Multi-Disciplinary Reading – Book Reviews

Exit, Voice & Loyalty, Albert Hirschman, 1970 – When organisations, countries, groups, products, people deteriorate, their citizens, customers, members have an option to either voice their opinion if they want the product / service to be improved or they can exit. What drives people to do either, which ones are most efficient and under what circumstances is what this book is about. To think someone can take so abstract a notion and think so deeply about it is why we need things like sociology and political economy. This treatise is a work of a genius

My Notes –

• Latitude for deterioration – Human societies create surplus above subsistence that lets them take considerable deterioration in their stride (higher the surplus, higher the latitude for det.)

• Modern economy keeps despotism/destruction in check – no monarch, tyrant, despot can survive economic deterioration for long (coffee is incompatible with anarchy – Pinilla was driven out from dictatorship in Colombia when coffee prices collapsed) is a popular belief with growth in capitalism. This belief however is mistaken as economic growth has not prevented wars

• An economy producing a surplus is not at liberty to not produce a surplus or produce less – thus its no different from an economy from a no-surplus or subsistence economy

• The paradox is that production frontier expands but individual firms are barely getting by at any given point. Man likes surplus but is fearful of paying its price (our inability at understanding “enough” stems from this paradox)

• Organisational slack – Firms are normally aiming at “satisfactory” rather than a highest possible rate of profits

• Macroeconomic policies can’t cure microeconomic slack (can make it worse?) – while low rate of savings, high level of prices or insufficient r&d affect the economy, the micros – management, design, salesmanship, labour unions cause considerable slack (low rates for eg. can make this worse)

• While slack is a bad thing, it also helps during downturn – there’s always ways to cut costs, improve efficiency by going after this slack (as Elon did with X). Slack is continuously generated in an economy. This decay generates its own cure (counterforces)

• Slack gets cured through Exit or Voice. Exit is economical and Voice political (this is pure elegance in thought!)

• Exit is felt through a set of statistics while voice through faint grumbling or violent protest. Former is straight-forward while latter roundabout and messy. Economists prefer the “Exit” option (invisible hand)

• Exit in some domains can be branded as criminal (for desertion), defection and treason

• Relying on “Exit” as an org – it can go beyond the point of no return where losses weaken the firm so badly that bankruptcy will occur before remedial measures can.

• A drop in quality of product should never exceed the point of no return. When demand is inelastic, the problem (customers on the edge of “Exit”) may not show up until its too late. (Happens often with countries in downfall – you can’t renounce your citizenship easy). If demand is too elastic, the firm won’t have time to recuperate from a mass exit

• A mixture of “alert” (who voice/exit) and “inert” customers (who grumble but stay) will provide the firm sufficient time to react (Amazon reviews make voice so dominant that makes every customer an “alert” customer though)

• Exit could fail to cause revenue loss if firm kept gaining new customers as it lost old (hence SaaS firms monitor churn – though few do much to listen to the whys of the churn)

• When uniform quality decline hits a industry, customers churn throughout and decline sets into the industry as a whole (mergers/monopoly might be preferred here)

• Voice is the only option when exit is unavailable (family, state, church)

• Voice is a more commanding option in less developed countries where options are less (Silent-exit is preferred when options are aplenty, as in developed economies)

• What keeps a customer inert could be switching costs (rational) or loyalty (less rational)

• Effort to voice would be proportional to the advantage to gained multiplied by the probability to influence a favourable outcome

• Inexpensive, nondurable good vs Expensive durable good (automobile) can also influence voicing

• Exit is either/or but voice is an art, constantly evolving in new directions. Presence of an exit usually atrophies the art of voice (classic eg. is brain drain)

• State monopolies like alternatives so they don’t have to address glaring inefficiencies. A deterioration in rail service is not a serious matter if other long distance transportation like trucks exist. They are also insensitive to customers switching long as they have the backing of the national treasury (our PSUs have lived by the same logic)

• If you dont like the management you should sell the stock results in perpetuating bad management and their bad policies

• Customers who drop out first as price increases aren’t the same as the ones who exit as quality drops. Differences in quality inflicts very different losses to diff customers (even if quality can be expressed in price terms)

• Easy exile in Latin American countries promoted Exit of political opponents to neighboring countries (it was in fact preferred). Japan offered no such option being an island and there was always compromise worked out through Voice

• Those who have nowhere else to go are not powerless but influential – in a two-party system centrist views might isolate the hard-right or hard-left causing defection or sitting out

• Loyalty makes exit less likely and might activate Voice. It is however just a barrier with a finite cost, like protective tariffs

• Effectiveness of Voice is strengthened by the possibility of Exit, though willingness to use it also reduced by Exit

• Boycott – on the border between Voice and Exit is the “threat” to Exit with a promise of re-entry (points of exit and entry will be far from identical though)

• High fees for entry and stiff penalties for exit increase loyalty (cults work this way!). Loyalty leads to self-deception (severe the initiation, higher the self-deception – why weddings have so many rituals)

• Penalties of excommunication, defamation or deprivation of livelihood keep Exits in check

• Exit from public goods and some orgs/services may cause further deterioration (as is happening with Vi / Vodafone and in public schools in the US)

• Some loyalists may prefer not to leave so as to not leave the org / country in a worser shape – worse it gets, the harder it is to leave (”right or wrong, my country” can become “the wrong-er the my-er”)

• Domestication of dissenters is achieved by assigning the role of “official dissenter”. With the label, his official position becomes explicit and predictable and hence “powerless” (phenomenal insight)

• Orgs that treat Exit as treason and Voice as mutiny are unlikely to be viable in the long run

I found in this book a useful way to think abstractly about several different situations that apply to countries, companies, societies and its orgs. Economics emphasizes exits as with Adam Smith’s invisible hand but its not as straight-forward in a lot of situations where Voice would have been preferred. We pay so little attention to Voice and it could be to our detriment if that option doesn’t exist or if it isn’t used. In a zoomed out view it is not hard to see why cryptocurrencies rose up and why current geopolitics is leading to long-term de-dollarization for eg. – without the threat of exit, there’s nothing that can improve fed and the US govt’s behavior (song and dance over debt ceilings and govt. shutdowns). Once you start applying Voice/Exit, you will see it everywhere. 11/10