It’s tempting, especially in the latter days of this digital age, to forget about the value of the middleman. When you can buy artisanal chocolate directly from the source, wine directly from the winery, art from artists, and so on. Doing so means that every dollar you spend benefits the person or people who made the stuff you want — what could be more elegant and less wasteful? What value do brokers add? Amazon is amazing, yes, but aren’t they just skimming value out of the market?
Well… yes. But turns out that’s a good thing.
I heard a story once, which sent me a-web-searching today for the history, which you can read here. In Taiwan, in the early 20th century, there were more than 20,000 tea farmers. Raw tea leaves need to be refined before they’re made into drinkable tea. (Who knew? Not me.) In the 1920s there were about 60 tea refineries in Taiwan. About 300 middlemen worked the market, purchasing raw tea from tea farmers for as little as the farmer would accept and selling it to refineries for as much as the market would bear. Buy low, sell high. Sound familiar?
Now, the government of Taiwan thought this was unfair. What were the middlemen doing? They weren’t growing the tea; they weren’t making drinkable tea. They were making tea more expensive for the fine tea drinkers of Taiwan without adding any value whatsoever. To right this terrible wrong, the Governor General of Taiwan helped to found the Taiwan Tea Common Market, where tea farmers and refineries could trade their goods without any pesky, value-sucking middlemen getting in the way. Good for everyone, right?
Sounds great, until you do the math. 20,000 tea farmers and 60 tea refineries means 1.2 million possible deals to be made. Turns out the middlemen added incredible value to the market in the form of knowledge. Each knew his territory, the strengths of individual crops, and what products the refineries they did business with were looking for. To make a long story short, it was a disaster. The price of tea doubled, then tripled. The government ended up having to subsidize the Common Market, and ended up having to charge the farmers for the privilege of trading there. The whole thing collapsed on itself and, thankfully, that’s not the way tea is traded anymore.
There are object lessons all over this. Complexity, the efficiency of markets, the value of preserving tradition without real understanding. More than anything, though — don’t mess with the middleman.