24. The Middleman

0:00CHAPTER 24 THE MIDDLEMAN We are told that middlemen are exploitative. Even worse than other profiteers, who at least provide some type of service, the middleman is considered entirely unproductive. He buys a product which someone else has made, and resells it at a higher price, having added nothing whatsoever to it, except the cost to the consumer. If there were no middlemen, goods and services would be cheaper, with no reduction in quantity or quality. Although this concept is popular and prevalent, it is an incorrect one. It reveals a shocking ignorance of the economic function of middlemen, who do, indeed, perform a service.

0:52If they were eliminated, the whole order of production would be thrown into chaos. Products and services would be in short supply if they were available at all, and the money that would have to be spent to obtain them would rise wildly. The production process of a typical commodity consists of raw materials which must be gathered and worked on. Machinery and other factors used in production must be obtained, set up, repaired, etc. When the final product emerges, it must be insured, transported and kept track of. It must be advertised and retailed, records must be kept, legal work must be done, and the finances must be in good order.

1:42Production and consumption of our typical commodity could be portrayed in the following Number 10, number 9, number 8, number 7, number 6, number 5, number 4, number 3, number 2, number 1. Number 10 represents the first stage in the production of our commodity, and number 1, the last stage, when the commodity is in the hands of the consumer. The stages number two through number nine indicate the intermediate stages of production. All of these are handled by middlemen. For example, number four may be an advertiser, a retailer, wholesaler, jobber, agent, intermediary, financier, assembler or shipper.

2:34No matter what his specific title or function, this middleman buys from number five and resells How does the product to number three? Without specifying or even knowing exactly what he does, it is obvious that the middleman performs a necessary service in an efficient manner. If it were not a necessary service, number three would not buy the product from number four at a higher price than that at which he could buy the product from number five. If number four were not performing a valuable service, number three would cut out the middleman and buy the product directly from number five. So it is apparent that number four is doing an efficient job, at least a more efficient job than number three could do himself.

3:28If he were not, number three would again cut out middleman number four and do the job himself. It is also true that number four, although performing a necessary function in an efficient manner, does not overcharge for his efforts. If he did, it would pay for number three to circumvent him and either take on the task himself or subcontract it to another middleman. In addition, if number four were earning a higher profit than that earned in the other Entrepreneurs in the other stages would tend to move into this stage and drive down the rate of profit until it was equivalent to the profit earned at the other stages, with given risk and uncertainty.

4:18If the number four middleman were eliminated by a legal decree, his job would have to be be taken over by the number 3s, number 5s or others, or they would not get done at all. If the number 3s or the number 5s took over the job, the cost of production would rise. The fact that they dealt with number 4 as long as it was legally possible to do so indicates that they cannot do the job as well, that is, for the same price or less. If the number four stage were completely eliminated and nobody took over this function, then the process of production would be seriously disrupted at this point.

5:04The present analysis notwithstanding, many people will continue to think that there is something more pure and direct in exchanges which do not involve a middleman. Perhaps the problems involved with what economists call the double coincidence of wants will disabuse them of this view. Consider the plight of the person who has in his possession a barrel of pickles which he would like to trade for a chicken. He must find someone who has a chicken and would like to trade it for a barrel of pickles. and how rare a coincidence would have to occur for the desires of each of these people to be met. Such a double coincidence of wants is so rare, in fact, that both people would naturally gravitate toward an intermediary, if one were available.

6:00For example, the chicken-wanting pickle-owner could trade his wares to the middleman for for a more marketable commodity, gold, and then use the gold to buy a chicken. If he did, it would no longer be necessary for him to find a chicken-owning pickle-wanter. Any chicken-owner will do, whether he wants pickles or not. Obviously, the trade is vastly simplified by the advent of the middleman. He makes a double coincidence of wants unnecessary. Far Far from preying on the consumer, it is the middleman who, in many instances, makes the trade the consumer wishes possible. Some attacks on the middleman are based on the following situation.

6:48In an earlier time, the price of the good was low, and the share that went to the middleman was low. Then the share of the value of the final good that went to the middleman rose, and so did and the Cost of the Good. Examples such as these were used to prove that the high prices of meat in the spring of 1973 were due to middlemen. But they prove, if anything, quite the opposite. The share going to the middlemen may have risen, but only because the contributions made by middlemen have also increased. An increased share without an increased contribution would simply raise profits and attract many more entrepreneurs to the area, and their entry would dissipate the profits.

7:40So if the share which goes to middlemen rises, it must be because of their productivity. Examples of this phenomenon abound in the annals of business economics. Who can deny that department stores and supermarkets play a greater role and take a greater share of the market than middlemen in times past? Yet department stores and supermarkets lead to more efficiency and lower prices. These new modes of retailing necessitate more expenditures on the middleman phases of production, But greater efficiency leads to lower prices.