Markets and Governments: Voice and Exit

The recent discussion over at Crooked Timber, which Micha has responded to below, raised some interesting issues. Particular attention was given to the concepts of "Exit" and "Voice" from Albert Hirschman?s Exit, Voice and Loyalty. I have not read it, but (I think) I understand the concepts of Exit and Voice discussed. Exit, from what I can tell, means the ability to abandon patronage to an institution. Voice means the ability to express dissatisfaction with the institution. Both are seen as mechanisms by which to affect the performance of institutions.

Though there are some similarities between markets and governments, there are fundamental, underlying differences that give rise to their particular characteristics.

Markets change in response to both Exit and Voice. The fear of customer Exit results in the fear of revenue loss and the drive to innovate, create better products, and improve service. Every customer that leaves for the competition results in a loss of revenues. Voice can also be a tool by which to change the behavior of businesses, as agitation often precedes Exit.

Governments on the other hand have little reason to fear Exit. It is costly to move to another municipality, state, or country. Sometimes, governments do not even allow it. To Exit government institutions, an individual has to leave his family, friends, job, and familiar surroundings. He has to pack up all of his belongings and safely transport them to his destination, convert his financial assets to those types that are useful at his destination. He has to assimilate to a different culture, and might have to learn a new language.

Hence, the easiest way to create Exit is not to move away, but to move governments out of power. In a democracy, this opportunity is presented at election time. Yet, contrary to markets, democracies are winner-takes-all systems. Whichever faction acquires 51% of the votes (or less in a plurality) gets to dictate terms everyone else. The losers cannot Exit. And as a result of the limited ability to Exit, Voice is less useful also. In contrast, every marginal dollar can be used to Exit in a market.

To further highlight the differences, consider the following scenario. Instead of being able to Exit one hosting service to another like Catallarchy just did, suppose all the blogs in the blogosphere took a vote every two years to decide who "we" were going to use as "our" hosting service. The winning service would be the one which bloggers have to use. Those that did not vote for that service would not be able to choose another service, i.e., Exit from the winner. They would be left with having to write letters periodically to the winning service to Voice their dissatisfaction, but let's face it, without the threat of Exit, the winning service has little incentive to take these complaints seriously, at least until the next election. And again, during that election, they only need to capture a plurality of the votes. The loss of a minority of votes is of little consequence, unlike the loss of revenues from every customer in a market.

Surely this would be a horrible system for choosing hosting companies. Yet, it is the very system used for choosing education in most of the world. Rather than being able to Exit educational systems that they are dissatisfied with, parents are left with the the mere ability to Voice their complaints. Since school boards do not fear the loss of revenues, they have little reason to heed the complaints of parents. The "revenues" are already extracted from the parents in the form of taxes without their consent. Unless they want to uproot their family, the only thing they can do is vote in the next school board election and hope that they are in the winning faction. And with the mass romanticism of democracy in the Western world, education is not the only good that is allocated in this manner. So is

When evaluating the incentive structure of democracies and markets, it is apparent that at a basic level, democracy is simply incompatible with the free market, and sooner or later, we have to come to terms with this fact. That includes you too, libertarians.

And conversely, the best governments would be those with whom the option of Exit was as easy as it is with web hosting services. Instead of having to uproot family, learn a new language, assimilate into a new culture, convert assets, transport belongings, or having to resort to an impotent participation in a winner-takes-all vote every four years, a better system would be the ability to change governments by using a credit card on your laptop without leaving the comfort of your recliner. Governments would have much better reason to respond to Voice and Exit under those circumstances.

Summary -

Markets empower individuals with the ability to Exit much more powerfully than governments do. The power of Voice is only as effective as the threat of Exit, and hence, markets have a much greater incentive to respond to Voice than governments do.

Share this