Middlemen help the world go round … but is that a good thing?
Middlemen help the world go round … but is that a good thing?
Intermediaries or middlemen show up in just about every aspect of our lives from shopping, to home buying, to financial services.
“They are the connective tissue. They’re critical part of the modern economy that make our lives easier, goods cheaper,” says Kathryn Judge, author of the new book “Direct: The Rise of the Middleman Economy and the Power of Going to the Source.”
Think about the last time you bought produce, for example. You likely went to a grocery store, a middleman, instead of directly to the farm where the crops are grown.
But what makes intermediaries so good at their jobs, can also give them significant influence says Judge. “The challenge that arises is that all of the attributes that make them such good connectors, they build this amazing infrastructure and expertise and a set of relationships, tend to give them outsized power in future periods.”
Marketplace’s David Brancaccio spoke with Judge, who is also a Columbia Law professor and financial regulation expert, about the role of these intermediaries in our lives. The following is an edited transcript of their conversation.
David Brancaccio: What should we call them? Intermediaries, I’ll use mainly. I mean, they’re everywhere, I suppose, right? When was the last time I actually went to the farm to get the tomato?
Kathryn Judge: Yeah. I mean intermediaries, middlemen, whatever you want to call them they are the connective tissue. They are a critical part of the modern economy. They make our lives easier, goods cheaper. So we’re certainly not getting away from a world with a lot of intermediaries.
Brancaccio: But you think they add friction, in addition to maybe the services they provide. And you don’t like friction, and it might be inefficient?
Judge: Yeah. The core challenge is that originally they rise to actually get rid of frictions, right. So usually, when intermediaries come to power, they’re providing a really valuable service. They’re helping to facilitate the flow of goods, the flow of money, from people who have them to people who need them. The challenge that arises is that all of the attributes that make them such good connectors, they build this amazing infrastructure and expertise and a set of relationships, tend to give them outsized power in future periods. And so what we see is that over time, there’s a shift in the balance of power, where they go from really helping consumers to suddenly be in a situation where they’re serving their own interests, often at the expense of consumers and creators and the others that they are helping to connect.
Brancaccio: Well, I mean, let’s look at the online site, Etsy. Good or bad, right? Because they are a way to connect creators and producers more closely with the consumer with the buyers, but they also take 5% right off the top.
Judge: Yeah, I would actually say Etsy is much more a force for good than a force for bad. And if we’re kind of at a point in time, that could be a pivot point where we continue to have meaningful choice, or were kind of the biggest players really dominate. I’d say Etsy is part of the alternative ecosystem that helps restore that choice. When you think about it, if you go on to Etsy, yes they take a cut, but they also really help small makers, small creators, small retailers connect with consumers across the country, around the world. And they also create a lot of transparency. You actually see the person from whom you’re buying a good, you get to communicate with that person directly, they get to create a site that really reflects who they are, so you know, who you’re supporting and where the goods are coming from. By contrast, Amazon Marketplace, also an incredible connector in a lot of ways, but the structure of it makes it a lot harder to know the people and the places behind the goods that you’re buying.
Brancaccio: Now, I happen to pay special attention to Sub-Saharan Africa. I’ve lived there, I’ve done reporting there, where I have met farmers getting only a teeny tiny fraction of the market price of something that they’ve raised or grown, because of the middleman or middlewoman, the intermediary in the middle.
Judge: That is a perfect example of how the balance of power is really off kilt[er] right now. So on average, farmers receive about 15% of the price that we pay for food. And so yes, intermediaries play a critical role. Most of us can’t go directly to the farm. But right now, there’s so many layers of intermediaries, we don’t even see the farm or the farmer. We’re systematically blinded to the impact of our actions on those … the people who are a times nearby at times quite far away because of the layers. And so the idea is when we start to strip some of those layers, we’re reminded of that impact. And then we can make choices that are really are more aligned with our values.
Brancaccio: You know, what helped with the situation with farmers and the intermediaries was more information digitally. Even through the simpler of cell phones, where they could see the market price of that, which they were selling and drive a harder bargain with the intermediary.
Judge: Yeah, and so information is a key way of kind of empowering people on both sides. And one of the things that we see oftentimes is that intermediaries tried to shroud that information and protect it for themselves. That being said, as long as farmers are in a situation where they’re having to be price takers, the balance of power is going to be such that oftentimes they’re not going to be able to make the choices that they want to make to protect their land and that a lot of the people that they’re helping to feed, that they are helping to cloth, might actually want them to make. So one of the core challenges that we’ve seen over time, is while there’s incredible efficiencies from today’s middleman economy, the process of transforming everything into a commoditized good, really strips goods from that sense of place, and makes it a lot harder for people who are suddenly creating something where they’re competing in a global playing field to make the small choices that actually would result in greater sustainability and subtle differences in the quality of the goods that they are creating and growing.
In real estate
Brancaccio: Let’s talk about real estate, right. We know the classic intermediary is the real estate agent. But there’s also multiple listing services, there’s as a whole ecosystem for selling and buying a house. But a big one is that investment firms buy up real estate. So not the people who actually want to use the house or the lot. And often, you’re doing business with a more opaque corporation, if you’re interested in real estate.
Judge: Yeah. So I think there’s numerous challenges right now around real estate and Americans are really suffering for it. As you said, one, the overall supply chain is getting longer because you’re having additional players come in, and making sure that they’re taking a cut, by coming in and buying up the housing that is available and then renting it out at rates that really ensure a healthy rate of return for that player. But I would say those key real estate agents are also a domain that deserve a lot more scrutiny. You know, real estate agents come into play, because they provided a really valuable service, particularly before we had the internet. As you noted, they created this multiple listing service, they created this database, where you have all of the different homes for sale in a given area. Before you had the internet, it made [it] a lot easier for sellers to get their homes in front of buyers, for buyers to figure out…okay, well, what are the types of homes I can afford? And finding the ones right for them. But what’s surprising today is technology should make those services a lot less valuable and a lot less expensive. And yet real estate agents are continuing, collectively to charge about 5% on the sale of a home. For the middle-class American family, a home is their most valuable financial asset. Those really high fees that are going to real estate agents are cutting in to the wealth of the typical American family in a meaningful way.
In the stock market
Brancaccio: And how could we not ask about when you buy and sell a stock? These days, their apps and the transaction seems free. But because of middle men and women in the process, that many investors have never even heard about, government regulators have questions about whether we’re getting the best price.
Judge: Yeah, and so what we’re seeing is a really active effort by the SEC and other regulators to bring transparency and accountability. Which is part of what we really need to ensure that intermediaries are serving the best interests of those that they are meant to connect, rather than just lining their own pockets. And what’s really interesting is you can look actually at the history of the stock market and see numerous instances where there was technology that was available, that should have made it cheaper and easier for individuals to trade stock, but you had a concentrated group of middlemen that worked really hard to entrench a system that was outdated. So it used to be for example, we had fixed brokerage fees. And the intermediaries fought really hard to say we need to have those fixed brokerage fees, not just because they make it so we’re very, very profitable but, you know, all these bad things would happen. We’d have massive consolidation and all these problems for consumers, if you actually allowed a competitive playing field here. And the SEC was really scared about what changes might occur in the face of unknowns. And so it took the SEC far longer than it should have to allow that competition to enter. But when it did, again, we got cheaper trades, and a better overall system. So what we’re seeing is just middlemen using their expertise, their control over that infrastructure, first to provide value, but then to make sure that they’re getting too much of that value for themselves and they’re not passing enough along.
The way toward a “rebalancing”
Brancaccio: Now you’ve thought long and hard about remedies for the … what you regard as the outsized role of these intermediaries. Give me a sense of a key one that comes to mind.
Judge: Yeah. So the key here, first of all, is that we want a rebalancing, the goal is not a world without middlemen. They play incredibly valuable services. It’s making sure middlemen are there, they’re providing valuable services, but the real power continues to lie in the hands of consumers and creators, where the real value creation happens. And so one example, is just helping to make sure that the public provides the infrastructure that small creators need to really connect directly with the consumers who want their goods. So for example, sellers right now oftentimes feel obliged to sell on Amazon. It’s partly because that’s where people start searching for goods when they go online, but it’s also because Amazon has this very impressive fulfillment process. And there’s no reason not to allow Amazon to do a great job providing very fast packages. But the longer it takes for a small maker to get their good in the hands of a consumer who wants it, the more consumers are going to be drawn to Amazon. So if we have the Post Office step up and provide faster service and more affordable services for those small makers, that really just helps to ensure that people continue to have a meaningful choice. That they can go elsewhere when they want to and that there’s a cost to opting out, but the cost is manageable and it’s one that people are able to endure.
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