‘negative’ benefits of providing surveillance against shirking, this appears to be a by-product of other aspects of the arrangements designed to improve morale and maximise co-operation.
In building teams and ‘quality circles’ as social groups the architects of TQM took advantage of the kinds of social norms that seem hard wired into our natures presumably from our evolutionary socio-biology. If contemporary theories I’ve discussed elsewhere are anything to go by, human consciousness and society emerged from the interactions both co-operative and Machiavellian of individuals in groups of primates (often of about the same size as TQM production teams!).
But TQM management goes to great lengths to encourage collaboration and undermine the more manipulative side of our natures. Thus employees are not ‘incentivised’ individually using piece rates or suggestion boxes with individual rewards. And one of Deming’s imperatives is to ‘drive out fear’. Fear of insecurity and individual penalties and rewards from management are seen as encouraging envy, resentment, buck-passing, and various other Machiavellian traits. Primatologists have argued that these kinds of Machiavellian manoeuvres may lie behind the evolution of human consciousness and society. But having done their work, the TQM managers try to keep them at bay to optimise the quality of collaboration and feedback within the system.
It all goes to illustrate ways in which Hayek’s insights about the importance of complements to the engineer’s scientific knowledge can be extended and the productive power of feedback in economic relations. Indeed, one could go so far as to argue that feedback is the ultimate economic category with price determination being a very specific sub-set of feedback between economic agents.
In our next exciting installment, we discover the neurological foundations of feedback between people or as Adam Smith called it ‘sympathy’. Yes folks, modern neuroscience really has uncovered the neuro-micro-foundations of Smith’s Theory of Moral Sentiments! There is no way to discover whether this is a silly exaggeration or a truth worthy of Troppodillians . . . . other than to read our next exciting installment coming to Troppo, sometime soon.
* The new approach has many names such as ‘post-Fordism’, ‘post-Taylorism’ and ‘just in time production’. There are no doubt various debates trying to specify differences between these terms. But I’ll use the expression total quality management or TQM to denote this new system.
** It was a surprise to me when I went looking for innovation in Scientism and the Study of Society that Hayek’s perspective on information was pretty static. He does write about the economy and society in an historical context, but he doesn’t really make innovation a focus of his discussion. This seems odd given that the dynamism of localised information adds another very powerful string to his anti central-planning bow. Perhaps the explanation is that Hayek spent his time developing his conception of information alongside and to a substantial extent in opposition to neoclassical economics and so his arguments are addressed to the ‘comparative static’ perspective of neoclassical economics. Another explanation is that I’m wrong it’s a while since I read Scientism and Hayek’s later work.