Economist Albert Hirschman was a great thinker. He was not a household name, nor did he win a Nobel Prize for economics. But he made an enormous contribution to the social sciences, and his writings remain highly germane for anyone interested in current public policy.

Hirschman died last December at 97, having led an extraordinary life that placed him at the heart of the historical forces that shaped the 20th century. He was born in Berlin in 1915, but fled Nazi Germany in 1933. He was an ardent anti-fascist who acted on his beliefs, joining the Republican cause to fight against Franco in the Spanish Civil War. During the Second World War, Hirschman served in the French army. After the defeat of France, he helped thousands of refugees to escape over the Pyrenees Mountains into Spain.

In 1941, he emigrated to America, where he served in the US Army, ending up at the war’s end as a translator for a German general at the Nuremberg war crimes trials. He then worked for the Federal Reserve during the implementation of the Marshall Plan that helped postwar Europe back on its feet. Back in the US, he turned his academic energy to development economics, particularly with respect to Latin America, and held high-level academic appointments at a variety of US universities for the rest of his career.

Despite living through such terrible times, Hirschman remained an intellectual optimist. He believed in the obligation to try to solve social and economic problems — no matter how big — and chastised naysayers for their timidity. Hirschman constantly challenged conventional wisdom. He wrote in a clear and compelling way, resisting the general movement in economics toward mathematical expression, and he became a zealous advocate of crossdisciplinary thinking.

His eclectic approach to economics makes it hard to summarize Hirschman’s large body of work. Perhaps the best approach is to whet the readers’ interest with a brief synopsis of his most famous book.

In 1970, Hirschman published Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. He argued that the economic assumption of fully and undeviating rational behaviour stands at odds with reality. It does not allow for the fact that any economic, social or political system has agents — individuals, businesses, organizations — that will have lapses in behaviour.

Whether as a result of dysfunction or misbehaviour, there is a tendency toward decay, a moving away from optimal economic, political and social outcomes. It also leads to ever-present “slack” in the form of underutilized, or inappropriately utilized, resources. This disequilibrium, which was also a core theme in Hirschman’s writings on economic development, creates an opportunity for changing a failing organization or system.

But the kind of change we get depends on how people react when confronted with failure and poor performance. Will they complain and demand improvement — the so-called voice option? Or will they simply seek alternatives — what economists call “exit” — if goods, services or performance don’t meet their expectations?

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Albert O. Hirschman at the Institute for Advanced Study, 1992. Photo: Martin Arias. Shelby White and Leon Levy Archives Center, Institute for Advanced Study, Princeton, NJ, USA.

Hirschman felt that too many economists focus on the exit option. If a company’s performance deteriorates, investors will sell their shares. If the quality of a product falls, consumers will stop buying it. But Hirschman believed there was greater scope for voice to affect economic outcomes than traditional theory allowed. Those shareholders might be better off holding their shares and agitating for improved corporate management. In political science, Hirschman felt that voice was given too much emphasis, as the exit option was a powerful complement of or substitute for voice. If a government’s performance was poor — failing to deliver security, social needs or a decent economy — one could agitate for change through voice. It was the threat to change parties, to not vote or to leave the country that could influence the effectiveness of this dissent.

The exploration of exit and voice has deep public policy implications. For example, Hirschman reveals how exit actions can be detrimental or lead to unintended outcomes. He uses the example of public and private school systems. If there is deterioration in the public system, parents who care about the quality of education may opt to move their children into private schools. The result is diminished pressure on the public system for reform, and the likelihood is that those schools will decline further.

Hirschman was led to this line of thought by his reflection on the poor development of transportation in Nigeria, where the availability of private trucking took pressure off government to reform and improve the public rail system. A key observation was that limited competition, particularly where one organization can draw on the public purse, can lead to suboptimal outcomes. Although Hirschman tends to overstate his case, his exploration of behavioural responses was insightful.

Hirschman also evaluates the impact of loyalty, which can delay the decision to exit. The emphasis in the book was on the benefits of loyalty. By delaying exit, it allows companies to have time to change course in reaction to feedback they are receiving, thereby improving their products or performance. This is a key reason for companies to build loyalty with their customers or employees. In politics, loyalty gives parties time to adjust to the wishes of their members or alter policies in order to garner more public support.

Hirschman stresses that there is a point where the extent of deterioration exhausts loyalty and exit occurs, and the exit option gives the influence of voice during the period of loyalty more impact. Although the book highlights the benefits of loyalty, there is also a sense that it can be harmful when it leads to excessive complacency about decay.

The messages of Exit, Voice, and Loyalty are powerful. Hirschman holds that change for the better is possible, a crucial belief in an age where we face public policy challenges that are seen as too big and too complex to be solved. He argues that public discourse, agitation and feedback can bring about change, especially if the “voice” is combined with the threat of exit. No matter how intractable a problem seems, Hirschman tells us, we must resist becoming complacent or resigned to endure it. At a time when we face problems that sometimes seem too big to fix — like climate change, Aboriginal poverty and income inequality — his voice is a powerful reminder and conscience against paralysis and timidity in public policy.

Photo: Shutterstock

Craig Alexander
Craig Alexander is senior vice-president and chief economist, TD Bank Group.

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