Adam Smith, the father of modern capitalism ,famously thought that fair markets required a shared moral framework between buyer and seller. That’s no surprise, considering that his ideas came out of the 18th – century marketplace, in which producers and consumers were likely to be neighbors. Advances in technology, transport and communications have taken us a long way since then, creating in my opinion too complex global supply chains over the last four decades under the umbrella of globalization. These initially have reduced consumer prices but introduced risks of their own, from market – distorting monopoly power to labor exploitation and environmental degradation.
One of the costs of these supply chains – which exist in both physical products and also global capital – has been the rise of powerful corporate middlemen. These include companies such as Cargill, which transports more than 200 million tons of food and other cargo a year, and any number of large financial institutions that package complex securities, Big Tech platforms like Amazon, giant retailers like Walmart or even the real estate brokers that intermediate between home buyers and sellers. All these middlemen in my opinion grease the wheels of capitalism, but also distort it in ways that are undermining our economy and society. Middlemen make it possible for us to buy goods made on the other side of the world, build for example a diversified investment portfolio, order groceries from the comfort of our couch without the necessity of leaving the house. But what most of us do not realize is that this connective power is undermining accountability by creating so much separation between buyers and sellers that it is impossible to tally the real cost of convenience and low prices.
There are in my opinion plenty of examples to support this case, from textiles made with child labor, to E.coli outbreaks in complex food supply chains, to the disproportionate rents taken by middlemen in financial services or platform technology.
In the latter, information asymmetries make it difficult for market participants to have a shared understanding of what’s being bought and sold – one thing that Smith believed was a pre-requisite for well-functioning markets.
Hyper – globalization and extreme concentrations of corporate power are in my opinion certainly factors behind market failures from the subprime crisis of 2008 to the supply – chain shortages of recent years. The growth of the middlemen economy itself is the problem, created by the consumer out of comfort and convenience because it disintermediates responsibility, and even morality, within our market system.
Consider, for example, how the landscape of public company stock ownership has changed in recent decades. In the US in 1950, only 6.1% of such stock was held by institutions – the rest was owned outright by individuals who analyst companies and who voted themselves on matters such as who should sit on a board.
Today, institutional middlemen like pension funds, mutual funds, hedge funds and soon, own 70% of those shares. Most use two other large middlemen, the proxy advisers ISS and Glass Lewis, to tick the boxes on corporate voting matters despite efforts by the Security and Exchange Commission (SEC) to crack down on such “robovoting”. All this makes real corporate social account-ability extreme difficult. And there are many other such examples.
Having said this, is it any wonder that after decades of a market system controlled by middlemen focused on comfort and convenience for the consumer, lower costs, higher risk adjusted returns and “efficiency”, that we have more financial volatility, a growing number of supply – chain disruptions and a warming planet?
The two big questions are how to create system change and who will bear the cost of it. There are in my opinion no silver – bullet answers for either, even though technology offers new possibilities to connect buyers and sellers directly. The rise of peer – to – peer lending, direct – to – consumer retailers and 3D printing which allow for shorter supply chains are all examples of this, though none currently provides anywhere near the scale to replace current systems of finance or manufacturing.
A better and clearer tallying of the input costs of our current market system might help. Just as the now infamous 18th -century block print of a slave holding ship showing humans packed toot to head in horrible conditions shifted haw average individuals saw their sugar bowl, so the increasing amount of research revealing the correlations between things like cheap food and obesity, or fast fashion and landfill dumping, or complex securitization and predatory lending, could help create demand for a fairer and more sustainable market system today.
The challenges of inflation – which again will push some consumers and policymakers back towards low prices as the sole metric of wellbeing – and inertia will in my opinion be powerful headwinds against system change. Yet it’s important to remember that it is already happening in some areas, albeit slowly. In for example financial regulation, which are only just beginning to process, some15 years on from the 2008 financial crisis, how wilting layers of complexity out of lending systems has finally led to more stable banks and less indebted consumers.
Just as the subprime crisis led us to examine the costs of middlemen in finance, so today’s supply chain disruptions may force us to calculate the true cost of low prices in other goods and services.
Finally, the time has come that comfort and convenience has its own price – sooner or later we have to pay the bill of endless consume and globalization myth.