Courses

I Bet You Thought You Were Supposed to Hate These Guys

Speakers
Steve Davies,

Release Date
August 2, 2013

Topic

Free Markets and Capitalism
Description

Like most Americans, are you frustrated by ticket scalpers? These middle men buy tickets for events and then resell them at more than face value to make a profit. If you’ve ever purchased from a scalper, you may have been frustrated at having to pay higher than face value for your seats. But what were the alternatives? Since there may be more people who want to attend an event than the event can hold, an efficient market mechanism is to ensure that the people who are willing to pay the most are the ones who get to go. This cannot be accomplished by a lottery system to allocate leftover seats, as that would fall to pure chance to decide who won. Waiting in a long line might be an option, but maybe your time is more valuable and you’d like to get a ticket now. The scalper is able to help you get the tickets you want in the amount of time you desire.
Prof. Stephen Davies explains that although ticket scalpers and other middle men are often looked down upon by the public because they don’t physically make any goods, they do provide a service that improves the efficiency of the market. Middle men who connect buyers and sellers and profit for their work do add value to society by enabling people to get what they want or sell what they don’t.
In some cases, the ability to buy goods at a low price and sell them at a higher price has saved lives. In 18th century France it was illegal to purchase food in areas with low prices and sell them for a profit in areas where food was scarce due to a shortage or a failed harvest. As a result, many people literally starved to death because no one would supply them with food. At the same time, England did not have these laws. So while food prices increased in areas struck by famine, we don’t see many cases of people actually starving to death. The middle man’s ability to buy food inexpensively in one area and sell it for a profit in an area with a food shortage literally saved lives. Though looked down on by society, middle men perform a useful function in improving human well being.

Munger on Middlemen (podcast): Mike Munger of Duke University talks with EconTalk host Russ Roberts about the often-vilified middleman–someone who buys cheap, sells dear and does nothing to improve the product. Munger explains the economic function of arbitrage using a classic article about how prices emerged in a POW camp during World War II.
Desert Island Game (game, beginner): Can you learn something about trade and cooperation by being marooned on a desert island?
Trade Ruler (game, advanced): As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.
All Hail Ticket Scalpers! (article): Jim Caple at ESPN argues that ticket scalping is the epitome of a victimless crime and should not be made illegal
Middlemen and Markets (article): Professor Stephen Davies explains how the middleman can save lives and increase well-being
Cavemen and Middlemen (article): Richard Fulmer discusses how middlemen expand markets and offer greater opportunities for specialization and growth.
The Paradox of the Middleman (article): This blog posting argues that the middleman will exist as long as information exists and that the information age calls for a new type of middleman.
Is Ticket Scalping Legitimate? (debate forum): Join the debate! This website offers users the opportunity to argue the pros and cons of ticket scalping

I Bet You Thought You Were Supposed to Hate These Guys
How do you feel about ticket scalpers? If you’re like most Americans, then you don’t think very highly of them and you probably deeply resent, if you’ve ever used them, having to pay more than the face value of a ticket to go to a concert or a sporting event. This attitude isn’t just confined to the United States either. Ticket touts, as we call them in the UK, are just as unpopular over there as scalpers are here.
But think about this: Why do you feel upset if that’s what you’ve done? Sure, you’ve had to pay more than the face value for a ticket, but you paid it voluntarily. So, by definition, it must have been worth your while to do it. Moreover, think what the alternatives were. One would have been to stand in line for a tremendously long period of time, and your time is valuable. Another would have been to go into a lottery and have pure chance determine whether or not you got that ticket. It might not have gone to you; it might have gone to somebody who didn’t value it as highly as you did.
The point is that with things like sporting events and concerts there’s a fundamentally fixed supply of seats, and there’s a very high demand for them. Having a secondary market through people like scalpers is the best way there is of making sure that those tickets get into the hands of the people who value them most highly. But why, then, are people so upset about scalpers and their activities?
It’s not peculiar to this in fact. This is just one example of a more general phenomenon, which is hostility towards middlemen—people who make a living by putting willing buyers in touch with willing sellers.
The common underlying notion is that middlemen do not add anything of value, that they don’t create wealth because they don’t physically actually make anything. This is quite simply wrong. Value is not created by work. You could work all day making some kind of good, but if nobody wants to buy it, it’s worthless.
Value is not created by work; it’s created by trade and exchange. The way you discover how much something is worth is by finding out what other people are prepared to give up in exchange for it. If one person owns something and somebody else values it more highly than they do, then, if you as a middleman would put them in touch with the other, then both parties are better off. By definition economic well being has been increased.
Middlemen play a vital role in the functioning of a market economy. Sometimes this role has been literally vital. Most people think that there’s something deeply wrong about buying food in areas where the price is low and then selling it at a profit in areas where the price is high because of a food shortage or a harvest failure.
In France in the 18th century, there were laws to stop this, and the result was that you were not able to buy food in areas where there was a surplus and then sell it at a profit in areas where there was a shortage. The consequence was that in France there were repeated famines in which many people quite literally starved to death. In England, by contrast, at that time there were no such laws and so, although there were local shortages and high food prices, you never got famines in which people actually starved. So the point to take from all this is this: Scalpers, like any other kind of middlemen, are playing an important function in the market economy. A market economy cannot work without middlemen. They play a central part in the way that economy works, and without it, it’s not going to function and human well being will definitely suffer.

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