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Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations,…

by Albert O. Hirschman

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358456,597 (4.06)4
An innovator in contemporary thought on economic and political development looks here at decline rather than growth. Albert O. Hirschman makes a basic distinction between alternative ways of reacting to deterioration in business firms and, in general, to dissatisfaction with organizations: one, "exit," is for the member to quit the organization or for the customer to switch to the competing product, and the other, "voice," is for members or customers to agitate and exert influence for change "from within." The efficiency of the competitive mechanism, with its total reliance on exit, is questioned for certain important situations. As exit often undercuts voice while being unable to counteract decline, loyalty is seen in the function of retarding exit and of permitting voice to play its proper role. The interplay of the three concepts turns out to illuminate a wide range of economic, social, and political phenomena. As the author states in the preface, "having found my own unifying way of looking at issues as diverse as competition and the two-party system, divorce and the American character, black power and the failure of 'unhappy' top officials to resign over Vietnam, I decided to let myself go a little."… (more)
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A rare book that is both insightful and less than two hundred pages. I miss the days when "serious" books got by their content and not by their length. Originally recommended to me by a freshman year professor, Exit, Voice and Loyalty is a classic for a good reason. I was recently reminded of it when in Con Law. Exit, voice and loyalty made a surprise appearance in Bruce Ackerman's article about the role of exit and Carolene Products footnote 4 (if "exit" from unpopular minorities is too easy, it makes it difficult organize activism. While it seems like it would be a disadvantage to be clearly identifiable as a minority, the ability to "cover" comes with its own problems). Some of the examples and politics are a bit outdated, and Hirshman clearly has his political sympathies (Ralph Nader gets a few honorable mentions, as does Eugene McCarthy), but this book is worth reading for the timeless principles Hirshman articulates as well as the breadth and creativity that he brings to economics.

The basic idea of the book is that there are two major responses to declines in firms or organizations. The first is exit, "vote with your feet" to stop buying the product or to quit the organization. The second is voice, to raise a ruckus by protest. Hirshman notes that economists tend to think of exit as the exclusive response, while political scientists tend to focus on the voice mechanism.

In Hirshman's model, firms face random quality deterioration that is correctable if management responds to either exit or voice. Hirshman makes the interesting note that for management to respond and correct, exit cannot be too fast or too slow, since aggressive exit would lead to the collapse of the firm before response. Exit also fails to correct firm decline, if the consumer just aimlessly cycles through what are substantially the same firms (some radicals argue that political parties allow the status quo through exactly this mechanism. Voters unhappy with one party exit it and switch to another, only to be disappointed and so-on, when in fact the problem is the system itself).

Voice can be a residual to exit, in some situations (such as monopoly or in autocracies) it may be possible that exit is impossible, and voice is the only response. Voice can also be a substitute to exit, consumers may protest before they stop buying a product. Voice is also more complicated in that members of an organization and consumers must consider the chance that their voice will be effective, and the worthwhileness of a correction compared to the certainty of another existing product. For that reason, organizational memberships and major purchases are likely to be places where voice is used as a substitute to exit.

The most interesting parts of the book come from the interactions between exit and voice. A special difficulty is that the consumers that are most quality conscious (consumers probably face different utilities from different quality levels, making it impossible to translate quality to effective price decreases) and thus in the best position to exercise voice to alert management to failure are also the most likely to exit in response to a decline in quality, leaving the firm to continue to decline. The examples that Hirshman uses are interesting, from Nigerian railroads (they were bad at the time because being publicly funded, management was not sensitive to exit, and the alternatives of cars allow quality sensitive consumers to exit the railroad), to shareholders who quickly sell instead of protesting to management (no longer strictly true, with the rise of activist shareholders. In a sense Hirshman anticipates this, as he mentions that there may be ways to make the voice mechanism more successful/less costly). Hirshman even argues that in some cases, monopolies want to create an exit option to rid itself of troublesome protestors, thereby making even competition a tool of monopolies. A fascinating chapter is Hirshman's answer to the failure of the medium voter theorem. The medium voter theorem predicts that all political parties move towards the center in order to maximize the number of voters. Hirshman notes the failure of this model when political parties consistently produce extreme candidates. Hirshman's answer is that the party may not be responsive to edge voters who exit the party if the party moves on the idealogical spectrum, but more responsive to the "captive" members of the party who voice. These captive members tend to be ideologues who want "purer" candidates.

There is a lengthy chapter on loyalty that explores some interesting ideas as well. Hirshman mentions that loyalty may be useful because it slows the exit of members and consumers, giving firms a chance to correct their decline. Loyalty many case consumers/members to be less sensitive to initial decline but more willing to use voice than others past a certain threshold. A loyalist's threat to exit is a combination of voice and exit, and organizations that make it impossible to threaten exit (that penalize threats of exit with death for example) collapse quickly. Finally, Hirshman discusses situations where loyalists cannot truly exit the organization, therefore turning their decision to exit into balance of the shame of staying in an organization and the chance of reforming "from the inside".

The chapter on applying the concepts to American politics is a little dated but still thoughtful. Hirshman notes that the US is a country formed out of those who "exited" other societies. One of the most thought provoking arguments in this chapter was that high achieving minorities tended to exit their cultural group, depriving that group of those most able to use voice to protest the injustices towards that minority. Hirshman notes in the book, that was the reason that political movements had been focusing on group upward mobility rather than individual upward mobility.

Hirshman ends the book with the note that organizations may have varying responses to exit and voice. That leads to the simple conclusion that to fix much decline, steps should be taken to either make the organization more sensitive to existing voice or exit or make it easier for voice/exit to come out. However, there might not be a stable optimal mix of voice/exit because those mechanisms are also subject to decline (Hirshman gives the example of LBJ administration institutionalizing dissent, keeping major players from resigning and affecting policy by allowing them to "air their conscience").

In short, highly recommended reading.
( )
  vhl219 | Jun 1, 2019 |
Excellent piece of theoretical scholarship that hold up very well even after more than 40 years since its writing. Hirschman argues that consumers and, more general, members of organizations have two approaches to react to decreasing levels of quality with a product or an organization: (1) Exit, (2) Voice. He then goes on to discuss various constellations under either option would be either beneficial or detrimental in working as a signal to get a product or organization back in shape. Hirschman also emphasizes that neither option or mix of options could be identified as optimal. Instead, he sees their potential influence as shifting always depending on the currently dominant form of feedback:

"[...] conditions are seldom favorable for the emergence of any stable and optimally effective mix of exit and voice, Tendencies toward exclusive reliance on one mode and toward a decline in its effectiveness are likely to develop and only when the dominant mode plainly reveals its inadequacy will the other mode eventually be injected once again." (p.125)

Hirschman presents his argument very elegantly and so this book becomes also an interesting example for concise and elegant theoretical scholarship. ( )
  ajungherr | Mar 15, 2018 |
Eliot Spitzer said: "But the participation of shareholders is genuinely difficult. The problem starts with the remarkable liquidity in the stock market. Owners of shares can trade out and sell their positions easily. Isn’t that a good thing? Of course. But it also means that shareholders do not stay in for the long, hard slog of reforming companies in which they have a momentary ownership interest. Liquidity thus undermines the urgency of and the argument for participation.

Albert O. Hirschman’s 1970 book, Exit, Voice, and Loyalty, brilliantly captures this dynamic. How do people consider the various options they face when they see a product—whether toothpaste, a political party, or a share in a company—and need to decide whether to use their voice to improve it or to exit and find something better? Hirschman presciently observed the implications of easy exit options for “perpetuating bad management”: because of the “ready availability of alternative investment opportunities in the stock market . . . any resort to voice rather than to exit is unthinkable for any but the most committed stockholder.” Somehow we have to overcome this problem. Perhaps shareholders should be given additional voting power if they own a stock longer. That solution has its own troubles. But we need to find a way to give shareholders the power and incentive to get involved."
  pedestrian | Mar 20, 2010 |
Hirshman's analysis of the role of exit and voice in institutional change is, I suspect, more referenced than read. There's a lot of not terribly good economics here, which lards up an already thin book. Nonetheless, the thematization is an useful one: and the lenses of Exit and Voice, are useful tools for thinking abotu how one people relate to institutions. Will the rise of complex economic goods led to a greater salience of "Voice" in market transactions? I would say LibraryThing itself is a vindication of that prediction! ( )
  ben_a | Aug 13, 2006 |
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An innovator in contemporary thought on economic and political development looks here at decline rather than growth. Albert O. Hirschman makes a basic distinction between alternative ways of reacting to deterioration in business firms and, in general, to dissatisfaction with organizations: one, "exit," is for the member to quit the organization or for the customer to switch to the competing product, and the other, "voice," is for members or customers to agitate and exert influence for change "from within." The efficiency of the competitive mechanism, with its total reliance on exit, is questioned for certain important situations. As exit often undercuts voice while being unable to counteract decline, loyalty is seen in the function of retarding exit and of permitting voice to play its proper role. The interplay of the three concepts turns out to illuminate a wide range of economic, social, and political phenomena. As the author states in the preface, "having found my own unifying way of looking at issues as diverse as competition and the two-party system, divorce and the American character, black power and the failure of 'unhappy' top officials to resign over Vietnam, I decided to let myself go a little."

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