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

Are a firm, an organization, and a state, which left behind the competition for whatever reasons, doomed to become extinct to converge to market equilibrium? While the perfectly competitive market model in micro-economics affirms this, Hirschman (1970) refines the story about the fate of such organizations in more theoretically sophisticated ways. He draws the readers' attention to a relatively neglected side of the story. Before talking about their vanishing, he asks to examine how these organizations attempt to bring their performance back into the right track. In doing so, he posits two key recuperation mechanisms, which include Exit and Voice. Hirschman's recovery model provides counterintuitive insights about the conventional wisdom of how competition contributes to recuperation efforts by illuminating conditions under which the Exit option prevails over the Voice option and vice versa as well as their interaction. Hirschman claims that two action plans to alert the management to its decline are available for consumers or members of an organization when a firm or an organization underperforms given its maximum potential. Unlike previous economics literature, this organizational slack, which is indicated as a decline in the quality of goods or services, is not a consequence of either a manager's cost-reduction efforts or market failures. Instead, Hirschman sees the constant existence of slack in human society as a countervailing force to the production of surplus above the subsistence level. In other words, organizational inefficiency is not the outcome of rational choice in the process of utility maximization but the random result of satisfying nature of human beings. Altering the cost-benefit calculation of delinquent management, consumers or members of an organization can warn the management to deal with this occasional shock of a decline, a gradual loss of surplus-producing zeal, and prolonged mediocrity. Mechanisms of generating behavioral changes from management, nevertheless, are different between Exit and Voice. The Exit option imposes direct revenue losses arising from the shrunk sources of income on slack management so as to change its course of action; however, Hirschman does not explicitly identify exactly what incentives this management ever has to listen to Voice. The condition for these two recuperation mechanisms to be effective is built upon the key assumption that people respond to quality decline differently. Thus, both Exit and Voice can be effective only with a mixture of "alert and inert consumers" (24) and with "influential but deferential voters" (32). In other words, consumers or members should be able to inflict large enough impact upon management's incentive structure but management also needs long enough time to have its remedial measures come into fruition. On the flip side of the coin, if consumers or members were not successful in generating a proper amount of losses, their Exit would no

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 t

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.

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.