David R. Henderson  

Middlemen by Munger

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The feature article on Econlib this month is by economically literate political scientist Michael Munger. In it, he defends the role of the middleman, drawing on two classic articles, one by Bastiat and one by R.A. Radford.

My favorite paragraph:

Once again, the point seems paradoxical. It is because of profit that middlemen create value. And the seeking of profit by middlemen, buying cheap and selling dear, ensures that, as Bastiat put it, the "wheat will reach the stomach" faster, more cheaply, and more reliably than any service the state could possibly create. The system of middlemen performs what seems like, to Bastiat and to me, a miracle: "Directed by the comparison of prices, it distributes food over the whole surface of the country, beginning always at the highest price, that is, where the demand is the greatest. It is impossible to imagine an organization more completely calculated to meet the needs of those who are in want..."

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CATEGORIES: Economic Education



COMMENTS (10 to date)
Cyberike writes:

I shouldn't have to make this point, but we seem to have collectively forgotten: Where there is no profit, there is no service.

RJ writes:

I'm glad to see that although the libertarians admit that labor cannot switch from industry to industry at the drop of a hat, the role of the middleman is applicable to all markets and industries...

Wait, that doesn't sound right, does it?

David R. Henderson writes:

RL,
Maybe it's because I missed my Wheaties this a.m., but I didn't follow your remark above. You're always on target and so you're probably making a good point above, but it's too subtle for me. Please explain.
D.

RJ writes:

The value of middlemen in any given industry/market is contingent upon the nature of that market.

My complaint is that a post like this posits that middle men are a good thing. That is it. Not, "middle men can be good market actors that increase consumer surplus, reduce prices, increase productivity, and provide useful employment" like Wal-Mart does.

Middle men, like many of those in the financial sectors, can be useless, irrelevant, artificially created, and even actively damage the economy, all while pulling down massive salaries and providing no useful service to the economy.

It upsets me when I see the posts on this blog clearly point out that labor is specialized and cannot be transferred easily from market to market and use that to attack a stimulus, but then make posts that don't apply the same level of scrutiny to other ideas. I feel that some posts are, intentionally in some cases, unintentionally in others, disingenuous.

Then again, you were just providing a link, to feature a short article that I would expect to see in an Introductory Economics textbook. Clearly the point is that there is value in middleman, though I think this is far too simplistic a view.

El Presidente writes:

Cyberike,

I shouldn't have to make this point, but we seem to have collectively forgotten: Where there is no profit, there is no service.

I haven't forgotten that, but I don't approve of starving those who cannot pay . . . enough. No matter the distance between the wheat and the stomach, we need to see to it that they find one another if possible. Some people lower the barriers to this miracle and some raise them higher.

A point about definitions and terminology:

" . . . beginning always at the highest price, that is, where the demand is the greatest."

I know we are empathically challenged when it comes to distinguishing between demand and need, since economists are often incapable of differentiating capacity to benefit from willingness and ability to pay, but the distinction is real and we ignore it at our own risk. Meeting demand efficiently is not always the same thing as meeting needs efficiently.

Goods movement is a valuable industry. Brokering through wholesalers is valuable as well. I don't think these points are in dispute amongst the intellegent. However, a middleman doesn't necessarily fall into either of these categories. There are speculators who are superfluous to the efficient distribution of goods and services to meet needs, whatever their utility for meeting demand.

Kevin writes:

RJ doesn't the market already clear for the issue you raise? i.e. is it not the case that the markets that by their nature need no middleman have no bid for the services of middlemen? Why should there be a hat tip to the nonexistence of nonexistent middlemen?

Also, I'm not sure I understand your point about worthless middlemen who pull down large salaries. Aren't the markets those middlemen serve better equipped to value their services than you or I? Or are you talking about intermediations that exist by state fiat, like WiMBy's and tax sleeves?

Arthur_500 writes:

In your case, Middlemen can provide a useful service - or not. Looking at Stock Markets we have found that the person on the floor of the NYSE can get you a better deal that the computers of NASDAQ. Obviously, middlemen can provide a valuable service as long as it is financially beneficial to them.
What happens when we have monopolistic situations, such in our financial markets? There are relatively few players and they command egregious (since I am not the receiving one) incomes at the expense of those utilizing their services. Now we are dealing with some of the fallout from these pseudo-monopolistic situations - too big to fail.
I continue to argue that they should reap the failures of their actions as well as the rewards. I do not think they are too big to fail.
Throw their business to the wolves and see what gets snapped up. Soon non-monopolistic middlemen will attempt to make compost out of manure and sell it to a willing buyer. We will all benefit from a more rapid ascent from the crash.

Tracy W writes:

El Presidente

I haven't forgotten that, but I don't approve of starving those who cannot pay . . . enough.

That is Cyberike's point. If farmers don't make a profit in the sense of gaining more from growing food than it cost them to produce then they won't produce food, and then everyone starves. This was discovered in Russia under War Communism, and is being discovered in Zimbabwae. Farmers do conclude that "If I'm not going to get enough from this harvest to keep from starving, I may as well save my energy and stop working and hope that something else comes along to save me from starvation."

Now a government can tax everyone a little and buy food from the farmers to give to the poor. The taxes can be small enough to still provide the incentive for farmers to make food. Or, the government can send the army out into the fields to force the farmers to work - but the government has to pay its soldiers enough so that they will do that rather than desert or overthrow the government, and also the farmers forced to work will be trying to sabotage its efforts.

El Presidente writes:

Tracy W,

If farmers don't make a profit in the sense of gaining more from growing food than it cost them to produce then they won't produce food, and then everyone starves . . . Farmers do conclude that "If I'm not going to get enough from this harvest to keep from starving, I may as well save my energy and stop working and hope that something else comes along to save me from starvation."

The key word in the sentence you quoted from my remark is "enough". People should pay to the extent they can. We should endeavor to be sure all can afford what they need from the wages of their own labor, including the farmer. Redistribution has a role to play in ensuring that is possible.

How much profit is required? To say that people need and should receive accounting profits is one thing. I agree with that. To say that we should allow and encourage them to hold out for a particular level of profit (economic profits) is something else. That would require some justification in my opinion. I have no problem with somebody earning a profit greater than the rate of inflation. I have a big problem with entire economic sectors believing and behaving as though they are entitled to ridiculously high incomes and unjustifiably low taxes for the service of selling lies and moving imaginary money around so quickly that nobody can see where it is going. It's a big game of three-card monte. These are the "middlemen" with whom I am most displeased. Their behavior sets a higher competitive equilibrium for capital formation, which causes the prospective farmer to lose ground and contemplate alternatives. It raises the interest governments must offer for debt sales. It makes everything cost more and it does little to help most people pay for the rising cost.

Rimfax writes:

The reason that middlemen are valuable across industries/markets is because their added value is social, not material. In the context of social networking theory, they are superconnectors. They are Kevin Bacon or Paul Erdős, not value adders.

They are skilled with connecting people and organizations. This works just as well for distributing wheat as it does with dildos and used light bulbs.

This is also why many of them are considered leeches. At some point, the demand for new connections may contract putting negative pressure on their commission rates. The demand for new connections need not be linked to the growth or contraction of that particular market/industry. Even a growing market/industry may reach an equilibrium of connections and the demand for their skills may disappear, especially if high commissions encourage an oversupply of middlemen, just as a contracting market/industry may increase the demand for middlemen.

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