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NOTE 24. The Middleman

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CHAPTER 24 THE MIDDLEMAN

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We are told that middlemen are exploitative.

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Even worse than other profiteers, who at least provide some type of service, the middleman

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is considered entirely unproductive.

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He buys a product which someone else has made, and resells it at a higher price, having added

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nothing whatsoever to it, except the cost to the consumer.

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If there were no middlemen, goods and services would be cheaper, with no reduction in quantity

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or quality.

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Although this concept is popular and prevalent, it is an incorrect one.

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It reveals a shocking ignorance of the economic function of middlemen, who do, indeed, perform

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a service.

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If they were eliminated, the whole order of production would be thrown into chaos.

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Products and services would be in short supply if they were available at all, and the money

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that would have to be spent to obtain them would rise wildly.

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The production process of a typical commodity consists of raw materials which must be gathered

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and worked on.

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Machinery and other factors used in production must be obtained, set up, repaired, etc.

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When the final product emerges, it must be insured, transported and kept track of.

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It must be advertised and retailed, records must be kept, legal work must be done, and

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the finances must be in good order.

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Production and consumption of our typical commodity could be portrayed in the following

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Number 10, number 9, number 8, number 7, number 6, number 5, number 4, number 3, number 2,

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number 1.

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Number 10 represents the first stage in the production of our commodity, and number 1,

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the last stage, when the commodity is in the hands of the consumer.

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The stages number two through number nine indicate the intermediate stages of production.

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All of these are handled by middlemen.

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For example, number four may be an advertiser, a retailer, wholesaler, jobber, agent, intermediary,

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financier, assembler or shipper.

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No matter what his specific title or function, this middleman buys from number five and resells

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How does the product to number three?

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Without specifying or even knowing exactly what he does, it is obvious that the middleman

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performs a necessary service in an efficient manner.

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If it were not a necessary service, number three would not buy the product from number

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four at a higher price than that at which he could buy the product from number five.

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If number four were not performing a valuable service, number three would cut out the middleman

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and buy the product directly from number five.

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So it is apparent that number four is doing an efficient job, at least a more efficient

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job than number three could do himself.

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If he were not, number three would again cut out middleman number four and do the job himself.

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It is also true that number four, although performing a necessary function in an efficient

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manner, does not overcharge for his efforts.

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If he did, it would pay for number three to circumvent him and either take on the task

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himself or subcontract it to another middleman.

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In addition, if number four were earning a higher profit than that earned in the other

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Entrepreneurs in the other stages would tend to move into this stage and drive down the

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rate of profit until it was equivalent to the profit earned at the other stages, with

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given risk and uncertainty.

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If the number four middleman were eliminated by a legal decree, his job would have to be

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be taken over by the number 3s, number 5s or others, or they would not get done at all.

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If the number 3s or the number 5s took over the job, the cost of production would rise.

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The fact that they dealt with number 4 as long as it was legally possible to do so indicates

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that they cannot do the job as well, that is, for the same price or less.

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If the number four stage were completely eliminated and nobody took over this function, then the

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process of production would be seriously disrupted at this point.

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The present analysis notwithstanding, many people will continue to think that there is

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something more pure and direct in exchanges which do not involve a middleman.

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Perhaps the problems involved with what economists call the double coincidence of wants will

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disabuse them of this view.

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Consider the plight of the person who has in his possession a barrel of pickles which

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he would like to trade for a chicken.

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He must find someone who has a chicken and would like to trade it for a barrel of pickles.

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and how rare a coincidence would have to occur for the desires of each of these people to

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be met.

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Such a double coincidence of wants is so rare, in fact, that both people would naturally

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gravitate toward an intermediary, if one were available.

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For example, the chicken-wanting pickle-owner could trade his wares to the middleman for

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for a more marketable commodity, gold, and then use the gold to buy a chicken. If he

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did, it would no longer be necessary for him to find a chicken-owning pickle-wanter. Any

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chicken-owner will do, whether he wants pickles or not. Obviously, the trade is vastly simplified

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by the advent of the middleman. He makes a double coincidence of wants unnecessary. Far

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Far from preying on the consumer, it is the middleman who, in many instances, makes the

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trade the consumer wishes possible.

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Some attacks on the middleman are based on the following situation.

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In an earlier time, the price of the good was low, and the share that went to the middleman

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was low.

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Then the share of the value of the final good that went to the middleman rose, and so did

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and the Cost of the Good.

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Examples such as these were used to prove that the high prices of meat in the spring

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of 1973 were due to middlemen.

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But they prove, if anything, quite the opposite.

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The share going to the middlemen may have risen, but only because the contributions

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made by middlemen have also increased.

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An increased share without an increased contribution would simply raise profits and attract many

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more entrepreneurs to the area, and their entry would dissipate the profits.

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So if the share which goes to middlemen rises, it must be because of their productivity.

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Examples of this phenomenon abound in the annals of business economics.

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Who can deny that department stores and supermarkets play a greater role and take a greater share

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of the market than middlemen in times past?

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Yet department stores and supermarkets lead to more efficiency and lower prices.

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These new modes of retailing necessitate more expenditures on the middleman phases of production,

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But greater efficiency leads to lower prices.