The Engineers of Exchange: Middlemen, Part Deux

Between them , in time and complexity , lie millions of highly specialized and highly profitable actions and transactions . But are middlemen good for market systems or are they just parasites ? There's a new twedge . This month's letter plus book it a month and more Straight out of Creedmoor . This is Tidy C .

I thought they'd talk about a system where there were no transaction costs . It's an imaginary system . There always are transaction costs . When it is costly to transact , institutions matter and it is costly to transact . Today I'm going to return to one of the most misunderstood and most maligned figures in the architecture of commerce the middleman .

Entrepreneurs are the architects and designers , but middlemen are the engineers of exchange . Throughout history , middlemen have been portrayed as parasites , opportunists or mere speculators buying cheap , selling dear and allegedly providing no real value , just raising the price . The truth's more subtle and a little bit more important for understanding how markets function .

I'm going to go back to a topic that I talked about in May of 23 , my own name , munger , which comes from the Saxon word Mankgear .

I'm going to say a little bit about how middlemen increased the number of trades and the welfare of society at large , and I'm going to look at a classic text from RA Radford's famous 1945 article the Economic Organization of a POW

Camp . Well , let's start with an important question what is a middleman ? I have a stake in this question because my own name , munger , m-u-n-g-e-r , comes from monger , m-o-n-g-e-r , a dealer or trader , often in illicit or smuggled goods . So it's not a noble name . The name has very old roots .

Saxon writings of the 11th century we find it as mancer M-A-N-C-G-E-R-E . So according to the etymology dictionary , the Latin noun was mangonus , a trader or merchant , often , sadly in the 11th century , in slaves . Mangonus , in turn , has its roots in a Greek word mangonin , a war machine or contrivance . The Trojan horse was a mangonon .

Given that origin , it's not surprising that traders were often seen as deceivers , thieves and parasites . There's little to place on the positive side of the etymology ledger , at least until 1000 AD or so . Now . By that time the river of meaning had forked .

There were war machines , such as the medieval manganel or catapult , and traders in the market , the Mancure . Now , in May of 2023, . I talked about this , the definition of the Mancure , but I thought I would say it again because it is an interesting character .

So in Sharon Turner's three-volume History of the Anglo-Saxons , which was published in 1836 , she cites Salter , an old psalm book from the 11th century , and in a way it's a little bit like the characters in the Canterbury Tales . There is a type , a merchant called the mankir , and the mankir is introduced . Merchant called the Mankir and the Mankir is introduced .

I say that I am useful to the king and to the alderman and to the rich and to all people . I ascend my ship with my merchandise and I sail over the sea-like places . I sell my things and I buy dear things which are not produced in this land and I bring them to you here with great danger over the sea .

Sometimes I suffer shipwreck with the loss of all my things , scarcely escaping myself . What things do you bring us ? Skins , silks , costly gems , gold , various garments , pigment , wine , oil , ivory , or a calcus , which means tin . Or a calcus which means tin , copper , silver , glass and such like , actually . Or a calcus means brass .

So will you sell your things here as you brought them there , says the interlocutor . I will not , because then what would my labor benefit me ? I , I will sell them dearer here than I bought them there , that I may get some profit to feed me and my wife and children . So notice what

this story is . The mankir , the middleman , goes and buys stuff someplace else and brings them , brings these things to a place where people want them and then sells them . Do you improve them will ? Will you sell your things here as you brought them there ? Well , no , I'm gonna sell them for a higher price . I'm not gonna change them in any other way .

But the main gear of the 11th century is not a parasite , at least not in his own eyes . In fact , he claims that he's useful . Now , of course , all parasites are going to argue that they're useful , at least to themselves . They'd like to be able to sleep at night . The Mancure freely admits he does nothing to change or improve the product .

All he does is transport it and then sell it at the highest price that he can get . Wouldn't we be better off without him ? And the answer is no . Without middlemen , we wouldn't have markets in the first place . The story about why that's true is interesting and important .

I wanted to go back to RA Radford's famous prison camp article I said before it was published in Economica 1945 .

The title of it is the Economic Organization of a POW Camp , and Redford writes , and I'm quoting now Very soon after capture , people realized that it was both undesirable and unnecessary , in view of the limited size and the quality of supplies , to give away or accept gifts .

Goodwill developed into trading is a more equitable means of maximizing individual satisfaction . Well , they all got Red Cross parcels , and so each Red Cross box contained items like tinned milk , jam , biscuits meaning cookies chocolate , sugar and , crucially , cigarettes . The prisoners' preferences differed over all those things .

Some valued chocolate over meat , some treasured cigarettes . They differed in what they wanted , but all of them had the same endowment . So exchange begins to happen . If we have the same endowments , we all have a box with identical elements , but we like things differently . We will start to exchange .

Now there's no middleman there yet , but it's the story of the middleman that Redford describes that I think is most relevant for my discussion today and that's why I'm bringing it up . If one prisoner prefers two tins of jam to one tin of beef and one likes two tins of beef more than one tin of jam .

They obviously can exchange , but trade is not always easy . Information's imperfect potential , trading partners are dispersed and timing may matter . That's where the middleman comes in . Redford tells a story of an itinerant padre , a priest whose sharp eye for opportunity made him a legend of camp economics . Redford recounts , quoting now , stories circulated of a padre

who started off around the camp with a tin of cheese and five cigarettes and returned to his bed with a complete red cross parcel in addition to his original cheese and cigarettes . So you have a red cross parcel that has 10 , 12 different things in it .

Padre starts off with a tin of cheese and five cigarettes and starts exchanging , return to his bed with a complete Red Cross parcel in addition to his original cheese and cigarettes . So he profited . All he did was make exchanges .

He would buy something and then go sell it , and then whatever he acquired from that sale he would sell again and he managed to make . These are profits . You have to call them profits because he didn't produce anything new . All he did was buy and sell existing things . Now there's no claim that the Padre engaged in deception or coercion .

Commodities are standardized . The cigarettes are identical , the tins of food are all uniform At every stage . Each exchange left both parties better off , and yet the Padre accumulated wealth . So here we witness the fundamental role of the middleman .

The padre found one prisoner willing to pay , say , six cigarettes for a tin of beef , another one willing to sell one for three . Now , if the two could find each other they could exchange . But they lack information , access to each other or time . But the padre , through his knowledge of the market , orchestrated that exchange , earning a profit in the process .

So what that means is that middlemen are brokers . They find people who want to buy and they connect them with people who want to sell , and they charge a fee for that service . And it is a service , because the buyer and seller might not be able to find each other at all . These exchanges might not take place .

So what we want mentally is for the exchange to have taken place at the minimum cost to the participants . That's not the way that works .

The alternative is the exchange wouldn't have taken place at all , and since every one of the exchanges that the Padre engaged in made both parties better off , we should see the Pad and the middleman more generally as a hero , not as a parasite .

It might seem like the wandering padre only took value , buying cheap , selling dear and changing or improving none of the products that he exchanged . But just like the Saxon mankier meaning the monger , I have to admit so I have a stake in this outcome . Still , the Padre actually created value at every step in the process .

Each person is better off by at least one cigarette , in my example , and the Padre profits one cigarette by finding the exchange opportunity , profits one cigarette by finding the exchange opportunity . That process is arbitrage , exploiting price differences across markets , which ultimately drives prices towards equilibrium .

It improves market efficiency and increases the number of exchanges

. Whoa , that sound means it's time for the twedge . This is a joke about a bank robber in South Texas . Jose robbed a bank , fled south across the Rio Grande . Texas Rangers were in hot pursuit . They caught up with him in a small Mexican town . Now , jose knew no English and none of the Texas Rangers spoke Spanish .

They found a local resident willing to act as a translator and began their questioning when did you hide the money , they asked in English , and the translator says the gringos want to know where you hid the money . Tell the gringos , I will never tell them . Then he says in English well , jose says he'll never tell you .

The rangers all cock their pistols and one of them takes out a rope that's hung in a noose . They all stare at Jose . You tell him , said the rangers , if he does not tell us where the money is hidden , we will shoot him or hang him . The translator says the gringos say if you don't tell them , they'll shoot you . Jose begins to shake with fear .

Okay , okay . He says in Spanish tell the gringos , I hid the money by the bridge over the river , under the green rock . And the translator turns back to the Texas Rangers and says Jose says he is not afraid to die .

So that is an illustration of the fact that if middlemen have specific information or have access to what economists call rents and they can protect those rents , then it is true that middlemen can be exploitative .

In this case , the translator was the only one who actually knew the information about the language and so , as a result , he was able to exploit that and so , as a result , he was able to exploit that . This

week's letter from ER In the June 24 Tidy C , a letter was read about Fred Brooks' observation that adding people to a project may not reduce the project time and may even add to time . The letter correctly noted the transaction's cost of training , but there's another important transaction cost in Brooks' book communication among team members .

My favorite Brooks quote came from an interview when Brooks , a lively Christian , was asked what he thought of people comparing his book the Mythical man Month to the Bible . Brooks said well , both of them are revered , but in neither case do people do what they say . Them are revered , but in neither case do people do what they say .

Now ER says that that's paraphrased . It may not be an exact quote , but it is kind of funny . As a side note , er says I grew up in IBM , starting in the late 60s . I so often heard of Brooks and his famous book . When I taught computer science in the 2000s I had students read most of it .

I had the pleasure of meeting him in person when he spoke to a smallish conference in 2011 . At 80 years old , he was a delight to listen to and talk with over meals . Still engaged in active research , he wrote another , less well-known book , the Mythical man Month , which I think is in some ways his better book .

One challenge in computer science and other fields is how to teach students how to design . There isn't an easy answer . Brooks wrote a book entitled the Design of Design . If you flip through it it can seem almost like rambling random topics , but by the end of it I found it was the best thing I've read on the process of design . End of letter .

Well , thanks , er . It is funny that you actually met Brooks . I had not encountered anything about that book until I got the other letter , so this is an advantage of using letters as a way of getting more information . The book of the week .

We're spending most of this summer at the beach in Wilmington and so I'm reading books that I've been putting off and wanting to look at . This week I want to recommend Country Music USA by Bill C Malone . It's published by University of Texas Press , was first published in 1968 , and since then it's had several editions .

Well , the next episode will be released next week , tuesday July 15th . We'll have a new topic , some letters and , of course , a hilarious new twedge . All that and more next week on Tidy C .