Freeman

ARTICLE

Cavemen and Middlemen

MARCH 28, 2012 by RICHARD W. FULMER

Filed Under : Entrepreneurship

If a caveman could specialize in a single craft such as making stone knives, he would likely become very skilled through sheer repetition. He would soon learn to create better products more quickly and with less effort than if he had to spend potential knife-building time hunting, fishing, gathering food, constructing shelters, building fires, and crafting baskets, pottery, and clothing. Specialization, however, would only be possible if there were sufficient demand for his tools. If the caveman’s clan is small, demand will be limited, making it unlikely that he would be able to trade his knives for enough food, clothing, and other goods to ensure his survival.

The size of the market determines the degree of specialization that is possible and therefore the productivity of a cave clan’s members. Their productivity in turn determines how well they live. If the market could be expanded, a higher degree of specialization would be possible, raising both productivity and living standards.

Suppose Rok, an itinerant caveman, notices that his clan makes particularly good obsidian knives, while another, miles away, makes excellent bone needles, and still another makes fine loincloths. Rok is lucky in a hunt one day and kills a large deer. He gives its hide and most of the meat to his clansmen in return for knives, reasoning that he can easily transport them to the other clans and trade for needles and loincloths.

He can bring these back and exchange them for even more knives to trade with the other clans for still more goods.

Rok has done far more than simply transport products among clans. He has unleashed a complex, dynamic, iterative process. First, by expanding the marketplace to three clans, he has enabled more cavemen to specialize, increasing their productivity and improving their own welfare and that of their clans. By opening trade among the clans he has boosted each one’s survival chances. If a hunt goes badly for one they may be able to trade for food with another that has had better luck.

In addition Rok has introduced the clans to goods that they may have never seen before, sparking new ideas and planting the seeds for improved and perhaps entirely new products. If he profits by the exchanges he makes, he also provides an example to others who may go into direct competition with him, increasing the volume of trade among the three clans, or who may open trade with still other clans, potentially discovering new products and ideas.

Rok’s surplus goods, or profits, provide him with working capital. By trading some of his goods for food, Rok buys time that he can employ in improving his wares or in trying out new ideas such as small-animal snares or obsidian scrapers and awls. If his new products are successful, Rok’s wealth will grow, but this wealth will pale in comparison with that created by clan members exploiting the increased productivity that Rok’s new tools engender.

Rok’s growing surpluses may also serve as venture capital. Rok can lend stone tools, bone needles, loincloths, and snares to others, who can then “trade them for time” as Rok did. They in turn may be able to increase their own and their clans’ wealth with the products they create with that time. If their efforts are fruitful, they can pay Rok back with interest; if not Rok will lose his investment. However, if Rok invests in enough other budding entrepreneurs and inventors, and if he carefully chooses to whom he entrusts his surplus, his gains will likely outweigh his losses.

Again, though, however high Rok’s profits are, the clans will benefit as well. The tools that he and his partners create will increase the productivity of everyone in the clans and leave them all materially better off than before.

Unfortunately Rok’s activities spark resentment among some clan members. A few cavemen believe that Rok is cheating them out of the full value of their labor. They see that, as a trader, he is simply transporting goods between the clans and making a profit even though he does not improve the goods in any way. They do not see that simply by moving them, he adds value to the goods. Nor do they, like Rok himself, see the subtle, though critically important, processes that he has unleashed by expanding each clan’s market, nor the clans’ greater resilience and rising prosperity through increased specialization and communication of ideas.

Cavemen who borrow from Rok resent being indebted to him and having to pay him back more than they originally borrowed. They do not understand that the interest they pay Rok is the cost of the time that they purchased with his goods. Nor do they understand that by lending them the goods, Rok was giving up the opportunity to employ those goods in other ways.

Rok is also seen as an outsider by the members of the other clans with which he trades. People’s natural distrust of strangers, their resentment of Rok’s “exploitation,” and their envy of his relative prosperity all feed their growing hostility. Moreover, they reason that by trading with other clans, some amount of value is leaving their own clan. When two people trade both must benefit or the trade would not take place. If the two are from the same clan the mutual benefits would all be kept within the clan. They do not see that “inter-clan leakage” is more than offset by the advantages of an expanded market and by a bigger “idea pool.”

The growing resentment and envy leads one of the clans to drive Rok away and to cut off trade with his clan and others. Later they notice that their living standards fell significantly after Rok left, though they see no connection between their growing poverty and Rok’s departure. This self-isolated clan is far less likely to survive and prosper than are those that welcome, or at least tolerate, Rok and other middlemen.

Rok’s descendants are what Thomas Sowell calls “minority middlemen”: Jews across the world, “Armenians in the Ottoman Empire, Ibos in Nigeria, Marwaris in Burma, overseas Chinese in Southeast Asia, and Lebanese in a number of countries.” A significant number of people from each of these groups have, for a variety of geographical, cultural, and historical reasons, worked far from their homelands as peddlers, merchants, and moneylenders. They and other middlemen helped bring mankind out of caves and into prosperity; in return they have been reviled, persecuted, tortured, and killed.

The oppression of “parasitical middlemen” has immeasurably diminished humanity’s welfare. Had their contribution been understood in Rok’s time and since, the world’s people would be far wealthier than they are today. Even an additional annual growth rate of only 1 percent, compounded over the millennia, would have doubled and redoubled per capita income many times over. The human suffering that would have been avoided can scarcely be imagined. When we interfere with peaceful, free trade, we hurt ourselves, our children, and their children throughout eternity. Let’s stop.

ASSOCIATED ISSUE

April 2012

ABOUT

RICHARD W. FULMER

Richard Fulmer is a freelance writer from Humble, Texas, and the winner of the third annual Beth A. Hoffman Memorial Prize for Economic Writing for his article "Cavemen and Middlemen," from the April 2012 Freeman

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