“Declining productivity and quality means your unit production costs stay high but you don’t have as much to sell. Your workers don’t want to be paid less, so to maintain profits, you increase your prices. That’s inflation” — W. Edwards Deming
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In this quote, W. Edwards Deming is explaining how inflation can occur due to declining productivity and quality in business. He says that when productivity and quality decrease over time, a company’s unit production costs remain high even though they have less product to sell. Since workers will not accept lower wages, companies try to maintain profits by raising their prices.
Deming argues that this process of increasing prices specifically due to declining productivity and quality, which forces companies to charge more for goods and services to offset higher costs, is what leads to inflation at the economic level.
So in essence, the quote is attributing inflation to the price increases that result when businesses try to preserve profit margins facing internal inefficiencies like falling productivity, rather than lowering costs in other ways.