by Albert O. Hirschman
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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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3 of 4 people found the following review helpful:
 Snapping the firm back to efficiency, 2007-05-02
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.
15 of 17 people found the following review helpful:
Bridging the Gap between Economic and Political Theory, 2001-03-07
I read this book in the 1970's when I studied Political Science in Jerusalem. The Author bridges the gap between Economic and Political Theory. He shows from his real experiences that not always a monopoly is bad for the Public. A situation where you have too many choices is worse than having a few choices. As People who have experienced Multi-Party Systems like Weimar Republic in Germany and France in the Fifties, Many Parties does not mean Effective, (Good) Parties. USA and UK Manage very Well with few Political Parties. The Implications of this book are wide. How do you encourage people to use "Voice" to improve organisations instead of Exit or Loyalty (Where people stay quiet). A must to read to Understand the Social Dynamics. Another must is Isiah Berlin on the Paradox and clash between Freedom and Equality.
51 of 54 people found the following review helpful:
 A fresh view at market liberalism, 1999-12-30
Albert Hirschman's Exit, Voice and Loyality is a book written by an economist but accessible to all - a rare achieve in any academic disipline, especially economics. The book was written in the early 70's but still has relevant today. Its greatest achievment is the illumination of 'exit' as the mentality of modern western capitalist societies - the idealisation of the consumers' right to 'vote with one's feet' - and its spread into all forms of social activity. Hirschman adds a historical dimension to this by arguing that the whole of the United States has largely been built on 'exit' mentality - from the mass migration out of Europe from the 17th century onwards to the calls to 'go west' across the plains. Exit is the strategy advocated today by neo liberals as being the manifestation of democracy in the market sphere. Hirschman's observations were made in the early 70's, yet their relevance as an internal critique of the free market is perhaps even more important today in the post-cold war era when the traditional critiques of the capitalism (such as Marxism in its Communism manifestation) have so clearly failed. As liberals try to grasp the future - while opponents of liberalism turn their attention from Marx to Nietzsche (such as John Gray), Hirschman's Exit Voice and Loyalty is an accessible, refreshing and insightful look at market liberalism from within, and is therefore throughly recommended.
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