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?
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.