Kathryn Judge is a law professor at Columbia University, with most of her work regarding banking and finance. Below, she shares 5 key insights from her new book, Direct: The Rise of the Middleman Economy and the Power of Going to the Source. Listen to the audio version—read by Kathryn herself—in the Next Big Idea App.
1. We live in a middleman economy.
Our economy has a lot of middlemen, and they play a structural role in shaping the economy. It used to be, in the United States, that we had community banks spanning the country. They tended to be small organizations taking money from local depositors and using it to make loans to small businesses and homeowners in the area. They did so through what they knew about the people to whom they were loaning money.
Then, starting in the 1980s, there was a significant shift as banks began buying up other banks. Suddenly the four largest banks dominated banking. Not only did they become bigger, but they had a different way of making loans. They used standardization and data to figure out who deserves loans. This facilitated new sources of capital which provided a backbone that led to securitization, where loans were packaged with other loans and put into newly created entities that were funded by investors the world over. We had much larger banks, much more complex supply chains, and some real benefits in terms of access to capital.
These two trends of large middlemen and longer, more complex supply chains dominated other sectors of the economy as well. In food, farmers used to grow crops primarily for local consumption. Today, farmers operate in a globally competitive market. Most of the corn and soy my cousin in Illinois grows ends up feeding animals in Asia. This has been enabled by commodification—that veneer of standardization akin to what happened with home loans. Most farms in the United States continue to be relatively small, family-controlled enterprises, but the middlemen are not. Cargill is the biggest private company in the country, and other food giants, such as Nestlé, play critical roles facilitating the flow of food from farm to table. But they are playing an outsized role shaping the overall system. As a result, figuring out where the grains in your cereal were grown is nearly impossible.
We see the same trend in retail. Amazon and Walmart are numbers one and two on the Fortune 500. They are the two biggest revenue producers in the country. They allow incredible choice and convenience. But partly because of their scale, there’s been a transformation in production. Goods are rarely made in the United States anymore. Instead, they are made abroad and at a scale that justified disaggregating production. So, it’s no longer happening in one factory, but across a number of nodes that can span continents. This is the middleman economy.
“Goods are rarely made in the United States anymore. Instead, they are made abroad and at a scale that justified disaggregating production.”
2. Middlemen make our lives easier.
Going direct is not a naïve call to cut out middlemen wherever they lie. The middleman economy did not come from nowhere—it was not foisted upon us—rather, it was a response to our demands for ever-cheaper goods and ever-greater convenience. That doesn’t mean the current regime is optimal, but it’s critical for understanding that middlemen are here to stay.
Middlemen play critical roles facilitating the flow of goods from those who have them to those who want them, and the flow of money. The goal is not eliminating middlemen, but understanding the values they bring and the dangers they pose so that we can achieve a healthier balance.
3. Our middleman economy has drawbacks.
One of the biggest drawbacks is that as these chains become longer and more complex, we end up with fragility. Go back to 2006. It seemed like securitization was helping people buy their first home. The racial wealth gap was lower, as was the racial housing gap. It seemed like a great system. But in ’07, ’08, and ’09, the other shoe dropped. Home loans started underperforming, and the real problem was meaningful losses on subprime loans in particular. The bigger challenge was that the securitization chains that seemed to make the entire domain more efficient had also distributed the risks in ways nobody could fully understand.
Banks and other financial institutions became scared to work with one another because they didn’t understand the other institutions’ exposures. Regulators couldn’t figure out how the risks were allocated. They didn’t know where to start addressing the problem so they were slow to respond. The crisis started over a year before the failure of Lehman Brothers. Yet during that time, the Fed and other policy makers plugged up holes without ever getting to the source of the challenges. When Lehman did fail and AIG almost failed, they took the opposite extreme and threw money absolutely everywhere, because they lacked qualitative insight over where the holes were that needed plugging.
“One of the challenges of the middleman economy is it undermines resilience. It works great when times are good, but fails spectacularly precisely in the circumstances when we most need our economy to function well.”
We’re seeing similar dynamics today. Ever since the pandemic, there are significant challenges in the functioning of supply chains. At first, this largely created inconvenience because people had to wait a few more months to get that dream couch. Pretty quickly, that dysfunction begot more dysfunction. Not only were institutions and different nodes looking out for themselves, but policy makers ended up behind the curve. Through most of 2021, bad policymakers assured the public that supply chain problems would rectify themselves.
The fact that we seemed to be experiencing inflation didn’t justify a strong policy response. By mid-2022, the situation could not have looked more different. There were still challenges with supply chains, but the Fed now realized that in an environment where dysfunction begets more dysfunction, the situation is not going to correct itself. You need meaningful policy support to get the system operating again. One of the challenges of the middleman economy is it undermines resilience. It works great when times are good, but fails spectacularly precisely in the circumstances when we most need our economy to function well.
A related challenge with the length and complexity of supply chains today is it undermines accountability. Consumers and investors have less ability to understand and see the people and places behind the goods they consume. It means that if you’re an investor and you put your money into a fund that advertises itself as an ESG (a fund promoting causes that you believe in), real questions can arise over whether that fund is achieving any of its purported objectives.
Another core challenge is the whole system was built to maximize short-term efficiency. But as consumers and investors care more about a broader set of values, the opacity created by long, complex supply chains makes it virtually impossible to get the information they demand.
4. Intermediation matters.
Intermediation might sound like a scary word, but it just captures the structures through which we are investing and the structures through which we are buying. Are you going to a farm stand and interacting directly with a farmer, or are you ordering food from a local grocery, where there are probably layers of middlemen between you and that farmer?
“Are you going to a farm stand and interacting directly with a farmer, or are you ordering food from a local grocery, where there are probably layers of middlemen between you and that farmer?”
The goal is not to say that one is better than the other. There is a place for both in the economy and our individual lives. But once we recognize the trade-offs, we make conscious decisions about through whom we buy or invest. As we understand how the “through whom” decision shapes the ripples of the transaction on people and the environment, we can make choices that serve our long-term interests.
Shifting from the individual to the structures that we are all a part of, understanding the importance of intermediation helps explain a lot of challenges. Particularly, a lot of the ways that the economy and our society don’t track with the deeper values many of us claim to hold. Once we understand the role of intermediation and the middleman economy in these challenges, then we can ask creative questions about the role of policy makers in ensuring that we have meaningful choice, as well as policy’s place in the resilience needed to avoid financial crises.
5. Going direct is the cornerstone for a balanced system.
Like any cornerstone, it is a small piece of a grander edifice. The goal is understanding what’s at stake in our intermediation systems—how does it shape what we do and don’t know? How does it shape the impact on workers and the environment? How does it affect the resilience or fragility of a system? The goal is not abandoning the middleman economy, but rather figuring out ways to build a robust and accountable system, and to recover small sources of joy that we might not realize we’re missing.
Where to start really depends on who you are, your preferences, and where you’re willing to go outside your comfort zone. For some, this is their local farmer’s market, or a coffee shop that brews its own beans. For others, it’s going online and realizing that thanks to intermediaries like Shopify, there are a lot of small businesses that can directly reach people around the world. There are innovative entrepreneurs who use social media to educate consumers in Europe, the United States, and other countries about the women who transform shea seeds into body butters, or the farmers who grow the spices in our cabinets.
One of the fun parts of the process is acknowledging that it might be inconvenient or impractical. But once in a while, making that extra effort to go direct, to give money to a creator, can help restore a sense of connection within us and increase appreciation for the products in our lives. Having a little of our money flow through mechanisms where you can see the people and places affected can go a long way in reawakening the consciousness that has been dulled by the middleman economy.
To listen to the audio version read by author Kathryn Judge, download the Next Big Idea App today: