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Middlemen, Government, and the Free Market

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There are multitudes of ways in which goods are exchanged on the free market. The most common way that most people purchase merchandise is by shopping at a general or specialty retail store: Walmart, Sears, Kroger, Home Depot, Office Depot, Target, Best Buy, Walgreens, and so on. But in addition to retail stores, goods are also sold through auctions, flea markets, convenience stores, outlet and factory stores, garage sales, eBay, warehouse clubs, pawn shops, vending machines, food trucks, roadside stands, farmers’ markets, street vendors, subscriptions, e-commerce, and car dealers.

Most merchandise is not purchased directly from the corporations and other entities that manufacture or produce it. Rather, it is bought through a middleman. There are some notable exceptions, of course. Companies such as Apple have retail stores in which they sell only Apple products. Some clothing companies have factory stores in outlet malls where they sell only their clothes. In general though, general or specialty retail stores are the norm. Best Buy might offer for sale three different brands of televisions in addition to its own. Home Depot might have five different brands of hammers. Walmart might stock ten different brands of toothpaste. Convenience stores might sell fifteen different types of candy bars. Amazon might make available for purchase every brand of television, hammer, toothpaste, and candy bar that exists. Entities such as auctions, markets, and eBay facilitate the meeting of buyers and sellers, and receive a fee for doing it, either up front, as a percentage of the sale price, or both. Vending machines are nothing but mechanical middlemen.

Middlemen

Middlemen (sometimes called exchangers or merchants) have been much maligned throughout history as parasites, exploiters, and profiteers who add nothing of value to products and unnecessarily increase the cost of goods. Even the pickers on the television show American Pickers have been criticized for ripping people off by buying things dirt cheap so they can turn around and sell them for a huge profit. The phrases “cut out the middleman,” “direct to consumers,” and “factory direct” are sometimes used in advertising by certain businesses. The idea is that without going through middlemen, goods consumers purchase from them are cheaper than they would otherwise be. It is just assumed that the goods would be of the same quality, and available in the same quantities as they are now.

But is that how things really are? Consider the case of factory-outlet stores. The United States has more than 12,000 outlet locations. They were traditionally a place for retailers to sell goods, usually clothes, that were still on the shelves at the end of the last season, to get rid of overstock, or to sell off factory seconds. But now many retailers are manufacturing specific lines of clothing just for their outlet locations. According to the research firm Buxton, roughly 86 percent of the stock in outlet stores is made specifically for the outlet. Banana Republic and J. Crew confirmed to CBC’s Marketplace that their outlet stores sell only made-for-outlet products. A study by Consumer Reports found that although most outlet-store goods were 3 percent to 72 percent cheaper than in retail locations, some items were actually the exact same price or more expensive. And there is generally a reason that goods at outlet stores are cheaper: they are of a quality inferior to what consumers could expect to see in a regular retail store. For example, Consumer Reports bought two pairs of ballet shoes from J. Crew — one from an outlet and one from a regular location. Although the footwear looked almost identical, “the outlet shoes were made in China using a synthetic material and the retail shoes were made in Italy using real leather.”

Nineteenth-century economist Francis Wayland’s defense of middlemen in his book The Elements of Political Economy is still relevant today:

We see that exchangers are as necessary to the cheapness of production as producers themselves. Hence, we also see how absurd is the outcry sometimes raised against them, because it is said they produce nothing. Did not a large class of the community devote themselves to this employment, it is impossible to conceive what would be the price of the most common and necessary utensil. Were the farmer obliged to carry his wheat or his cattle to Sheffield, to exchange for needles for his wife, or for a sickle for himself, who could estimate what these utensils would cost? If the laborer were obliged to go to Birmingham for a spade, which he must use in New York, what would be the price of a spade, and how would he ever be able to gain a subsistence?

And more recently, economist Robert P. Murphy writes in The Politically Incorrect Guide to Capitalism,

By “buying low and selling high,” middlemen perform the vital service of shipping goods from the site of production to retail outlets where they are demanded by the consumers. The hated “markup” (the difference between the farmer’s price for his goods and the retail price to the consumer) is proportional to the importance of his actions.

There are a number of benefits of middlemen.

Middlemen bring together buyers and sellers, producers and consumers, businesses and customers. The largest middlemen — department stores and supermarkets — are characterized by more efficiency, greater selection, and lower prices than are found in small independent stores. In most cases, without middlemen, goods would be in short supply, if available at all, and prices would be higher, not lower. Middlemen allow producers to focus on what they do best. As explained by Richie Siegel, founder of Loose Threads, a media company known for its in-depth analysis of consumer, retail, and commerce industries,

The single biggest benefit of a middleman is what it lets a business focus on. To use a wholesale brand as an example, having a retailer take care of the merchandising, selling and servicing of the product enables the brand to focus on designing and producing the best product possible. The retailer charges the brand for taking care of the end selling by buying the product at the wholesale cost, which is half price. The retailer gets to double the wholesale cost and capture this margin because it is providing a valuable service and has a specific skill set that enables it to succeed. If a brand wants to cut out a wholesaler and sell to the end customer, that’s totally fine. But now the brand has to pick up the retailer’s slack, which includes both a cost and a skill set gap. To capture the full margin, the brand now has to thrive at marketing, merchandising, customer acquisition, and customer service, all on top of designing and producing great products.

In a free market, the role of middlemen can change. It used to be that you purchased airline tickets through a travel agent. Now you can purchase airline tickets through a travel agent; from other middlemen such as Expedia, Orbitz, or KAYAK; or directly from the airlines.

Large companies such as Proctor & Gamble — the maker of Bounty paper towels, Charmin bathroom tissue, Crest toothpaste, Dawn dishwashing liquid, Pampers disposable diapers, Tide laundry detergent, and other established brands — could rent space in a mall or shopping center or build stand-alone stores to sell its products. However, it chooses not to, and instead relies on Walmart, Target, Costco, and other middlemen to sell its goods. In a free market, companies decide on the best way or ways to offer their products to consumers.

Mandated middlemen

Whether a company uses middlemen to sell its products is entirely up to the company. Except when it is not. Automakers in the United States do not sell their cars directly to consumers. No American who wants to purchase a new Mustang or Camaro goes down to his local Ford or Chevy store. All car sales are made through independently owned and operated car dealerships. In fact, by the 1950s, all of the states had passed dealer-franchise laws that prohibited automakers from owning licensed dealerships or selling cars directly to consumers. According to a recent report by Reason,

In the late 1990s, Ford attempted to circumvent the dealerships in Texas by starting its own stores and selling used cars through their own company website. The Texas Department of Transportation ruled that this violated the state’s franchise laws and ordered Ford to shut down operations. Ford was also hit with a $1.7 million state fine. The following year, then Texas Governor George W. Bush signed a law that strengthened protections for the dealership cartel.

A Republican state legislator in Texas introduced a bill in the 2017 legislative session that would get rid of car-dealership rules. “What my bill basically says is that a manufacturer of an automobile can sell direct to the consumer if they want to,” said Rep. Jason Isaac. Texas lawmakers didn’t act on the bill this session. To do so would mean going up against “the politically connected Texas Auto Dealers Association (TADA), which opposes any efforts to change franchise laws.” During a speech at the Automotive Press Association in 2016, National Automobile Dealers Association chairman Jeff Carlson maintained that “consumers preferred the dealership sales model” and that dealership networks were “the best, most efficient, and most pro-consumer way of selling new cars and trucks.” But how can that be the case when it is consumers’ only option? How can it be the case when the car dealership is a government-mandated middleman?

And consider the situation of automaker Tesla. It generally sells its electric cars directly to consumers at the Tesla website. It operates stores and galleries, usually in malls, in about twenty states and Washington, D.C., that serve as showrooms to provide prospective shoppers with information about Tesla vehicles. Showrooms generally have only a few cars in inventory for display and test drives. Potential purchasers are directed to the company’s website to customize and reserve their vehicles. In Connecticut, Louisiana, Michigan, Texas, and West Virginia, Tesla is forbidden by law to sell cars directly to consumers. Some states limit the number of Tesla stores allowed within their borders. Car dealers and dealer associations in some states have filed numerous lawsuits against Tesla to prevent the company from selling cars directly to consumers. The TADA even claims that allowing Tesla to sell directly to consumers is a violation of “true free-market” principles by giving [Tesla CEO Elon] Musk and Tesla “a monopoly just for them.” (It should be pointed out that although sales of Tesla electric vehicles are subsidized by a “Qualified Plug-in Electric Drive Motor Vehicle Credit” that can be as high as $7,500, the existence of this tax credit is unrelated to its direct-to-consumers business model.)

Government as a middleman

The only thing worse than a government-mandated middleman is a government middleman. Now, no government in the United States at any level (federal, state, or local) forces producers to sell all of their products to it so it can then turn around and sell the products to consumers. However, governments do function as middlemen in a variety of ways — usually under the guise of protecting consumers — when they require, mandate, or restrict certain actions of individuals and businesses if they are to engage in commerce or prohibit them from doing so altogether.

The results of government’s playing the role of a middleman are that the supply of goods and services is artificially restricted, businesses are burdened with complying with government regulations, prices for consumers are increased, competition is stifled, property rights are violated, and personal and economic liberties are infringed.

Here are just some of the ways in which government functions as a middleman:

Government functions as a middleman when it requires a license from the government to work in certain occupations.

Government functions as a middleman when it mandates that employers must pay their employees a minimum wage.

Government functions as a middleman when it sets rules for overtime pay.

Government functions as a middleman when it mandates that employers must provide their employees health insurance.

Government functions as a middleman when it mandates that businesses be accessible to the handicapped.

Government functions as a middleman when it restricts alcohol sales on Sundays.

Government functions as a middleman when it requires businesses to serve everyone.

Government functions as a middleman when it mandates that businesses have a certain number of parking spaces for the handicapped.

Government functions as a middleman when it sets Corporate Average Fuel Economy (CAFE) standards for cars and trucks.

Government functions as a middleman when it prevents businesses from raising prices under the threat of being charged with price gouging.

Government functions as a middleman when it restricts car sales on Sundays.

Government functions as a middleman when it limits the maximum interest rate that lenders can charge borrowers.

Government functions as a middleman when it outlaws smoking in restaurants, bars, and places of business.

Government functions as a middleman when it tells employers that they can’t discriminate in hiring.

Government functions as a middleman when it prevents one company from buying another company.

Government functions as a middleman when it imposes excise taxes on gasoline, tobacco, and alcohol.

Government functions as a middleman when it restricts the hours that alcohol can be sold in stores or served in bars and restaurants.

Government functions as a middleman when it tells clubs and organizations whom they have to admit as members.

Government functions as a middleman when it redistributes wealth from one segment of society to another.

Government functions as a middleman when it mandates that employers provide family leave.

Government functions as a middleman when it decrees that you must obtain permission to travel to certain countries.

Government functions as a middleman when it tells property owners that they can’t discriminate when renting a house or apartment.

Government functions as a middleman when it operates liquor stores and prevents private entities from doing so.

Government functions as a middleman when it requires that employers permit their employees to wear a hijab, yarmulke, scarf, or turban.

Government functions as a middleman when it subsidizes flights at rural airports.

Government functions as a middleman when it forbids people to pump their own gas.

Government functions as a middleman when it makes it difficult for Uber or Lyft to pick up passengers.

Government functions as a middleman when it builds sports stadiums.

Government functions as a middleman when it transfers income from one American to another.

Government functions as a middleman when it mandates that service dogs be allowed in stores.

Government functions as a middleman when it limits the number of taxis that can operate in a city.

Government functions as a middleman when it sets taxi fares.

Government functions as a middleman when it requires that all taxicabs have a medallion to operate.

Government functions as a middleman when it enacts compulsory school-attendance laws.

Government functions as a middleman when it prevents companies from merging.

Government functions as a middleman when it prohibits the sale of alcohol.

Government functions as a middleman when it delivers the mail and forbids private companies to do so.

Government functions as a middleman when it guarantees mortgages.

Government functions as a middleman when it builds public housing.

Government functions as a middleman when it limits the amount of beer and wine that one can produce at home.

Government functions as a middleman when it outlaws the possession of drugs.

Government functions as a middleman when it requires a license from the government to get married.

Government functions as a middleman when it sets the drinking age at 21.

Government functions as a middleman when it interferes with the voluntary, peaceful activity of consenting adults.

Is there anything wrong with companies’ offering a good salary, overtime pay, health insurance, or family-leave benefits? Of course not. Is there anything wrong with businesses’ being handicap-accessible or having parking spaces for the handicapped? No. Is there anything wrong with stores’ restricting the days or hours that they sell alcohol? Definitely not. Is there anything wrong with businesses, clubs, organizations, or landlords who welcome everyone? Not at all. Is there anything wrong with car manufacturers’ producing fuel-efficient vehicles? Certainly not.

Is there anything wrong with restaurants, bars, or places of business that prohibit smoking? Surely you jest.

Clearly, free-market middlemen should be distinguished from government middlemen. Middlemen in the free market perform a valuable service; government middlemen, not so much.

This article was originally published in the November 2017 edition of Future of Freedom.

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