Three Cheers for the Middlemen

What makes the sharing economy so successful is that it allows users to more easily engage in voluntary exchange by dramatically reducing transaction costs (costs that prevent a transaction from taking place).

January 29, 2016 • Commentary
This article originally appeared on Forbes​.com on January 29, 2016.

On commercials, screaming used car salesmen and wholesalers sometimes promise to “eliminate the middleman.” But what’s wrong with middlemen? Middlemen can help you find a ride or a couch to sleep on, and middlemen have even helped prisoners of war make the best of their circumstances.

In 1942 a British soldier named R.A. Radford was captured in Libya. For years Radford lived in prisoner of war camps, which housed allied soldiers from across the globe. Within a year of his release, Radford wrote a paper on the economy of prison camps, explaining how POWs traded goods and used cigarettes for currency.

Red Cross packets were the principal source of goods, and they included things such as cigarettes, jam, chocolate, biscuits, sugar, and other “foodstuffs.” Because the POWs didn’t like those things equally, they traded these goods with one another.

Amid this trade, Radford notes, middlemen emerged. These middlemen made it their business to facilitate trade by learning who needed a particular good and who had that good for trade. Yet, despite their obvious benefit, middlemen were hardly universally praised in the POW camps, as Radford explains:

Taken as a whole, opinion was hostile to the middleman. His function, and his hard work in bringing buyer and seller together, were ignored; profits were not regarded as a reward for labour, but as a result of sharp practices. Despite the fact that his very existence was proof to the contrary, the middleman was held to be redundant.

Even when everyone had access to food packets and trade was voluntary some still frowned upon those who profited from using information to their advantage. That animosity towards middlemen in the POW camps is remarkable, but it is a common attitude toward middlemen that still exists today. When taxi drivers lit tire fires on the streets of Paris in protest of rideshare companies like Uber, they were protesting middlemen.

Uber and Airbnb do not own cars and hotels. Rather, they are profiting from what they know about consumers and dead capital. Before the rise of Uber there were many people who needed rides but were unable to efficiently contact nearby strangers who would be willing to give them a ride in exchange for a fee. In a similar fashion, Airbnb connects travelers in strange cities to the hundreds of nearby homeowners who have spare bedrooms. Before companies like Airbnb travelers faced significant costs if they wanted to spend their holiday living in a native’s spare room. In almost every circumstance, booking a hotel or hostel room was more cost‐​effective and reliable. Now, finding people who want to give you a place to sleep is just a few clicks away.

Consequently, Uber and other “sharing economy” companies such as Airbnb have been causing headaches for regulators and competitors across the world. Although Uber and Airbnb are not taxi or hotel companies, traditional market incumbents are facing stiff competition from these new upstarts.

Traditional competitors seeking to halt the growth of the sharing economy will claim that Uber and Airbnb should be governed by the same regulations that oversee taxi companies and hotels. In Paris, a representative from a taxi collective called for the government to “ensure respect for the regulations,” and a protester accused Uber of “economic terrorism.”

The protester in Paris was not the first person to allude to terrorism when discussing ridesharing companies. In 2014 the president of the Pennsylvania Taxi Association said, “I try to equate this illegal operation of UberX as a terroristic act like ISIS invading the Middle East.”

These protests provide an opportunity to remind people that sharing economy companies operate much more like Radford’s middlemen than they do radical Islamic fanatics. Like those who disliked Radford’s middlemen, people seem to think that those who only trade information—whether it is who has coffee to trade or who has an extra room—are not adding any actual value.

It might strike many readers as bemusing that companies that merely trade in information can be valued at billions of dollars. Like some POWs critics of middlemen regard Uber’s and Airbnb’s profits not as “reward for labour, but as a result of sharp practices.” Not too long ago a friend of my family remarked that he didn’t understand why Uber was worth so much money when it doesn’t “make anything.”

Unfortunately, many people remain skeptical or ignorant of the fact that the total welfare within a group can dramatically increase without an increase in available goods. All that is needed is voluntary exchange. This won’t come as a surprise to those who are familiar with the “brown bag” experiment.

What makes the sharing economy so successful is that it allows users to more easily engage in voluntary exchange by dramatically reducing transaction costs (costs that prevent a transaction from taking place). Uber isn’t producing new cars, but it’s providing car owners with a way to find people willing to pay for rides.

It would be a mistake to regulate Uber as if it were a taxi company. Uber is a technology company that connects drivers with passengers. It’s not a taxi company

True, in many jurisdictions taxi drivers have had to invest time and money into securing the opportunity to do business. Clearly, it’s frustrating to have diligently complied with taxi regulations and then to have Uber arrive on the scene without having dealt with the same regulatory hurdles.

Nevertheless, instead of regulating Uber and Airbnb as if they were taxi companies and hotels lawmakers should deregulate the taxi and hotel industry, thereby allowing taxis and hotels to compete on a level playing field. But why stop there?

There are many industries where middlemen are needed but are held back. You’d think in 2016 it wouldn’t be too much to ask for alcohol to be delivered to your doorstep or for you to be able to invite people into your home for a meal without risking running afoul of the law.

The alcohol delivery service Klink can deliver to those lucky enough to live in the nation’s capital. But, thanks in part to alcohol regulations, Virginia residents like myself don’t have access to its services. This is regrettable considering that I’d gladly pay for a liquor store driver to deliver booze to my front door. The problem is I don’t have a cost‐​effective way of finding those drivers without Klink, In other words, I need a middleman, but regulators are preventing me from finding one.

There are also so‐​called “underground supper clubs,” which might sound nefarious, but are really just places for people to gather to eat. Granted, sometimes these “clubs” are operated out of someone’s home and are not inspected like restaurants, but that shouldn’t prevent entrepreneurs from openly and freely connecting talented amateur chefs to hungry mouths to feed.

Duke University’s Michael Munger foresees the growth of a “middleman economy,” which he describes as the “third entrepreneurial revolution.” Clearly, people are willing to pay for lowered transaction costs, and we should expect that trend to continue and for more companies to seize the kind of opportunities the founders of Uber and Airbnb saw years ago. But it shouldn’t be a surprise if suspicion of middlemen as well as anti‐​competitive market incumbents hamper the spread of this revolution, if only temporarily.

But unfortunately, the hatred of middlemen is eternal, whether it is in POW camps or anti‐​Uber protests.

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