Direct: The Rise of the Middleman Economy and the Power of Going to the Source
June 10, 2022
Kathryn Judge's new book shows the benefits and costs of the modern middleman economy, giving us a clear picture of how it functions, how we can make it function better for all of us, and reconnect to one another in the process.
Direct: The Rise of the Middleman Economy and the Power of Going to the Source by Kathryn Judge, Harper Business
Stephanie Smith was twenty-two when she ate a hamburger at a family barbecue in Minnesota—a common enough activity across the upper Midwest this time of year. She ended up in a medically induced coma and permanently paralyzed. It turned out that the burger she had eaten was contaminated by E. Coli. The meat had been purchased from Sam’s Club, but tracing it to its source beyond that proved nearly impossible. Sam’s Club bought the meat from Cargill, but they didn’t produce the product. Kathryn Judge tells this story early in her new book, Direct, and how it was ultimately an investigation by journalist Michael Moss that got closest to revealing the source:
He eventually learned that the burger that paralyzed Stephanie “had been an amalgamation of various grades of meat from different parts of the cow and from multiple slaughterhouses as far away as Uruguay.”
The long and complex supply chains that obscured the source of that meat hide much more beside that, including the conditions in which so many of the products we buy are made. Judge explains that, despite her love of chocolate, she often forgoes it because most of the major producers—like Nestlé, Hershey, and Mars—use cocoa that is sourced from places notorious for using child and forced labor. The companies effectively killed a bill in Congress that would have developed a “slave-free” label requirement on chocolate, and have been making promises for the past twenty years to improve the situation, but little has changed. We hear all the time about how connected we all are in the global economy, but as Judge sees it, the long supply chains and middlemen who rely on and control them do just as much to keep us apart—from both the direct source of what we buy and information about it:
Perhaps the most defining characteristic of middlemen today is that in the process of connecting, they separate. They stand between consumers and investors, on the one hand, and the people and places behind the goods they consume and the projects they help fund, on the other. […] This often lowers costs but it also breeds new sources of fragility, undermines accountability, and leaves all of us more disconnected.
That is not to say that such companies have not made substantial technical improvements. And while it’s not as deep or thorough as a book like Charles Fishman’s Walmart Effect, Judge does a great job of explaining the benefits provided by businesses like Walmart and Amazon, and how they operate. As she writes, “to jump to critique without acknowledging the benefits the services Amazon provides and the threat that it poses would do little to help policy makers or the rest of us understand where we are and the real challenges and opportunities ahead.” And, from Walmart’s lessons in price negotiation to Amazon’s model of coopetition with its third-party sellers, there is a lot in here to learn about the dominant middlemen of American retail.
But she also quickly contrasts that example with her experience with her local CSA (community supported agriculture) farm. We have a tendency to view the Walmarts and Amazons of the world as “real” business and things like CSAs as, well, not. I believe that is not only a mistake, but a moral failure, because such businesses provide a model that can improve both the quality of the products we buy and our quality of life. As Judge writes:
These types of organizations are in short supply today. A growing number of public health officials see loneliness as the next major public health crisis, alongside obesity. Both can lead to more illness and shorter life spans. At its best, direct exchange can help counteract this challenge, providing new avenues for connection, enabling the formation of new types of community, and solidifying existing communities, such as those that arise among neighbors.
CSAs are not as convenient for consumers as getting Amazon Fresh delivered to your door or doing a quick online order and pickup at Walmart. You might have to drive to the farm or another location to get it, and usually don’t even get to pick exactly what—or how much—you’ll get in your CSA box. But the more direct connection we develop in the process—to both the food we get and the community we are in—is something that most people find enriching. Two sociologists from the University of Wisconsin who studied CSAs and their customers found that “the very things that make CSA membership so inconvenient also made it meaningful.”
And the convenience offered by middlemen comes with significant costs. Or, as Judge puts it later in the book:
The drawbacks are intertwined with the benefits.
To understand how the benefits the middleman economy provides can become a bane of the overall economy, look no further than the history of securitization, which Judge details in Chapter Four. Originally intended to help smooth the challenges of interest rate hikes and the failure of Savings and Loans across the country in the late ‘70s and early ‘80s, the securitization of mortgages eventually brought the entire economic system to its knees in 2007 and 2008. A proliferation of specialization, middlemen, and long intermediation chains had come to separate those who needed home loans and those who owned them. And similar to the long supply chains in food processing, this obscured both real risk and real information. The development of mortgage-backed securities and other complicated schemes held out the prospect of increasing homeownership, and was therefore sold as being good for consumers, but it led to outright fraud (“By 2017, banks collectively had been forced to shell out more than $200 billion in fines and legal fees for the various ways they had enabled and profited from bad behavior”) and investors found out they were shielded from information, not risk.
Speaking of the gap between when the cracks first started to appear in the system in 2007 to the failure of Lehman Brothers and AIG a full year later, Judge notes:
The year that passed between when the dysfunction first set in and when Lehman failed, and the foregone opportunity to avoid the subsequent catastrophe, is a testament to how hard it is to shift from a system based on proxies, such as credit ratings, to one based on actual information once intermediation chains become too long and too complex.
Those who orchestrated the system recovered relatively quickly, and those with wealth in it gained an even larger share over time. But many, especially those in poorer and traditionally underserved communities, were irrevocably harmed, their lives forever altered by the fraud perpetrated against them, for which nobody ever went to jail.
Judge also takes a long look at another middleman in the homebuying process, the National Association of Realtors, and how they have used the multiple listing service (“once a remarkable advance that benefitted home buyers and sellers”) to entrench their own power, stifle innovation, and keep broker fees higher than they otherwise would be and are in other countries today.
The rise of the middleman economy affects our daily lives, the work we do, the way we buy, and the very structure of the society we live in. Yes, the rise of middlemen like Walmart and Amazon ostensibly saves us time and money. But the irony at the heart of the neoliberal order we live in today is that “people today do not seem to enjoy the extra wealth and leisure that are supposed to follow from saving money and time.” There are many reasons for that, but one of the main ones is that they don’t actually save us money in the end because they know how to shape our behavior so that we buy more than we originally intended to or really need, with real consequences:
Expanding waistlines and exploding closets may seem trivial relative to the racial wealth gap and financial fragility. Yet recognizing that so many different ills can be traced, at least in part, back to the middleman economy is key to understanding just how much is at stake in decisions about “through whom” to buy and invest.
And, as we witnessed in the Great Recession and during the past two-plus years of COVID and the disruption it has wrought, “complex supply chains that create short-term efficiencies also breed new sources of fragility, and tend to break down at the worst possible times.”
But there is hope and good news, and that is what Judge concludes the book with. She looks at people who have built companies that sell their products—from wine in California to shea butter in Chicago—direct to customers. She looks at the “DTC Decade” online and companies like Dollar Shave Club, Away Luggage, and Everlane, explaining where some progress has been made and how it has become a decidedly mixed bag with some bad actors and moral failures of its own.
She concludes with a final chapter detailing “Five Principles for Policy Makers, Companies, and the Rest of Us,” which are:
Principle #1: Intermediation Matters
Principle #2: Shorter Is Better
Principle #3: Direct Is Best
Principle #4: Follow the Fees
Principle #5: Bridges Can Help.
Judge has been studying these issues for over a decade, and even she finds it hard to completely forego the middleman companies that dominate so much of the economy. But knowing more about who they are, how they operate, and the true benefits and costs of using them helps us all be more conscious of the decisions we’re making even when that decision is to use them. And with the knowledge she provides, I think you’ll find many reasons and ways to not use them quite so often. The goal is not to be perfect, but to be informed, to make different decisions when we can, and push for systemic change that would create a more stable, humane, and truly connected economy.