Reading what Mr.Manmohan Singh said last week seems to be a new approach towards dealing with the middlemen that come in trade and industry. It is simple. If you cannot fight them join them. These middlemen have always occupied a center stage in trade and industry. They have been in social circles with events such as marriages, and they have been the mandwali dons in underworld activities. Even 'The Godfather' was in a way a broker. We generally tend to disregard these middlemen as rent seeking people but fail to understand the value they create for the society. I agree that had the world been ideal these middlemen would'nt have been in need but it is not so, and there is asymmetry of information and these middlemen try to bridge out the gap. Basically the middlemen are needed for various reasons:
- They are needed in situations where there is asymmetry of information. For example a real estate agent. In case you want to sell/purchase property, you would like to get a good deal without getting too involved in all the stuff. so what you do is just go and appoint a realtor. He brings in his experience of deciding the correct purchase price for the house as well as brings the whole market of saleable houses at your doorstep so that you don't have to roam around.
- They are the liaison officers between two parties. For example if two families want their sons and daughters to get married they would usually prefer an intermediary so as to improve the chances of a marriage actually taking place. A village pundit works exactly the same way. There are also liaison officers who work between government and industry and facilitate to ensure expedited work. They would also come in this category.
But they we need to understand that there are a lot of situations where middlemen are undesirable from the point of view of one of the concerned parties. Just take the case of the middlemen is arms purchase. I fail to understand what value addition do they bring for the government in the deal. But from the point of view of the arms company they are multi million dollar question. And they wouldn't wanna take chances with such a opportunity. Therefore they employ these middlemen. But it is a total waste from the side of the government because it raises the cost of the deal, as the cost of the middlemen is recovered from the government. Like all the purchases that are bought purely on the basis of their utility, even buying arms and ammunitions is a yes or no situation. There is no scope for any grey area in decision making. But it is the inefficiency of one of the parties, namely the government, which lead to such a situation that the middlemen come into play. Therefore I believe that instead of making such statements the PM should focus more on the decision making process for arms purchase and try to eliminate discretion out of the whole cycle.
P.S. : With the advent of the internet the information asymmetry that we were talking about is fast disappearing and so is the situation getting worse for the middlemen. For example real estate web sites that facilitate sale/purchase of property are doing better and cheaper job as compared to the realtors. The stock brokers are getting replaced by computer terminals. We can very soon expect a situation when we will be our own realtors and brokers.
P.S. : With the advent of the internet the information asymmetry that we were talking about is fast disappearing and so is the situation getting worse for the middlemen. For example real estate web sites that facilitate sale/purchase of property are doing better and cheaper job as compared to the realtors. The stock brokers are getting replaced by computer terminals. We can very soon expect a situation when we will be our own realtors and brokers.
