In defence of the middleman: There is more to intermediaries than fees

KICKSTARTER just won an Oscar. This year’s prize for best short documentary went to crowdfunded Inocente. More than 290 backers contributed $50,000 (£32,900) to pay for its post-production.

Around one in 10 of the films at last year’s Cannes film festival were crowdfunded, but it is far more than a great new way to raise financing for art projects. Jeff Lynn’s FSA-regulated Seedrs is aggregating seed capital for startups through its online platform, and Petridish lets scientific researchers bid for backers.

But there is also a danger in the crowdfunding goldrush. At least part of its attraction stems from a false dream: the elimination of middlemen.

People don’t like middlemen very much. In RA Radford’s 1945 classic paper The Economic Organisation of a POW Camp, he describes how the camp acted as a natural experiment in which to study the evolution of a black market. While Radford’s observations showed the ability of individuals (often from very different backgrounds) to self-organise and trade to their mutual advantage, he also found a characteristic suspicion of the entrepreneurs who made it possible: “Opinion was hostile to the middleman. His function, and his hard work in bringing buyer and seller together, were ignored; profits were not regarded as a reward for labour, but as the result of sharp practices. Despite the fact that his very existence was proof to the contrary, the middleman was held to be redundant.”

The people who work hard to bring us together reduce transaction costs, improve market liquidity, and refine the price information available. Yet we find it hard to shake our suspicion of the cut they require. Today, much of the City’s valuable work in brokering financial deals is viewed with suspicion by outsiders, who too often see only the fees taken without valuing the services for which they pay.

So it is not surprising that new platforms which seem to eliminate middlemen have mass appeal, from Kickstarter to peer-to-peer lending operations like Funding Circle, which promises on its website: “no middlemen, no banks”. But such enthusiasms blind us to the abiding value of middlemen in any market, however advanced.

This new wave of mass-funding deserves our enthusiasm for its ability to lower barriers to innovation – producing gadgets like the Pebble smartwatch or even quirky businesses like London’s first cat cafe. Yet it does so as a minor supplement to traditional market mediation, not as its replacement. And the crowdfunders themselves rely on taking intermediary fees: Kickstarter takes a five per cent cut on successful projects plus a three to five per cent payment processing fee. Social media sites seem free but can collect our personal data as payment on varying terms. We need to accept both humans and computers will always want a finder’s fee, and that doesn’t make their services a rip-off. A world without middlemen would be a poorer one.

First published: City A.M., 1/3/13

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Filed under Business, Economics, History, Human nature, Innovation

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