Middle Men: A Blast from the Past

I don’t usually “blast from the past” such a recent post, but it fits so nicely after Sunday’s “Money (reprise)” post that I wanted to include it here.

Sunday I talked about how money, as a common medium of exchange, makes economic transactions easier and, as a result, reduces the opportunity cost.  We can have more goods and services (or more time to enjoy the goods and services we have) because we’re spending less time trying to find the exact trade of what we have for what we want.

“Middle men” serve the same purpose.  They bring things that are produced far away, they break down inconveniently large quantities from sources to convenient amounts for us, the end users, and they aggregate a bunch of different sources into one “market” so we can go one place for the various things we want rather than chasing all over creation for them.

That said, here’s last August’s post:

People often talk about wanting to get rid of the “middle man” in buying and selling in order to bring down costs.  There’s just one thing.  While the middle man may increase the price they generally bring down the cost.

Allow me to explain.

From time to time, I’ve gone to a “u-pick” farm to get fresh strawberries.  I could drive out there, get a box, and go down the row of strawberry plants picking fresh, ripe strawberries and when I’m done, I have the box weighed and pay substantially less than the same amount of strawberries would cost at my local grocery store.  And that’s not counting the ones I ate–everybody does it–while picking.

Cost saved right?

Well, actually….

Consider a few things.  The farm is about an hour’s drive from where I live.  So that’s two hours round trip in addition to the time spent picking.  Two hours, and gas money on top of what I spent at the farm itself.  Now maybe folk might want to discount that because…fresh strawberries generally better than I can get in most stores.

But you can’t just discount it.  Imagine your typical weekly shopping cart.  Consider every item in it.  Now imagine going to where that item is grown or made and buying directly from the grower/manufacturer.  And if you live in the Midwest, like I do–or anywhere far from the tropics, and that cart contains oranges, grapefruit, or anything that requires subtropical or tropical heat to grow that means driving/flying/boating to a place where it does grow.  And you’re going to have to go to dozens of different places, all to get the things that would fill that imaginary shopping cart.

While the price of the items would likely be less than you pay at the store, wow much would all that traveling around to get it cost?  How much of your time would be absorbed just going from farm to manufacturer to craftsman to a different farm and so on, all to get the basket of items that amount to your weekly shopping?

Instead, we have middle-men.  We have wholesalers who gather items from manufacturers around the world.  We have shipping companies that do nothing but carry goods from one location to another.  and we have stores which provide a variety of different items in one place from which you can select all at once.  Yes, each of those “middle men” need to be paid, and their pay adds to the price of the good when you buy it at the store.  But they do so by dramatically reducing the cost in terms of the time and effort (and gas) that it would take you to go and deal with each of the producers individually.  It might be fun or useful to do one or two but when it comes to everything a person might want?  The middle men make it not only cheaper (in total cost) but possible at all.

Another aspect is scale.  In college I took several art classes.  A lot of our practice work was done on newsprint.  And while newsprint was about the cheapest paper in the art supply stores, it wasn’t what I would call cheap.  Perhaps, if a paper mill was conveniently located I might go and get my paper there.  There’s just one problem.  Have you seen the rolls of newsprint as they come from the mill?  I have.  I have no idea how much one of those weighs but several hundred pounds at least.  As a college student, I could come up with a few bucks for a pad of newsprint from the art supply store.  Coming up with enough money for one of those gigantic rolls?  Not so much.

This is another thing that middle men do.  They take large units that come from suppliers and break them down into more manageable chunks for the consumer.

All too often people decry the middle man for “driving the price up” without recognizing that the middle man is actually reducing their costs.  They don’t realize that without that middle man they would be spending time and resources that could be put to better use elsewhere just to obtain the things they obtain now.  The most likely result would be to cut back on the things they purchase now–after all, how many people in the midwest really can drive or fly to Florida to buy a crate of oranges so they can have juice with breakfast?–with a commensurate drop in quality of life.

Problems arise when those middle men charge more than the value they add by reducing the total cost of acquiring the goods.  In a market economy, this provides incentives for people to seek alternate suppliers or simply use less of the products these particular middle men are dealing with and using alternate goods and services that provide better value.

And sometimes changing conditions change the relative value that a particular middle man provides.  In the modern era, for instance, the combination of electronic communication and fast shipping we have more people dealing either directly with manufacturers or regional distributors as opposed to dealing with local retailers.  The changing technology in some cases has lowered the cost of skipping one more more levels of middle-men enough that it no longer justifies the price those levels need to add to be able to function.

While this may be uncomfortable for those in the levels being “skipped”, who will need to find other ways to generate income if they are to maintain their own standard of living, the effect on the economy as a whole is to bring more goods and services to the consumers at lower cost increasing the standard of living of the population as a whole.

4 thoughts on “Middle Men: A Blast from the Past”

  1. I think the worst middleman situations are where they are allowed exclusive contracts.

    While I’m in general very libertarian in terms of freedom to contract situations like that you see in comics, where one distributor cut sweetheart deals with both Marvel and DC in exchange for them exclusively going through that distributor essentially made Diamond a monopoly who can dictate terms to comic shops. They are killing their customers and may bring down all three tiers, but until the contracts a competitor can’t enter and correct the market until at least one of those exclusives expire.


  2. Ok, I get your point, and it makes sense regarding a lot of goods. But all things in balance. There is so much we can be doing for ourselves and our communities that can minimise the need for middlemen, even if we can never fully do away with them. The real problem is that as a society, we have become overly dependant upon someone else providing everything we need that we can no longer do anything for ourselves. Such as growing food in our backyard or making things ourselves, or even just repairing things rather than calling on a service man or replacing it with something new. When I lived out West, I experienced a more balanced attitude. People were growing as much of their own food as they can, or supporting the local gardeners and craftsmen at the farmer’s market. That’s not to say that money and middlemen have no value. Just that at present that value is rather bloated. Being more self reliant and community oriented means needing less money to acquire the goods and services needed, and therefore, less time one needs to spend working for someone else. For example, at present, I’m a stay at home mom, but we really don’t have a lot of money. Most people would say it’s not enough money to afford staying home with their child. But we get by fine by growing a garden and raising chickens to take the dent of our grocery expenses. I can do the garden work and take care of chickens which allows me to be home with my children. I can also do a little barter and trade within my community for some of our other needs. For everything else, the money we have is enough. It’s all about balance.


  3. The thing about economics is there rarely a categorical “this or that.” It’s about incremental trade-offs. A bit less of this and a bit more of that. When it comes to middle-men, situations change how much, or how little, in the way of intermediaries are appropriate. Where I work we deal with more manufacturers and fewer distributors than we did when I started here. The spread of internet communication and the rise of couriers like FedEx have made it much more practical to go directly to the source for many things.

    Some times, however, my boss will be diligently searching for a provider for some part or supply and I’ll go to Amazon, plug a brief description of the item in and there it is. Having a “middle man” as a “one stop” source is a value in that we save time which can be used for other things. It all depends.

    Sowell, in Basic Economics ( https://amzn.to/2VVqW56 ) gives the example of “petty traders” in Africa. They would set up shop right outside stores selling imported goods. What they would do, however, is break things down into much smaller lots–sell cigarettes in quantities of half a cigarette rather than a full pack, matches in lots of ten rather than a full box, that sort of thing. From some people’s views this would be an ideal situation to “eliminate the middle man” since people could walk right past the petty trader and buy, more cheaply (per unit) in the store. However, it would not be worth the time of the people in the store to break down their packages to the small quantities that the extremely poor people in that area could afford. The petty traders, however, do, allowing the people to at least get what they want in quantities they can afford. Eliminating that “middle man” would actually make things worse for the people who now couldn’t afford to buy things in the quantities being offered. Of course, what works there, for them, is not appropriate here. (Although perhaps not so inapplicable as one might think–after all, that’s what Eric Garner was doing–selling individual cigarettes rather than “by the pack”. In that case, he ran afoul of tax law and things went south but that’s somewhat separate from the economic issue.)

    As for doing for oneself, again, that’s a matter of trade offs and the answer is different for different people. I’m a reasonably capable “shade-tree” mechanic–to the point where I’ve rebuilt engines. There are very few repair/maintenance tasks that I can’t do if I make the effort. Some may require specialized tools that I don’t have, but leaving that aside, for many things it’s just not worth taking the time and making the effort. Oil changes? I have that done because weighing the time and aggravation on one hand vs. the cost of paying someone with a specialized set-up and it’s worth it to pay someone else to do it. Not having to get the car up on jack stands, crawl around on the ground under it, work in those tight spaces and then having to deal with properly disposing of the oil is worth the rather modest cost of paying the quick lube people. Brake pad and rotor replacement? A bigger task than the oil change, certainly, but also a lot more expensive to have done. In that case the balance came down on doing it myself. And so on.


  4. One might make the argument that the monopoly on comics is not actually the kind of monopoly that creates an existential threat to anyone’s existence. 🙂

    I find it interesting when companies advertise “eliminate the middle man” when really they are just creating a new middle man, run as a separate division of the same company.


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