Hidden Costs of the Middleman Economy

Middlemen are responsible for almost all of the goods and services that Americans enjoy today. To learn more about the “Middleman Economy,” our Founder Mark Javier sat down for an interview with Kathryn Judge, author of DIRECT: The Rise of the Middleman Economy and the Power of Going to the Source.

Kathryn is a Professor of Law at Columbia Law School and earned her JD at Stanford Law School. Prior to Columbia, she was a Fellow for the Center for Law and Economics at Columbia University and an Associate at Latham & Watkins.

Mark: Hi Kathryn, glad you could join us today. How are you doing?

Kathryn: Hi Mark, I’m doing great, how about yourself?

Mark: I’m doing well. Let’s go ahead and get started. Your book covers mainly the “Middleman Economy.” What is that?

Kathryn: Over the past thirty years, middlemen have built intricate financial and retail empires capable of moving goods across the country and around the world—transforming the economy and our lives. Thanks to technology and globalization, the importance of “middlemen” in the value chain has increased, along with the length of global supply chains. Because of middlemen, we enjoy an unprecedented degree of choice and convenience.

Mark: What are some of the costs of the Middleman Economy that some may not be aware of?

Kathryn: One example are the fees paid to realtors for house sales. The most serious costs are those that diminish the integrity of direct exchange between Buyers and Sellers. Some of the most dominant intermediaries contribute to loneliness, isolation, and lack of “human flourishing” around the world.

Mark: Can you explain what you mean by “Direct Exchange,” and how some platforms or intermediaries diminish that?

Kathryn: Sure, Direct Exchange means purchasing goods and securing services closer to their source, rather than through intermediaries. This reduces the complexity of supply chains and empowers Buyers and Sellers.

For example, if you are a Grower in Latin America exporting to the United States, you are in constant competition with growers the world over. They might have other ways of producing at a lower cost, which reduces your ability to compete. If the intermediary through which you are selling does not tell your story or share your brand, then the good becomes fungible to consumers.

One way we can start moving away from the commoditized, anonymized universe is to create a supply chain where a good has a sense of place, and the consumer is able to get some comfort and joy from knowing that they are supporting a business they align with.

Mark: Can you share an example of a company that has done this already?

Kathryn: One example is hanahana beauty. The Founder wanted to make sure that she was getting the body butter directly from the producers, who are mostly women. She has produced videos and organized fundraisers. There’s a sense of social responsibility ingrained in the business model.

Mark: That’s a great example. What about in the plant industry? How can Plants Without Borders create a supply chain like the one you just described?

Kathryn: Here are the main questions I would ask: Do buyers on your platform know where the products come from? Does your platform help the grower tell their story? Does your platform answer questions that buyers have, that alternatives do not answer?

If you are helping them share their story, you are helping them differentiate themselves, and as a result, helping to shift power to the growers.

Mark: Those are all great questions to ask. It seems like transparency is a big factor. How can you create a marketplace built on transparency, while disincentivizing market participants from bypassing the platform?

Kathryn: Working with a middleman can help smooth over transactions by providing services. If you look at something like Etsy, they have communities built by Creators. Before Etsy, the common mindset among independent makers was that they need to look after themselves. What they have done is create an environment of mutual support that grows as a differentiated ecosystem.

In regards to your platform–what can the buyers and sellers on your platform learn from each other? Facilitate the exchange of that information, and explain to buyers and sellers why they want to have an alternative system.

Mark: Wow, it is really cool to see how far Etsy has come. How can other platforms learn from Etsy and create a sustainable marketplace that is viable in the long-term?

Kathryn: You want to soften the lows of the market you are connecting, while also creating a system where everyone shares in the highs. Talk to the sellers to monitor the market. Then, talk to the buy side to get their perspective. This creates an enhanced mutual understanding the amortizes the shocks of the market.

Mark: I can see the value in an enhanced mutual understanding. What are some other ways that trust can be built between the two sides of the market?

Kathryn: Part of what's hard is that a grower in one of these countries might not know how to tell their story, in a way that resonates with a US audience. It’s like AirBnb–help them figure out what pictures and images they can take that will resonate. You can hire a part-time writer. You can create a social feed–in a way that is gifting. They were also growing followers that were interested. The key is facilitating cultural translation.

Mark: How does that bring value directly to the seller? The reason I ask is, that some sellers might be hesitant to invest time and effort into marketing tailored to an American audience.

Some buyers will pay a premium if they know the story behind the plant. This is only possible if you have visibility into the other layers. It’s like knowing the name of the author of a book. It can be a real structure to which connection is built. Without this, it is all quid pro quo. The more you give, the less you have.

Mark: Let’s say I’m a rose farmer in Kenya. What exactly do I need to do to tell my story to US consumers?

Kathryn: First of all, keep in mind that you do not necessarily care about the average US consumer. You are looking to find a niche, and then cater to that niche. Record video and pictures to tell the story of the different stages. Tell the story of who you are. The origin story of your business. Showcase all of your sustainable approaches to farming.

Mark: That is a great answer to end on. This has been a very informative interview, and I appreciate you taking the time to speak with me today.

Kathryn: No problem, thank you for having me.