The two institutional logics: exit-oriented versus commitment-oriented institutional designs

Abstract

Throughout human affairs there are two dual logics. Albert Hirschman investigated the two logics as the parallel-oriented logic of exit and the series-oriented logic of commitment, loyalty, and voice. Economics focuses almost exclusively on the logic of exit and questions of institutional design are seen through that lens. One goal here is to flesh out the alternative commitment-oriented logic of institutional design. The large Japanese-style firm is a major example of the commitment-oriented institutional design. Another point is that each logic has an internal consistency so some ‘mix and match’ hybrids can be more lethal than vigorous. In the East Asian crisis, highly leveraged firms from a commitment-oriented system of relational finance had ‘taken advantage’ of the new funds available from globalized financiers operating under the exit-oriented logic of arms-length finance – and the hybrid proved to be unviable. Overall, my goal is to illustrate the two institutional logics that offer two different and often incompatible ways to approach questions of flexibility, performance, and efficiency.

Keywords:

• Exit
• voice
• commitment
• lethal hybrids

Notes

¹The duality that is more familiar in economics is convex duality (Rockafellar, 1970). The dualities are related; convex duality is the integral or anti-derivative of series-parallel duality (see ‘Parallel addition, series-parallel duality, and financial mathematics,’ chapter 12 in Ellerman, 1995).

²Jane Jacobs (1992) develops a variation of the theme with the contrast between the exit-oriented commercial syndrome and the commitment-oriented guardian syndrome.

³In the correspondence between the tree search model and the options-characteristics model, the breadth-first strategy corresponds to treating characteristics as fixed so as to favour exit (from A to B or C), and the depth-first model corresponds to sticking with an option but trying to change its characteristics (from A to A1 or A2).

⁴The expressions ‘logic of exit’ and ‘logic of commitment’ are used by Kagono & Kobayashi (1994) who develop the two logics of organizational design by contrasting the American-style firm and the Japanese-style firm (see the section below on ‘The Modern Japanese Company’).

⁵See Jacobs's (1992) analysis of corruption resulting from a ‘monstrous hybrid’ between the commercial and guardian syndromes.

⁶See Goldberg (1980) for the contrast between relational and arms-length contracts.

⁷For instance, many Panglossian treatments of migration and development see people using the ‘exit to find a better home’ logic but then either returning from a ‘temporary’ migration with needed skills or at least sending back remittances to fuel local development so that the virtue of ‘committing to make home better’ will also be realized. But, as the saying goes, ‘there is nothing more permanent than “temporary' migration”’ and the remittances are spent largely for consumption purposes (see Jacobs, 1984: 122 on remittances; and overall see Ellerman, 2003). In this case, the desire to take the exit logic but still get the virtues of the other logic has largely proved to be a vain hope.

⁸See, for example, Pagels (1988) or Axelrod & Cohen (1999).

⁹Economists often assume a simplified ‘one hill’ model where hill-climbing mechanisms (local optimization) will suffice.

¹⁰Hence probability theory neglects the dual risk reduction strategy when it takes the probability distribution as being independent of the ‘bets’ made on each outcome.

¹¹Species such as the social insects (e.g. bees and ants) that can create a controlled microenvironment to protect their young (beehive or ant hill) will use the K-selection strategy.

¹²Notice that the exercise of voice now appears as the exercise or calling forth of effort broadly interpreted. Although the terminology of X-efficiency came later, Hirschman has emphasized the importance of the alternative notion of efficiency in economic development: ‘development depends not so much on finding optimal combinations for given resources and factors of production as on calling forth and enlisting for development purposes resources and abilities that are hidden, scattered, or badly utilized.’ (Hirschman, 1958: 5).

¹³Here again we see the logic of commitment being used to combat moral hazard.

¹⁴For instance, in the management literature this is closely related to W. Richard Scott's (1998) distinction between a corporation as a ‘rational system’ and as a ‘natural system’.

¹⁵Since there is no legal legitimation for the actual system, the public relations machinery in the companies, in the business press, and in academia broadcasts the goal of ‘maximizing shareholder value’ while the managers show their actual goals in their salaries, benefits, perquisites, (manipulated) stock options, and golden parachutes.

¹⁶A perfect labour market is similar to perfect insurance in that it gives workers no incentive to put forth effort (i.e. improve their effort characteristics) since, if caught shirking, they can exit and costlessly find the equivalent job elsewhere. The efficiency wage hypothesis is that firms will introduce imperfections by paying more than the going wage for a standard type of work so that workers will have something to lose if found to be shirking. See Akerlof & Yellen (1986).

¹⁷See Clark (1979) or Dore (1987) for similar tables.

¹⁸In the same vein, Hirschman refers to ‘that “long confrontation between man and a situation” (Camus) so fruitful for the achievement of genuine progress in problem-solving’ (Hirschman, 1973: 240).

¹⁹For instance, the advice of the World Bank to developing countries about labour is in the ‘labor markets’ topic area (see http://www1.worldbank.org/sp/); there is no ‘human resources’ topic area. But for its own staff within the World Bank, there is a Human Resources Vice President but no ‘Labor Market Vice President.’ Thus the Bank looks outward through an exit-oriented lens and inward through a commitment-oriented lens.