A business firm is limited, not only in its over-all size, but also in the range of functions that it can perform efficiently. General Motors makes millions of automobiles, but not a single tire. Instead, it buys its tires from Goodyear, Michelin and other tire manufacturers, who can produce this part of the car more efficiently than General Motors can. Nor do automobile manufacturers own their own automobile dealerships across the country. Typically, automobile producers sell cars to local people who in turn sell to the public.
There is no way that General Motors can keep track of all the local conditions across the length and breadth of the United States, which determine how much it will cost to buy or lease land on which to locate an automobile dealership, or which locations are best in a given community, much less evaluate the condition of local customers' used cars that are being traded in on new ones.
No one can sit in Detroit and decide how much trade-in value to allow on a particular Chevrolet in Seattle with some dents and scratches or a given Honda in mint condition in Miami. And if the kind of salesmanship that works in Los Angeles does not work in Boston, those on the scene are likely to know that better than anyone in Detroit can. In short, the automobile manufacturer specializes in manufacturing automobiles, leaving other functions to people who develop different knowledge and different skills needed to specialize in those particular functions.
The perennial desire to "eliminate the middleman" is perennially thwarted by economic reality. The range of human knowledge and expertise is limited for any given person or for any manageably-sized collection of people. Only a certain number of links in the great chain of production and distribution can be mastered and operated efficiently by the same set of people. Beyond some point, there are other people who can perform the next step in the sequence more cheaply or more effectively-and, therefore, at that point it pays a firm to sell its output to some other businesses that can carry on the next part of the operation more efficiently. Newspapers seldom, if ever, own and operate their own news stands, nor do furniture manufacturers typically own or operate furniture stores. Most authors do not do their own publishing, much less own their own bookstores.
Prices play a crucial role in all of this, as in other aspects of a market economy. Any economy must not only allocate scarce resources which have alternative uses, it must determine how long the resulting products remain in whose hands before being passed along to others who can handle the next stage more efficiently. Profit-seeking businesses are guided by their own bottom line, but this bottom line is itself determined by what others can do and at what cost. When an oil company discovers that it can make more money by selling gasoline to local filling stations than by owning and operating its own filling stations, then the gasoline passes out of its hands and is then dispensed to the public by others. In other words, the economy . as a whole operates more efficiently when the oil company turns the gasoline over to others at this point, though the oil company itself does so only out of self-interest. What connects the self-interest of a company with the efficiency of the economy as a whole are prices. When a product becomes more valuable in the hands of somebody else, that somebody else will bid more for the product than it is worth to its current owner. The owner then sells, not for the sake of the economy, but for his own sake. However, the end result is a more efficient economy, where goods move to those who value them most.
Despite superficially appealing phrases about "eliminating the middleman," middlemen continue to exist because they can do their phase of the operation more efficiently than others can. It should hardly be surprising that people who specialize in one phase can do that phase better than others.
Third World countries have tended to have more middle men than more industrialized nations, a fact much lamented by observers who have not considered the economics of the situation. Farm produce tends to pass through more hands between the African farmer who grows peanuts, for example, to the company that processes it into peanut butter than would be the case in the United States. Conversely, boxes of matches may pass through more hands between the manufacturer of matches to the African consumer who buys them. A British economist in mid-twentieth century West Africa described and explained such situations there:
West African agricultural exports are produced by tens of thousands of Africans operating on a very small scale and often widely dispersed. They almost entirely lack storage facilities, and they have no, or only very small, cash reserves. The large number and the long line of intermediaries in the purchase of export produce essentially derive from the economies to be obtained from bulking very large numbers of small parcels . . . In produce marketing the first link in the chain may be the purchase, hundreds of miles from Kano, of a few pounds of ground nuts, which after several stages of bulking arrive there as part of a wagon or lorry load of several tons.
Instead of ten farmers in a given area all taking time off from their farming to drive their individually small amounts of produce to a distant town for sale, one middleman can collect the produce of the ten farmers and drive it all to a produce buyer at one time, allowing ten farmers to apply their scarce resource-time and labor-to its alternative uses in growing more produce.
Society as a whole thus saves on the amount of resources required to move produce from the farm to the next buyer, as well as on the number of individual negotiations required at the points of sale. The saving of time is particularly important during the harvest season, when some of the crop may become over-ripe before it is picked or spoil afterwards if it is not picked promptly and gotten into a storage or processing facility.
In a wealthier country, each farm would have more produce, and motorized transport on modern highways would reduce the time required to get it to the next point of sale, so that the time lost per ton of crop would be less and fewer middlemen would be required to move it. Moreover, modern farmers in prosperous countries would be more likely to have their own storage facilities, harvesting machinery, and other aids. What is and is not efficient-either from the standpoint of the individual farmer or of society as a whole-depends on the circumstances. Since these circumstances can differ radically between rich and poor countries, very different methods may be efficient in each country and no given method need be right for both.
For similar reasons, there are often more intermediaries between the industrial manufacturer and the ultimate consumer in poor countries. However, the profits earned by each of these intermediaries is not just so much waste, as often assumed by third-party observers, especially observers from a different society. Here the limiting factor is the poverty of the consumer, which restricts how much can be bought at one time. Again, West Africa in the mid twentieth century provided especially clear examples:
Imported merchandise arrives in very large consignments and needs to be distributed over large areas to the final consumer who, in West Africa, has to buy in extremely small quantities because of his poverty. . . The organization of retail selling in Ibadan (and elsewhere)
exemplifies the services rendered by petty traders both to suppliers and to consumers. Here there is no convenient central market, and it is usual to see petty traders sitting with their wares at the entrances to the stores of the European merchant firms. The petty traders sell largely the same commodities as the stores, but in much smaller quantities.
This might seem to be the ideal situation in which to "eliminate the middleman," since the petty traders were camped right outside stores selling the same merchandise, and the consumers could simply walk right past them to buy the same goods inside at lower prices per unit. But these traders would sell in such tiny quantities as ten matches or half a cigarette, while it would be wasteful for the stores behind them to spend their time breaking down their packaged goods that much, in view of the better alternative uses of their labor and capital. The alternatives available to the African petty traders Were seldom as remunerative, so it made sense for these traders to do what it would not make sense for the European merchant to do. Moreover, it made sense for the very poor African consumer to buy from the local traders, even if the latter's additional profit raised the price of the commodity, because the consumer often could not afford to buy the commodity in the quantities sold by the European merchants.
Obvious as all this may seem, it has been misunderstood by renowned writers! and-worse yet-by both colonial and post-colonial governments hostile to middlemen.
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