What role do intermediaries—such as merchants, distributors, and traders—play in the market? Far from being mere profiteers, these intermediaries play an essential role in the division of labor. Without them, society as a whole could not function.
In his essay “What Is Seen and What Is Not Seen” (Chapter 6 — “Intermediaries”), Frédéric Bastiat addressed the profound misunderstanding concerning the role of intermediaries that prevailed in his day, particularly among socialists. Intermediaries were often dismissed as profiteers and speculators. Some socialists even advocated abolishing these professions. Socialists accused them of “interposing between production and consumption to extort from both without giving anything in return” while favoring a public and collective organization of the management and distribution of economic resources.
The Alternatives to Market Intermediaries
In defense of intermediaries or so-called “middlemen,” Bastiat wrote,
When the hungry stomach is at Paris, and corn which can satisfy it is at Odessa, the suffering cannot cease till the corn is brought into contact with the stomach. There are three means by which this contact may be effected. First, the famished men may go themselves and fetch the corn. Second, they may leave this task to those to whose trade it belongs. Third, they may club together, and give the office in charge to public functionaries.
As Bastiat perfectly describes in this chapter, it is quite obvious that the first option is never the one chosen by individuals, simply because they have neither the time, nor the means, nor the knowledge necessary to know where to find the cheapest, highest quality, and most easily transportable wheat on the international market. He continued, “For 36 million citizens to go and fetch the corn they want from Odessa [Ukraine] is a manifest impossibility.”
This leaves two options: either let the market take care of this task or entrust it to civil servants, who are oblivious to the reality of economic calculation, profits, and losses. Letting the government handle this task would inevitably lead to disaster. According to Bastiat, it would require substantial tax increases and the hiring of many civil servants to manage such an enterprise.
True to his thinking, Bastiat mentions two “unseen” and immediate problems that would arise from such an organization: corruption, injustice, abuse, and impoverishment of the population. The population would be unable to make alternative, more productive uses of its capital and would have to rely on a suboptimal resource distribution system because it would not be guided by self-interest and the pursuit of profit.
Finally, he points out that it is impossible for the state to manage all the information necessary to distribute wheat to a country like France, which had a population of 36 million in 1850: “They overlook the fact that society, free of regulation, is a true association, far superior to any of those that proceed from their fertile imaginations.” On these last points, Bastiat was a pioneering economist who—a century before Ludwig von Mises and Friedrich Hayek—was already criticizing socialism and the dangers of centralizing economic decisions on logical grounds. He pointed out the impossibility of economic calculation due to the dispersion of knowledge in society.
Even before the Austrians, he understood the crucial role of knowledge and the impossibility for anyone, even a genius, to know everything at all times and in all circumstances. He also recognized that those who refused to admit their own ignorance posed a certain danger to others. Bastiat concludes this chapter with this famous sentence about the socialists of his time:
The more we examine these advanced schools, the more do we become convinced that there is but one thing at the root of them: ignorance proclaiming itself infallible, and claiming despotism in the name of this infallibility.
The role of intermediaries is what we don’t see.
That leaves the second option: letting individuals organize themselves freely, in accordance with the freedom of transaction so dear to Bastiat,
At all times, in all countries, and especially when they are freer, more enlightened, and more experienced, when men have voluntarily chosen the second option [free association], I admit that this is enough to tip the balance in my eyes. My mind refuses to accept that humanity as a whole is mistaken about something that affects them so closely.
In a free market, intermediaries facilitate trade and provide services to consumers by performing the distribution stages that consumers cannot perform themselves. Yes, intermediaries are paid, sometimes very handsomely. Their compensation reflects their real contributions in terms of services. In other words, when we buy a consumer good, we pay for the intermediary’s work “on our behalf”: purchasing from producers, investing in capital (transportation, logistics, and storage), and the time, labor, and risk associated with these activities. As Bastiat writes, consumers are, in a way, obligated to reimburse commerce “expenses” because these expenses are advances that entrepreneurs make based on projected future profitability,
…commerce, I say, is led by its own interests to study the seasons, to give daily statements of the state of the crops, to receive information from every part of the globe, to foresee wants, to take precautions beforehand.
Intermediaries play a crucial role in the division of labor in the market. By specializing in the intermediation between producers and consumers, they allow the producers to focus on cultivation and production and allow the consumers to devote themselves to other activities. As always, the division of labor frees up time and energy. These increasingly complex investments and production processes allow individuals to continually increase their wealth. Bastiat’s “social harmony” implies three things: freedom of transaction, property rights, and respect for individuality. He wrote,
…the competition which they [the intermediaries] create amongst each other leads them no less irresistibly to cause the consumers to partake of the profits of those realized savings.
In this chapter of “What Is Seen and What Is Not Seen,” Bastiat reminds us that, through competition, intermediaries are responsible for offering the highest quality services at the cheapest prices. They play an essential role in the division of labor and coordination between individuals in a free market. They are the invisible coordinators who allow people to pursue their goals without wasting time on activities that don’t add value. The profit made by intermediaries is therefore normal, because their “services contain in themselves the principle of remuneration.” This remuneration, as defined by Bastiat, is the reward for their social utility. According to Bastiat’s pure vision of value, competition ensures that this reward remains proportionate to the usefulness of the service provided to the individual, as he develops it in his unfortunately unfinished master work: Economic Harmonies.
