Bad Economics

by Don Boudreaux on March 5, 2023

in Myths and Fallacies, Seen and Unseen, Trade

I very much enjoyed Marc Levinson’s 2007 book, The Box – a volume about the rise and several consequences of container shipping. I’m reading now Levinson’s 2020 book, Outside the Box: How Globalization Changed from Moving Stuff to Spreading Ideas. I’ll likely finish reading it, but a passage on page 19 reveals that Levinson’s interpretations of economic events, patterns, and outcomes must be approached with a discouraging amount of caution. Here’s the passage (emphasis added); it occurs during a discussion pre-industrial-era trade:

The ubiquitous role of middlemen added to the cost of trade. Manufacturing migrated to rural areas, where costs were lower than in crowded cities and farmers had ample free time in the winter to tend hearths and looms, but most goods were produced by very small workshops. In Venice, a law from 1497 – not always observed – prohibited a silk manufacturer from employing more than six weavers. Two centuries later the eighteen textile establishments in Clermont-de-Lodève, in the south of France, had only twenty-nine looms among them. Carriage makers in New England was the work of small shops and independent craftsmen even in the late 1830s; a factory with on hundred workers proved too large to manage profitably. Manufacturers operating at this minuscules scale had no hope of exporting on their own. At best, they could supply a trader in the nearest village, who could sell the goods onward to a merchant in a larger town, who might know a merchant in a port city who consolidated shipments for export. Each dealer, of course, collected a commission that added to the price charged to customers abroad.

DBx: No. The commission charged by each dealer was the price paid to cover the cost of that dealer’s efforts to transport the goods from one place (or owner) to another place (or owner). Absent each dealer’s (“middleman’s”) effort, the goods either would not have been transported to their final destinations or would have been transported the full distance by their manufacturers. In either case, the final costs of the goods to consumers – the goods’ final prices – would have been higher.

If the goods wouldn’t have been transported at all, the supplies of such goods at their final destinations would have been lower, consisting only of those units produced near the location of consumers – thus causing these goods’ prices to be higher. If the goods would have been transported and marketed by their manufacturers, manufacturers would obviously, no less than the middlemen, have to be compensated to perform these transportation and marketing services. They would perform these services only if and insofar as the final selling prices justified the extra effort.

It’s possible (although unlikely) that, were there no such middlemen, these manufacturers would have undertaken the ordeal of transporting and marketing the goods themselves (and thus, as so many advertisements scream, “avoiding the middleman mark-up!”). But because the option to so transport and market their goods themselves presumably was always present, there must be some good reason why manufacturers nevertheless chose to use these “middlemen” – why manufacturers chose to ‘hire’ these middlemen to perform those services. And there is a good reason: Transporting and marketing these goods as described above by Levinson was the lowest-cost way of getting these goods across the long distances for sale to their final consumers. Were it not so, if the goods were to be transported and marketed across those distances at all, the manufacturers would have performed these tasks themselves.

That the manufacturers chose the lowest-cost way of transporting and marketing their outputs to final consumers, the ‘optimal’ amount of those outputs were produced for export and so transported and marketed for final sale, causing their final prices to be lower, not higher. The middlemen whom Levinson accuses of raising consumers’ costs of acquiring these goods were in reality paid to supply services that lowered the cost of getting goods to final consumers.

Contrary to the opening and closing sentences of the above-quoted passage, therefore, the ubiquitous role of middlemen lowered the cost of trade. Each dealer, of course, collected a commission to perform a valuable service that lowered the price charged to customers abroad.


It’s discouraging to encounter, in a book about the history and economics of trade, passages such as the one that I quote above – a passage that reveals a misunderstanding of trade and economics that’s fundamental. Everything that I read by Levinson from here on in will be read with an extra dollop of doubt about the accuracy of his analysis.

I will tentatively continue to trust that the book overall will supply a worthwhile read. But the operative word here is “tentatively.”

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