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Market Makers or Parasites?: Michael Munger
7 paragraphs found.

No. Not even close. Without middlemen, we couldn't have modern markets. And the story about why that's true is one of the most important, and most misunderstood, in all of economics. I am going to consider two classic accounts of middlemen, from R.A. Radford and F. Bastiat, to illustrate how markets work through middlemen.

Middlemen in Action II: Bastiat and the Stomach that is Hungry

To resolve the paradox, let us turn to the other example, from the work of Frédéric Bastiat, first published in 1850. The entire essay, "What Is Seen and What Is Not Seen," is full of insight, but I want to focus on just Section 6, "The Middlemen."


From Bastiat, "What is Seen and What is Not Seen," Section 6: The Middlemen:

While the exaggerated development of public services, with the waste of energies that it entails, tends to create a disastrous parasitism in society, it is rather strange that many modern schools of economic thought, attributing this characteristic to voluntary, private services, seek to transform the functions performed by the various occupations.
These schools of thought are vehement in their attack on those they call middlemen. They would willingly eliminate the capitalist, the banker, the speculator, the entrepreneur, the businessman, and the merchant, accusing them of interposing themselves between producer and consumer in order to fleece them both, without giving them anything of value. Or rather, the reformers would like to transfer to the state the work of the middlemen, for this work cannot be eliminated. [Regarding the famine of 1847,] "Why," they said, "leave to merchants the task of getting foodstuffs from the United States and the Crimea? Why cannot the state, the departments, and the municipalities organize a provisioning service and set up warehouses for stockpiling? They would sell at net cost, and the people, the poor people, would be relieved of the tribute that they pay to free, i.e., selfish, individualistic, anarchical trade."
... When the stomach that is hungry is in Paris and the wheat that can satisfy it is in Odessa, the suffering will not cease until the wheat reaches the stomach. There are three ways to accomplish this: the hungry men can go themselves to find the wheat; they can put their trust in those who engage in this kind of business; or they can levy an assessment on themselves and charge public officials with the task.


While this quote is rather lengthy, the gist of Bastiat's argument is easy to state: There are three ways of getting food from farm to market. First, every consumer goes off on his own, with a cart. This is inefficient and too slow to answer the needs of the hungry (as David R. Henderson illustrates in his discussion of price controls in the aftermath of World War II, German Economic Miracle). Second, middlemen can buy, transport, and resell the products. Third, the state can buy, transport, and resell the products, or give the products away for free.


Bastiat notes that many claim that the state can always perform the function of middlemen more efficiently because the officers of the state are motivated by public service, not by profit. But this is disastrously wrong. First, agents of the state are not, in fact, motivated by the public interest. They are no better than anyone else and act to benefit themselves. Second, without the signals of price and profit provided by middlemen, no one knows what products should be shipped where, or when. In short, without middlemen, the state would act more slowly, less accurately, and at the wrong times.


Once again, the point seems paradoxical. It is because of profit that middlemen create value. And the seeking of profit by middlemen, buying cheap and selling dear, ensures that, as Bastiat put it, the "wheat will reach the stomach" faster, more cheaply, and more reliably than any service the state could possibly create. The system of middlemen performs what seems like, to Bastiat and to me, a miracle: "Directed by the comparison of prices, it distributes food over the whole surface of the country, beginning always at the highest price, that is, where the demand is the greatest. It is impossible to imagine an organization more completely calculated to meet the needs of those who are in want..."


Bastiat, Frédéric. 1850, Paris: France. "What Is Seen and What Is Not Seen." Available online at Selected Essays on Political Economy, Library of Economics and Liberty.