Sunday, 3 September 2017

Ask The Philosophical Muser: On The Value Of Middle Men

You may recall a while ago that I invited readers to submit any questions they might have to and I would publish some of them in some Ask The Philosophical Muser articles.

I have finally got round to putting some of them together (which was easy as there have only been six or seven thus far), as well as extrapolating some questions/comments/queries I've stored from my time on debating forums.

The questions that appear henceforward in the Ask The Philosophical Muser articles are a heady mix of actual reader questions, varying enquires and feedback that have come my way on social media, and some semi-factual/semi-fictional elaborations where I've taken segments of actual discussions I recall over the years and turned them into fun questions and answers for this Blog. I promise I have taken no liberties that depart from actual questions people have in some way been curious about either in written or spoken conversations.

For the first one, a reader probed me with a very intelligent question that I'd not really thought about in quite this way before. I'm not quoting him verbatim, but the gist of what he asks is this:

Q) If governments are bad when they provide an unnecessary filter between provider and consumer, then why aren't many shops bad when they provide an unnecessary filter between wholesaler and consumer?

A) It's one of those great questions because the logic is pretty robust, it's just that the information needs a little tweak. By which I mean, yes, at face value the logic suggests that any middle men (or middle women, of course) between provider and consumer are going to cream off a share of the value for themselves, because if I want to buy £3000 worth of envelopes from a paper mill via the middle man involvement of a stationery company like Espo, then by the time Espo have taken their cut, I will be paying something closer to £3200 or £3300 for the same product.

But what you don't always get to see about middle men is that they bring to the transaction certain specialities in which they have the comparative advantage, and through which they actually make your transaction with the manufacturer/wholesaler more financially beneficial.

To see why, imagine a baker who is also a pretty good driver with good knowledge of the city in which he bakes. If he wanted to provide a service where he delivered pizzas and cakes around the city, it would obviously not pay him to make the goods and deliver them himself, even if he is a slightly better driver and navigator than the person he hires to do his deliveries.

The reason being; it is more economically efficient for the baker to pay someone else to do the deliveries because what he'd gain in forgone wage costs he'd lose two or threefold in lost opportunity for baking. Suppose in terms of gross profit our baker can make £50 worth of baked good per hour (revenue minus cost of ingredients) and pay someone else £10 per hour to deliver the goods. The baker's profit goes down to £40 per hour, but if the baker spent 3 hours a day doing his own deliveries it would cost him £120 of baking profit to save just £30 of delivery costs.

Similarly, shops are good for consumers and providers alike, because even though the shops have to take their cut as middle men, they have the comparative advantage in things like market research and sourcing information on behalf of consumers. In fact, one can go so far as to say that the fact that the wholesaler chooses the services of retailers shows that the presence of retailers reduce costs by performing actions that would otherwise have to be performed by the wholesalers and the consumers.

As ever, any questions for this Blog can be sent to me and may become part of the series, consistent with the four golden rules:

* Please don't ask me to do homework, coursework or an assignment for you. No reader or blogger is interested in that.

* Before asking something, please check the *Labels* section on the right side-bar, as that topic may well have been covered before on here.

* There's no point asking a question about facts or information that you'd be better off typing in Google.

* Please keep your question short. You have a better chance of getting an answer if your question would comfortably fit on a post-it note.