A lot of articles I read recently propose tech (recall block chain & DAO?) as the solution to the middleman problem (women also, no?) in the supply chain. In this process they often demonize them so much so that today middleman sounds equivalent to an evil person.

See, I find calling them intermediaries as better than the middleman already.

It made me wonder what is the middleman problem BTW? OK. What are the problems with intermediaries? Who are these people? What roles do they play? What should we credit them for? Why are they made the devil behind the evils and intractable issues in the supply chain? Will tech be really able to replace them in the roles?

Let's think about it thoroughly before we make an attempt to replace, the Chesterton fence.

I will address only a few of the above questions below for now. Let's dig in.

What roles do the intermediaries play?

Cover counter-party risks
In food supply chain, traders in the middle facilitate transaction by investing capital of their own. Consumers often live far away from the location of production or the food producers. Traders scout for produce, invest their capital to buy (covers risk, assured payment to producers) and resell to the consumer. Consumer know the trader and are sure to receive the produce of good quality.
Bridge the trust gap
(I think it covers many more types of risks in addition to above)
Image credits: Juergen | Shutterstock
Would you buy a 1000 bucks perfume without smelling it first? In this case I would prefer to trust my own olfactory senses than reading reviews or product description about it.
As a buyer will I get delivered what I ordered and paid in advance? Will the product be genuine? The assured fulfillment in tech marketplaces and no questions asked return policy.
In may cases, I trust the local trader to get me good products, he will be answerable to me and not some company a thousand miles away I don't know about. (counter-party risks and how we deal with it, behaviorally speaking, changes with the amount and value being traded I think.)
1. Government as the great middleman
  You can also make government as the platform on which we all, thy citizens play.
  If I am taken undue advantage of or wronged in a transaction and the other party refuses to entertain my complaints or returns my money, where do I go? We grant government the authority to enforce on us, us and the other party. To go about doing their job, government has processes like KYC to validate entities (individual or organizations) and others things for legal.
  There is also an implicit trust in the currency, in the legal recourse that I will be fairly treated, in the enforcement power (however poor but functioning) - all this provide stability/ safety to go about my day-to-day business.
  When I pay in advance to a local govt registered entity X for an order, I kind of trust X e-commerce site will deliver. If it does not, the govt has done due diligence in registering the organization and if required, will help reclaim if things don't go well.
  Same I cannot expect from a not well known USA, Russian, or Chinese e-commerce site. Trust via govt is missing in transaction with those entities.
2. Trust on individuals
  From the example above, I will trust a person who I know, or live closer to me, or I have interacted with, than some stranger remotely.
3. Trust on brands
  Brands are created as an assurance of quality produce - Amul milk no matter where I buy from, I will get same consistency and quality, assured value for my money.
Business of distribution - complexities, skills, specialization, competitive advantage and economies of scale
Not every producer has the skills, capacity, ability, time or resources to get into distribution. It may not be his/her competitive advantage even. In my view, these are also intermediaries who provide distribution to the producers who cannot or do not want to get into distribution business (including but not limited to repackaging, sorting, modifying, logistics, and more). It can be offered as a service like choosing delivery partner on Shopify, marketing service on Amazon or selling the produce to an intermediary trader who manages his own distribution channels.

Financing
Farmers need finance to cover capex, op-ex or often planned or unplanned expenses in their life. As they are small and remote, away from the reach of formal finance services (banks), even if they are accessible, quite often don't qualify in the loan requirements. The intermediates who have had provided above service we discussed, who knows the farmer, lends money. Farmers rely on them quite often. By some estimates, in India, even after deep penetration of banks in rural areas, still more 40% of farmers depend upon informal lending.

For above services and more (that I couldn’t yet articulate. Are there more roles that intermediaries play? Do share.) they offer, they take some margin/profit or we pay taxes (in case of government).

Yes, a few intermediaries are evil or behave in an evil manner from time to time. It's the few bad apples, so are everywhere. For instance, few wilfully default on the loans, cheat, it doesn't mean we stop financing to all persons. All borrowers are evil, we can't say that, right?

Let's think through before demonizing (all) the intermediaries.

Circling back to the start of this article - what initiated this conversation, about technology as the ultimate solution :

Does it play all or a few of the above roles? How well?
Technology (or the people) made the devil out of middle man only to replace them. Technology became the middle man I believe. (for better or worse, much has been spoken I guess on technology biases and all…)

OK, the point I wanted to elaborate in this article was to not demonize intermediaries and understand why we have what we have today, the gates, the inefficiencies and and thinking through the first principles :

What functions of the intermediaries above can the new tech really replace? Does it remove or decentralized away?
Can it play all the roles in the trust-less / permission less systems we are envisioning ? May be a few systems from all the systems can be replaced with tech as an intermediary. May be efficiency can be gained and improved productivity and do less of (drudgery) work overall!

Let's be careful and not create another demon or at least evolve to a less evil demon.

The other day read the news that Fed helped recover stolen crypto https://www.cnbc.com/2022/02/08/feds-seize-3point6-billion-stolen-from-bitfinex-hack.html. Who said we can replace government? Should we really? If not government, we will need governing agencies or processes to protect from scams/frauds, and more I suppose, no?

More on this topic some other day...

putincontext

The Great Middleman