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

Put simply, Hirschman's work here attempts to better understand the dynamics that govern dissatisfied consumers, group members and citizens in their decisions to either leave in search of a better product, group or nation or to stay put and try to make things better ("exit" vs. "voice"). It's a fundamental social dynamic that applies to a variety of institutions (as the book's subtitle indicates), and he rather diligently builds and shares his model for considering the issues -- a model that, as other reviewers have pointed out, is still very much in use in a number of fields four decades later. The prose in this book is NOT a delight nor even always easy to read; Hirschman writes very much like an academic economist. But the ideas conveyed here are provocative and useful -- not only for students of economics and political science but for product managers, human resource managers and business leaders. If you like understanding key governing principles so that you can carry them with you into new situations AND you can get through really dry writing, this short book is more than worth your time.

This is an excellent book which raises the provoking question about the various ways one can react to a failing institution where one is a participant who has made a commitment both psychologically and politically. The author, however, does not end matter there because he sets out the various options and the circumstances which may, or may not, make an available option viable.

Too often there is a tendency to abandon the failing institution to the wrong people with long term consequences that are particularly damaging in the long run. However, we are not omniscient enough to have a clear picture of the future, so we guess the costs of the fight to save the institution and bail out if we think they are too high.

This should be read by any discerning person who is interested in institutional rehabilitation. .

This book's greatness is inversely related to its length. Hirschman's core insights on how to effect change in polities and firms are even more valuable in the early 21st century than when he was writing. We now have effective exit from almost every community we participate in, which means we have voice, too.

Hirschman argues that rather than operating at permanently optimal level - seeking profit maximization - firms often operate at a merely "satisfactory" level. Hirschman argues that this level of inefficiency leads to "organizational slack" in the firm. In times of strong competition, firms can draw upon this slack in order to squeeze out greater production through an investment in work hours, improved productivity, and other forms of pressure. When competition is not so fierce, firms are subject to a certain level of decline and subsequently become inefficient, i.e. they experience declining quality, high prices, etc. When firms are underperforming in this manner, customers have two options to correct this inefficiency: exit and voice. Both exit and voice are used by consumers in order to snap a firm back into efficiency. When selecting exit, customers leave the underperforming firm in favor of an alternative. When using voice, customers voice their concern directly to the firm or its managers. These two options are not mutually exclusive and may be used in tandem.

Exit represents the economic side of recuperation mechanisms and often results from a decline in quality. When quality drops, customers exit and the firm's revenues fall. When management becomes aware of customer desertion, it must take an active role in repairing the damage to the firm. However, the level of response varies with the level of exit. A small number of exiting customers is unlikely to lead to corrective action by management, because the damage caused by the exit is not significant to serve as an incentive for change. The same can be said about a high number of exiting customers. If the damage is too great, no recuperation measures will be pursued as the damage is too great to recover from. However, if an intermediate number of customers exit, the management will pursue actions which may lead to a full recovery. This illustrates the need for both inert and alert customers in order for exit to work. Alert customers leave and thus provide the firm with feedback, while the inert customers grant the firm time to adjust and change. However, it must be noted that exit does not always lead to efficiency. When goods are not readily substitutable, or a decline in quality occurs across a sector, exit will not work. Those who exit will be shuffling from firm to firm across a sector. For every customer lost, the firm will simply gain a customer from a competing firm.

Voice represents the political side of the recuperation mechanisms. It can be used as either a supplement or alternative to exit. The effectiveness of voice is positively related to its volume, but, like exit, it can be overdone. Like exit, a mixture of both inert and alert customers is necessary for the voice option to work. People will hold their political capital in reserve and bring a great weight to bear on the firm when they deem it necessary. However, the elites still must be allowed to make decisions. It must be noted that voice often serves in a residual role to the exit strategy. The voice option is often the only way a customer or members of a group can react when the exit option is unavailable, i.e. in churches, families, or the state. As such, "The actual level of voice feeds on inelastic demand, or on the lack of opportunity to exit" (Hirschman, 1970, p. 34). In such a case, voice carries the entire burden. However, in such cases where customers feel that voice will serve as an effective recuperation mechanism, the will postpone exit. This is true in that once a person has exited a firm, they have lost the power of voice, but not vice versa. Customers will prefer the voice option to exit when; 1. they assume the firm will return to its original superiority over substitutable alternatives; 2. they want to "do something" to change the quality, i.e. to exert influence; 2. they expect their own influence, coupled with that of others to create changes; 4. they have developed loyalty to the firm. In sum, the voice option works in markets with a limited number of buyers. Here, a group of buyers are able to influence the management of the firm. Such a trait is most often found in organizations as opposed to business firms. Additionally, we are most likely to see the voice option used when the buyer is stuck with, and dissatisfied with a product from which the customer can not readily exit.

With the Exit and Voice framework established, Hirschman seeks to use the paradigm to explain a number of social phenomena. For example, Hirschman argues that "the consumer who is rather insensitive to price-increases is often likely to be highly sensitive to quality declines" (1970, p. 49). These consumers tend to be better off as they can afford changes in price. In short, if price increases but quality remains the same, the customer is likely to stay. However, if quality declines and price remains the same, these consumers will exit in favor of a higher quality, but perhaps more expensive substitutable good. As such, Hirschman hypothesizes that customers are more likely to resort to protest in regards to declining quality in high-quality goods than they are with medium of low-quality goods. Hirschman uses this hypothesis to explain the differences between upper and lower class cleavages: "the role of voice in fending off deterioration is particularly important for a number of essential services larges defining `quality of life.' Since in the case of these services, resistance to deterioration requires voice, and since voice will be more forthcoming more readily at the upper than the lower quality ranges, the cleavage between the quality of life at the top and at the middle or lower ranges tend to be more marked" (1970, p. 53).

Additionally, Hirschman uses the Exit and Voice paradigm to examine monopolies, arguing that sometimes, a tight monopoly is better than a system of competition. He argues that a no-exit situation will be better than a system of competition under two circumstances; 1. "exit is ineffective as a recuperation mechanism, but does not succeed in draining from the firm or organization its more quality-conscious, alert and potentially activist members"; and 2. "if voice could be made into an effective mechanism once these customers or members are securely locked in" (1970, p. 55). This implies that in a tight monopoly, voice still holds some power. In a loose monopoly, where some competition still exists, a company is willing to loose those loud people who will choose to exit, thus ensuring that the firm will not pursue a move towards returned efficiency.

Hirschman also examines the role of Exit and Voice on the two-party system. Changes in quality are interpreted differently by different people. For example, in political parties, a move towards the center will anger those in the extreme polls. Hirschman writes that the firm will tend to minimize the discontent of its customers to reduce hostility in the environment in which it operates. This implies that the market will "clear" somewhere in the middle of the two discount levels. Hirschman argues that those voters who are near the middle of the spectrum are non-captive voters, meaning that they retain the power of exit. They may defect to the other party. Those on the extreme polls, however, do not have the exit option as they are too distant from the other rival party. Hirschman refers to those in the fringes as captive voters. As such, in a dual-party system, it pays for the party to mover towards the center in the hopes of maintaining the non-captive voters, knowing that the fringe voters are relatively stuck with the situation.

The main value of Hirschman's Exit and Voice framework is that is can be applied to a host of social science phenomena. Although written nearly forty years ago, scholars still take the Exit and Voice model when explaining other social problems.

I am still fairly new to scholarly economics, but Exit, Voice and Loyalty has helped illuminate for me what it is I like about the NORMS of economics (the encouragement to be selective about what one does with limited time and resources) and what it is I don't (the tendency to undervalue those things in human society -- in life -- which are hard to quantify, and which aren't allocated by markets efficiently, or at all).

Albert O Hirschman is probably the greatest economist of our times! He gets little credit except for insiders. He was at Princeton
for the last years and I hope he will have managed to influence the young economists of the future. Besides being a brilliant economist, he was also a very interesting human being and his adventures are remarkable. Interested readers need to find out more!!!!!

A classic and much needed work; an impressive guide to better understanding the nature of and dynamics related to our political nature and culture.

Good book!