Should the middleman be eliminated?

I attended this Commerce Day Celebrations of a leading Colombo School. Students, as usual, demonstrating their immense creative and leadership skills, had organized the function beautifully. One of the treats they hosted to us was short dramas played by students to educate us of common economic issues.

One such drama pertained to the role of the middleman. The storyline was that the middleman, being a parasite, was exploiting both the producer and the consumer. Hence, the moral of the short drama was that he should be eliminated from the economic system, so that all economic activities, namely, production, distribution and consumption, would be free from the crutches of his octopus like tentacles. I noted that everybody in the audience, students, teachers and other guests, had been deeply captivated and extremely exhilarated by its final scene at which the hated middleman was destroyed.

I had to address the students and I used the opportunity to conduct it as a discussion session rather than delivering a conventional lecture. “You all are commerce students. What’s the job involved in commerce?” I asked them. “Buying from one person and selling to another person,” one of the students answered.

“What do you call a person doing buying and selling?” There was a pause, but after sometime another student answered. “Middleman.” “Isn’t it ironical?” I asked them. “You train yourselves to be middlemen. But you brand yourselves as exploiters and cry that you be destroyed. Isn’t there something strange about it?” My question hit them on the head. There was a little murmur in the hall and later one student shyly admitted “Yes, we’ve been wrong. We were degrading our own trade. But, tell us why the entire society is up in arms against middlemen?” I got the opportunity to explain.

“Middleman is an important element in the whole production-distribution-consumption process. But, we always tend to ignore his services. That’s because we’re jealous of the profits he makes and the power he wields on us. So, we erroneously think that we can get those profits for ourselves, if he’s not there. But, without the middleman, our lives would become totally impossible. Both producers and consumers would become helpless, if the middleman is eliminated.”

“You’re correct. But, if you can explain it with a practical example, our students can understand it better” One of the teachers intervened. “Yes,” I said. “Let’s, for example, consider the rice market. Paddy is grown by farmers, but from paddy to rice which is consumed by consumers, there is whole lot of middlemen working. The millers who mill paddy, truckers who transport both paddy and rice, wholesalers who stock rice and make available to retailers and the retailers who finally sell rice to consumers. For a moment, let’s assume that we abhor all those people and kill all of them.

Then, how would farmers sell their paddy?” Students got interested in the issue and now there was a competition to answer the questions.“It’s simple,” A student answered. “Then, the farmer will have to do all the work by himself. He’ll have to mill the paddy into rice, transport the same, find the consumers, find out the price at which the consumers are willing to buy rice, sell his rice and collect payments from consumers. If consumers can’t pay immediately, he’ll have to sell rice on credit and collect the debt also. It’s an awfully large volume of work.”

“If the middlemen were not there, how could the consumer get his rice?” I asked the other side of the question. Another student answered. “Like the farmer, the consumer has to find where the rice available, at what price, transport the same from farm gate to his house, pay money, ensure quality and stock rice if he has bought more than his weekly or monthly consumption.”

“You’ve correctly identified the entire operation,” I said. “If the middleman is eliminated, then, both farmers and consumers have to incur hell of a lot of additional costs and inconvenience. They’re known in economics as transaction costs. It’s a term used to explain, in this case, the costs involved in searching for rice or consumers known as search costs, finding out the appropriate price or price discovery costs, transporting paddy or rice or transportation costs, warehousing costs, interest costs, quality assurance costs and so forth. Both the farmer and the consumer do not have time to do any other thing. They’ve to spend the whole time, not for farming or other income earning job, but for buying and selling. So, their income would be much lower than what it would be when they’re helped by all these middlemen. Therefore, you eliminate the middlemen to your own peril.”

“So, this charge against the middlemen as the cause of high rice price is unwarranted?” A student asked. “Definitely,” I said. “You eliminate them, and, then, as farmers, you would get a lower income. As consumers, you’ll have to pay a higher price and sometimes, you’ll have to go without rice at all.”