Diamonds are Forever - Middlemen
I'm posting a 14-part series of mini-essays on diamonds (but really about the economic point of view). Here's part 5.
Middlemen
Individual jewelry consumers don’t buy directly from the De Beers Group.
Instead, they go to a local jeweler—a middleman.
In fact, in advanced, industrial economies, buying from middlemen is the rule, not the exception. Most people don’t buy their food directly from farmers or their clothing directly from textile manufacturers. Most students don’t rent the hourly services of scholars to teach them. Instead, they attend a university staffed with experts who have studied work generated (largely) by others.
Market economies are shot through with middlemen. Many people argue that these entities are parasites, leeches on otherwise valuable exchanges. At my first job, I recall one lunch hour during which I was harangued by a co-worker who insisted that banks and insurance companies are nothing more than exploitative “money movers.” My friendly colleague is not alone; Thomas Sowell documents that people have directed intense animus at middlemen across the globe and throughout history.
However, it’s probably not an exaggeration to say that, without middlemen, life would be “nasty, brutish, and short” to borrow Thomas Hobbes’ felicitous expression. Middlemen specialize in uniting those who would like to buy and those who would like to sell. Stock brokerages or other financial intermediaries like banks—the organizations my lunch partner railed against—are the classic examples.
Without middlemen, there’d be no such thing as credit markets, to take one example. The return to saving would be lower. Without as much saving, there’d be less capital goods accumulation and thus less output of consumer goods. The world would be vastly poorer.
But middlemen do more than that. They also specialize in discerning the quality, genuineness, attributes, and safety of products. What’s more, they put their own reputation on the line to do so. This saves buyers the costs of search, knowledge acquisition, inspection, and the like.
In performing this role, middlemen reduce the individual number of reputations that a consumer must keep track of to make successful purchases. While there are hundreds of producers extracting valuable stones and while there are thousands of persons cutting and polishing them, a consumer need only know what sort of quality and product variety to expect from (say) Kay’s Jewelers. Buyers know that Kay’s will sell certain types and qualities of jewelry and that Walgreens won’t carry medicines that are poisonous at recommended doses.
Depending on time, it might also make sense for us to touch on vertical integration in this section of my hypothetical course. Clearly, some companies specialize in diamond extraction, others in polishing and cutting, and still others in retail sales to consumers. The reasons for vertical disintegration in this instance are not particularly clear to me, but each of these topics is a week in class, so there’d be plenty of time to ponder.