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

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

No. 10
         9
         8
         7
         6
         5
         4
         3
         2
         1

Number 10 represents the first stage in the production of our commodity and no. 1 the last stage when the commodity is in the hands of the consumer. Stages no. 2 through no. 9 indicate the intermediate stages of production. All of these are handled by middlemen. For example, no. 4 may be an advertiser, a retailer, wholesaler, jobber, agent, intermediary, financier, assembler, or shipper. No matter what his specific title or function, this middleman buys from no. 5 and resells the product to no. 3. 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, no. 3 would not buy the product from no. 4 at a higher price than that at which he could buy the product from no. 5. If no. 4 were not performing a valuable service, no. 3 would “cut out the middleman” and buy the product directly from no. 5.

So it is apparent that no. 4 is doing an efficient job—at least a more efficient job than no. 3 could do himself. If he were not, no. 3 would again cut out middleman no. 4, and do the job himself.

It is also true that no. 4, although performing a necessary function in an efficient manner, does not overcharge for his efforts. If he did, it would pay for no. 3 to circumvent him, and either take on the task himself, or subcontract it to another middleman. In addition, if no. 4 were earning a higher profit than that earned in the other stages of production, 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).

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If the no. 4 middleman were eliminated by a legal decree, his job would have to be taken over by the no. 3s, no. 5s, or others, or they would not get done at all. If the no. 3s, or the no. 5s took over the job, the cost of production would rise. The fact that they dealt with no. 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 no. 4 stage were completely eliminated, and nobody took over this function, then the process of production would be seriously disrupted at this point.

The 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. Imagine 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. For example, the chicken-wanting pickle owner could trade his wares to the middleman 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 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 arguments which are represented in the following diagrams. In an earlier time, represented by diagram 1, the price of the good was low, and the share that went to the middleman was low. Then (diagram 2), the share of the value of the final good that went to the middleman rose, and so did 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. 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. 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.