THE EXIT, VOICE, AND LOYALTY MODEL
When Albert Hirschman wrote Exit, Voice, and Loyalty, his primary goal was to help readers understand how both competition and the expression of dissatisfaction could improve the performance of failing companies, nonprofit organizations, and nations. Hirschman observed that firms and organizations often experience "repairable lapses" in performance, and if these go unnoticed, they can result in "permanent pockets of inefficiency and neglect."[12] A profit-seeking manager or wellintentioned president may not recognize the decline unless one of two things happens:
- Some customers stop buying the firm's products or some members leave the organization: this is the exit option. As a result, revenues drop, membership declines, and management is impelled to search for ways and means to correct whatever faults have led to exit.
- The firm's customers or the organization's members express their dissatisfaction directly to management or to some other authority to which management is subordinate or through general protest addressed to anyone who cares to listen: this is the voice option. As a result, management once again engages in a search for the causes and possible cures of customers' and members' dissatisfaction.[13]
Historically, people have used both exit and voice as response mechanisms. Many a firm has lost its customer base because it could not continue to provide the highest-quality product, and innumerable customers have tried to induce change through direct complaint. Many organizations have disappeared after their members found a better place to work, live, or play, but many members have worked for change from within an organization before giving up all hope and abandoning it.
Hirschman argues that whether people use the exit or voice option depends on their attitudes and circumstances. His model assumes that exit is the dominant reaction mode when better alternatives exist and switching products or organizations entails little cost. In a perfectly competitive market, consumers will always favor superior products and quickly exit any commercial relationship with firms that cease to produce the best goods available. Alternative products and organizations are not always present, however, and voice's role increases "as the opportunities for exit decline, up to the point where, with exit wholly unavailable, voice must carry the entire burden of alerting management to its failings." Exit is also more costly when it concerns "standardized durable consumer goods requiring large outlays" or, in organizational terms, when individuals have made a considerable investment in the organization.[14]
Before exercising their voices, however, people take into account a similar cost associated with expression. There are both the opportunity cost of forgoing the exit option and the "direct cost of voice which is incurred as buyers of a product or members of an organization spend time and money in the attempt to achieve changes in the policies and practices of the firm from which they buy or of the organization to which they belong."[15] Using an economic example, the cost of driving to a new grocery store with lower prices is lower than taking the time to compose and effectively deliver a complaint to one's previous store, not to mention the savings that are lost while waiting for the old store to respond by lowering its prices or improving the quality of its goods and services.
Because of these costs, the regular exercise of voice often depends upon a modicum of loyalty to a firm or organization. "As a rule," Hirschman argues, "loyalty holds exit at bay and activates voice." In the absence of loyalty, consumers will quickly switch from an inferior merchant, but if they like a particular store's produce, they may first complain to the grocer before shopping elsewhere for their leafy green vegetables. Such loyalty is not simply a matter of "faith." In comparison with acts of pure faith, Hirschman explains, "the most loyalist behavior retains an enormous dose of reasoned calculation." People will be more likely to exercise their voice and develop loyalty if they perceive that such actions have an impact over time. If loyal customers' voices go unheeded when they complain to the grocer about inferior produce, their loyalty will decline, leading to their eventual exit. Although not necessarily one, the loyalist "looks like, or turns out to be, a sucker" when his or her attempts to salvage a declining firm or organization fail.[16]
Even loyal customers or members may lean toward the exit option if they do not recognize a clear means of exercising their voice. "The propensity to resort to the voice option," Hirschman explains, "depends also on the general readiness of a population to complain and on the invention of such institutions and mechanisms as can communicate complaints cheaply and effectively."[17] In other words, an organization or firm will only receive feedback via voice if it has in place a straightforward complaint mechanism that its member-customers are accustomed to using. Exit is a relatively automatic process in this model, whereas voice
In sum, Hirschman's model demonstrates that people can respond to declines in product or organizational quality through exit and voice. Dissatisfled people will use the exit option when there are clearly superior and available alternatives and they lose little investment by switching products or affiliations. Exit will also be the favored response when exercising voice involves high opportunity costs and direct costs. People will make their voices heard, though, if they have developed loyalty to the offending organization based upon its perceived responsiveness. Resort to voice will also be more likely if efficient complaint mechanisms are available and familiar.[18]
Hirschman uses this model to derive some surprising insights about both economic and political behavior. In the thirty years since the model was introduced, Hirschman and other scholars have found even more ways in which the model applies to local and national politics. Only some of these observations have relevance to my own use of the model in this book, but it is useful to review those insights to better understand the original purpose and power of the model.[19]
When one considers the interplay of exit, voice, and loyalty, it becomes apparent that some of the fundamental assumptions of neoclassical microeconomic theory are false. Just as democratic theorists have their ideals, so do economists. The difference is that political philosophers (normally) have the modesty to recognize their ideals as just that—ideal types that one dare not dream will take solid form. Many economists, by contrast, begin with the ideal model of a perfectly competitive economy and then presume that the mythical "invisible hand" sweeps markets free of inefficiencies. If consumers and entrepreneurs behave rationally in pursuit of their self-interest, competition will ensure the maximization of their interests, and the dysfunctional firms that fascinate Hirschman will cease to exist.
Economists and many other social scientists accept the general tenets of this idyllic model.[20] Hirschman's writings, however, explain why this theory often fails to explain complex economic realities. First, actual competitive economies can, paradoxically, prove less satisfying to consumers than those with only a handful of firms. As Hirschman explains,
A competitively produced new product might reveal only through use some of its faults and noxious side-effects…. Competition in this situation is a considerable convenience to the manufacturers because it keeps consumers from complaining; it diverts their energy to hunting for the inexistent improved
Simply put, a multiplicity of equally unsatisfactory options is better for a producer than a monopoly. Producers will still scratch and claw the competition to lure more temporary customers to buy their products, but they understand that so long as no one produces a superior product, none of them need change their manufacturing processes.
A dash of competition may also be welcomed by a monopoly that knowingly produces a substandard good or service. Hirschman argues that inefficient monopolies actually invite some degree of competition "as a release from effort and criticism" when their power "rests on location and when mobility differs strongly from one group of local customers to another. If … the mobile customers are those who are most sensitive to quality," their exit permits the monopolist "to persist in his comfortable mediocrity." The "lazy monopolist may actually have an interest in creating some limited opportunities for exit" because the most quality-conscious customers are also "likely to be most demanding and querulous, in case of any lowering of standards." By showing them an open door, the monopolist encourages their exit and thereby reduces the chance that they will voice harsh criticism that could diminish the confidence and satisfaction of other consumers.[22]
Just as the absence of exit makes a lazy monopolist nervous, healthy competitive firms should dread the silence of a market where consumers speak only with their checkbooks. If consumers quickly switch products in response to even minute shifts in quality or price, a declining firm will be "wiped out before it will have had time to find out what hit it, much less to do something about it." Among other factors, Hirschman argues, it is primarily loyalty that causes influential customers and organization members to "stay on longer than they would ordinarily, in the hope or, rather, reasoned expectation that improvement or reform can be achieved ‘from within.’ " This measure of "irrational" loyalty conflicts with the ideal of perfect competition, but it actually results in a superior outcome because it gives firms the opportunity to correct themselves before collapsing. The ultimate threat of exit ensures long-term efficiency, but the willingness to use voice prevents the waste of invested resources that results when an otherwise rational firm briefly missteps.[23]
These three insights into illusory competition, lazy monopolies, and the value of loyalty apply to the political realm as well as to the marketplace. Regarding his description of false competition among equally
Public agencies and institutions also sometimes have the same incentives to promote modest competition as do lazy monopolists in the private sector. Hirschman offers the example of public schools:
Suppose at some point, for whatever reason, the public schools deteriorate. Thereupon, increasing numbers of quality-education-conscious parents will send their children to private schools. This "exit" may occasion some impulse toward an improvement of the public schools; but here again this impulse is far less significant than the loss to the public schools of those member-customers who would be most motivated and determined to put up a fight against the deterioration if they did not have the alternative of the private schools.[25]
For political processes, as for markets, the optimal balance then is a healthy mix of competition and dissent. Just as a perfectly competitive economy is too quick to destroy firms that err, so can highly competitive multiparty politics promote underdeveloped political parties. With an abundance of parties to choose from, "members will usually find it tempting to go over to some other party in case of disagreement. Thus, they will not fight for ‘change from within.’ "[26]
These few observations are only some of the insights into political life that one can glean from Exit, Voice, and Loyalty. Hirschman's work provided other observations about the dynamics of two-party systems, ideological bias, and overreliance on exit and voice. Subsequent essays by Hirschman and other scholars have applied the theory fruitfully to urban neglect, party competition in Israel, Japanese party politics, and the 1989 revolution in the German Democratic Republic. In addition, one scholar has applied Hirschman's ideas to political reforms aimed at democratic empowerment to criticize reforms that fail to balance exit and voice.[27] The same concern is central to this book, but before I use Hirschman's model, I wish to make substantial changes in its details and level of analysis. The remainder of this chapter introduces these modifications.