One of the persistent features
of politics and social life is the way that many insights of economics conflict
with strongly held and widespread beliefs among both the general public and the
business class. This contrast between the economic way of thinking and what we
may call the “gut instincts” of many people makes economics seem
counterintuitive much of the time. In many cases the principles of economics
also conflict with moral intuitions or commonly held sentiments, and so the analysis
is felt to be not only absurd but also immoral.
One example of this phenomenon
is the widespread hostility to middlemen: people who speculate in commodities
by buying them at a low price in order to sell them at a higher price. The
popular intuition is that such people are simply parasites. That is, they do
not create wealth or value because in the final analysis they do not actually
create anything real such as a physical product or a direct service. A popular
example of this is the intense hostility many people feel toward “scalpers” (or
“touts,” as they are called in my own country), who buy tickets for events and
concerts at face value and then resell them for more. The point of course is
that the people who buy tickets from scalpers do so willingly; thus by
definition it must have been worth their while to do so. Yet often these very
customers complain the most bitterly. Hostility to scalpers means that in many
jurisdictions it is a criminal offense to buy tickets and resell them to
willing purchasers.
Thinking more carefully about this, however, reveals exactly what it is that the middleman offers and also makes clearer the underlying (albeit mistaken) intuition that gives rise to the hostility. In fact the middleman does add value to both parties he transacts with, making both better off. Moreover the activity of the middleman—the connecting of willing buyers and sellers who do not know each other and would find it impossible or excessively costly to get to know each other—is essential to a functioning economy. Interfering with this by legislation or simple brute force has significant adverse effects. In cases such as tickets we may regard these as trivial, but in other ones the results can be deadly.
Work and
Value
The mistaken intuition is the
idea that value comes from work or effort and the act of trading something does
not add or create value. This is simply wrong. Work in itself does not create
value. It is perfectly possible to work all day to make something, but if
nobody wants it enough to exchange something for it, it has no value. Value as
a social phenomenon is created not by production but by exchange. The value of
something for a person is defined by what other things he is prepared to give
up in exchange for it. When a good is transferred from one person to another
the receiver (like his trading partner) has more value than when he started.
What then happens with tickets
to events? There is a fixed supply of a good (seats) and a potentially high
demand. The difficulty is how to find out who is willing to pay most for the
seats and ensure that they get them. One way would be to have an auction where
people (or more likely their agents) bid for the tickets. The other way is to
have middlemen—scalpers—who buy the tickets (often from the original promoters
or venues) and then offer them for resale to people who are prepared to pay
more for them. This benefits both sides. The ticket originators avoid the risk
they would run if they set the price themselves, overestimated demand, and made
a loss. They also avoid the cost of running an auction. The ultimate buyers do
not have to do what they would otherwise do and spend a lot of (valuable) time
either standing in line or seeking out willing sellers. Provided they are
prepared and able to pay enough, they can be sure of getting the seats. In the
process they evaluate just how much they are prepared to give up in other goods
to get the ticket.
What middlemen do in other
words is to align supply and demand by connecting suppliers and demanders. In
doing this they make both parties better off and channel resources to where
they are most in demand. Of course most people would rather get goods for less
than the price asked, but in the real world that option is often unavailable.
Either they will have to pay but in a different way (say, by standing in line
for hours) or they will not get what they want.
High
Stakes
In some cases this last point
is trivial but in others it is vital. Take for example trade in grain carried
out by speculative middlemen who buy where it is relatively cheap so as to sell
where it is relatively dear. Historically people engaged in this highly
speculative and risky trade attracted intense moral opprobrium. In fact,
however, they were literal life savers. France is the best example. Under the
ancien régime an array of legal controls was intended to stop this kind of
trade between different parts of the kingdom. There were many reasons for this,
but the ultimate driver was the widely held belief that it was morally wrong
for people to profit from hunger and dearth. As a result, grain did not move
from areas of relative abundance to areas of shortage when famine struck.
In 1774 the chief minister and
early classical-liberal economist Turgot swept away the controls on the grain
trade, explicitly stating the economic reasoning for the edict. The harvest of
1774–75 was marked by widespread failures. What followed in the spring of 1775
was both a triumph and disaster for Turgot. On the one hand, the economics
worked: The price of bread rose but widespread famine was avoided. However,
there was also an intense popular backlash against the price rise, which found
expression in a wave of riots, the so-called guerre de farines. This
contributed to Turgot’s fall from power in 1776, when the King failed to
support him in the face of opposition from vested interests to his reform
program, the Six Edicts. Later on during the Terror, the Convention imposed
price controls on foodstuffs with the infamous Law of the Maximum. This was so
disastrous that the policy was abandoned for good. Thereafter the French State
went to a policy of increasingly free trade in grain (while still trying to
manipulate the trade by “market interventions”), and by the early nineteenth
century, famine and serious dearth had ceased to be problems.
The evidence of history is
clear: Allowing middlemen to trade and speculate will maximize human well-being
and in some cases save lives that would otherwise be lost. The job of economic
educators is to show this and to undermine the persistent and misguided notion
that middleman activities are exploitative and parasitic.
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