Direct

The Rise of the Middleman Economy and the Power of Going to the Source

Kathryn Judge

• Publisher: Harper Business
• Year: 2022
• Print ISBN: 9780063041974
• eBook ISBN: 9780063041981
• Topic: Technology & Engineering
• Subtopic: Business Communication
• Index: Technology & Engineering

Axiom Award Gold Medalist for Business Theory

Finance expert, law professor, and fellow overwhelmed consumer Kathryn Judge investigates the surprising ways that middlemen have taken control of the economy at the expense of the rest of us, and provides practical guidance about how to regain control, find more meaning, and contribute to a more sustainable economy.

Over the past thirty years, middlemen have built intricate financial and retail empires capable of moving goods across the country and around the world—transforming the economy and our lives. Because of middlemen, we enjoy an unprecedented degree of choice and convenience. But the rise of the middleman economy comes at a steep price.

In Direct, Columbia law professor Kathryn Judge shows how overgrown middlemen became the backbone of modern capitalism and the cause of many of its ailments. Middlemen today shape what people do, how they invest, and what they consume. They use their troves of data to push people to buy more, and more expensive, products. They use their massive profits and expertise to lobby lawmakers, tilting the playing field in their favor. Drawing on a decade of research, Judge shows how to fight back: Go to the source.

The process of direct exchange—and the resulting ecosystem of makers and consumers, investors and entrepreneurs—fosters connection and community and helps promote a more just, resilient, and accountable economic system. Direct exchange reminds us that our actions always and inevitably impact others, as it rekindles an appreciation of our inherent interconnectedness. As Judge reveals in this much-needed book, direct exchange is both the cornerstone of the solution and a tool for revealing just how much is at stake in decisions about “through whom” to buy, invest and give.

Part I

Tracing Food from Farm to Table

Chapter 1

The Hidden Cost of Convenience

IN 2011, CANTALOUPE contaminated with Listeria monocytogenes killed more than thirty people and sickened 140.¹ All of the cantaloupe came from a single farm in Colorado, yet the victims were spread across twenty-eight different states. Supply chains that carry food far from its origins can also carry pathogenic bacteria. And the more food travels, the harder it can be to trace those origins, enabling the danger to spread even further.

These dynamics were on full display that same year in Europe. An E. coli outbreak started in Germany in early May 2011, but no one could figure out the source.² German health officials warned citizens not to eat raw tomatoes, cucumbers, or lettuce based on early indications that fresh produce might be to blame.³ Yet new cases continued to emerge. Hundreds, and then a few thousand people, fell ill. Many Germans experienced a pervasive sense of anxiety.⁴ “I am treated like a potential murderer,” one retailer said, “simply because I sell cucumbers and tomatoes.”⁵

On May 26, German health officials identified cucumbers from Spain as the likely culprit.⁶ Consumers across Europe started avoiding produce grown in Spain. Spanish farmers saw their fresh produce wilt, unsold, leading to losses of at least 50 million euros and potentially four times that amount ($72 to $280 million, at that time). Farmers in Belgium, Bulgaria, France, Portugal, Switzerland, the Netherlands, and Germany also suffered, as many Europeans remained fearful of any fresh produce.⁷ Tourists who had planned to visit and sports teams scheduled to compete in Germany canceled their trips to avoid the risk of contaminated food, increasing the economic fallout.⁸

Eventually, public health officials realized that neither cucumbers nor Spanish farms had played the slightest role in the outbreak. The real source of the E. coli was far closer to home: salad sprouts grown right in Germany.⁹ Unfortunately, by the time the true origin was suspected, most of the tainted sprouts had been consumed to the detriment of those who ate them. Ultimately, the outbreak caused 4,000 people to fall ill and resulted in 54 deaths.¹⁰ The full economic damage, much less the fear and anxiety the episode triggered, has never been quantified.

Although such outbreaks remain rare, they illustrate the dangers of producing food in large volumes and then distributing it across a continent and beyond. Even though the sprouts that posed such a danger were grown right in Germany, the fact that those who got ill were simultaneously consuming produce and other food from so many different places made it difficult for public health officials to identify the true source of the problem. More people got sick, more people died, and more farmers suffered as a result.

There are also signs that the same sprout seed stock—originally from Egypt, imported to Europe via Rotterdam, with some then going to Germany and some reaching France via the United Kingdom—caused a smaller-scale E. coli outbreak in France later in the spring of 2011. But again, the complexity of the chains through which the seeds and other produce traveled and the ways that complexity impeded the public health investigation precluded researchers from being able to do the type of testing needed to confirm this suspicion.¹¹

Even for those who avert death, the body’s response to food poisoning can cause lasting damage. This is a lesson that Stephanie Smith of Minnesota learned the hard way.¹² Stephanie was twenty-two when she started experiencing stomach cramps. She managed to make it through her workday, teaching children to dance, before landing in the emergency room. Once there, her speech became slurred, her kidneys failed, and she started suffering from seizures. At the advice of doctors, her mother consented to Stephanie being drugged into a coma and flown to a Mayo Clinic hospital. Stephanie survived, but her cognitive abilities remain permanently impaired. She is unlikely to ever dance or walk again.

Doctors eventually identified E. coli in a hamburger she had eaten at a family barbecue as the source of her troubles. The meat was traced to Sam’s Club, which had purchased the hamburgers from Cargill. But Cargill was not the producer of the contaminated meat. It was a middleman. Cargill is a food processing behemoth. Among the ways it makes money is by acquiring, processing, and packaging beef from various slaughterhouses, which it then sells to retail middlemen such as Sam’s Club. Because the meat is mixed together, even Cargill was not able to readily identify the slaughterhouse that had actually been the source of the tainted meat.

Stephanie’s family sued Cargill. After a couple of years of litigation, the company agreed to settle the case for an undisclosed amount. Cargill never publicly accepted that it was at fault for Stephanie’s illness. Settling without a trial kept the decisions that had allowed the contaminated burger to reach Stephanie hidden from public view.¹³ Exceptional investigative reporting by Michael Moss is the only reason Stephanie’s case got any public attention. And even Moss, a Pulitzer Prize–winning journalist, struggled to overcome government resistance and other challenges in his quest for answers. He eventually learned that the burger that paralyzed Stephanie “had been an amalgam of various grades of meat from different parts of the cow and from multiple slaughterhouses as far away as Uruguay.”¹⁴ In a world of middlemen, some answers remain elusive. Accountability, both legal and moral, suffers.

Middlemen and long intermediation chains are not directly responsible for most foodborne illness. Cargill didn’t want Stephanie to be ill. None of the middlemen that helped distribute the tainted sprouts in Germany bore any ill will toward those who bought their products. In fact, given the legal risks, most middlemen want the products that they help distribute to be free from harmful contaminants.

Yet middlemen need not be evil, or even indifferent to harm, to be part of the problem. Although there are a growing number of efforts to improve the traceability of food from origin to consumption, these efforts are costly and remain far from perfect. Recent research suggests most models of how to implement tracing systems still fail to capture the messy realities of how food moves through the economy.¹⁵ The aggregating, mixing, and subsequent splitting that often happens at multiple nodes along the way make actual tracing almost impossible much of the time. This is why even a large, sophisticated middleman like Cargill had such a hard time tracing the origins of the meat that moved through its own processing plant.

Long and complex supply chains are one of the defining features of the middleman economy. The way meat from cows slaughtered across the United States and Uruguay ended up potentially mixed together in hamburgers for sale at a Sam’s Club in Minnesota exemplifies how today’s supply chains work. They often accrete slowly and seem to create efficiencies as they grow and evolve. But, too often, the complexity also leads to fragility, unknowns, and a dearth of accountability. E. coli outbreaks that spread further and last longer because of traceability problems are just one example of the bad things that can result.

Another common challenge is that people end up buying food produced in ways that they would find unethical—if they actually knew what was going on. Yet because large middlemen and complex supply chains blind consumers to unpleasant realities, they continue to support practices inconsistent with their values. One example causes me particular pain.

THAT CHOCOLATE BAR

I love chocolate. It takes self-control for me to resist stealing cheap treats from my kids’ Halloween baskets, and I don’t always succeed. For a long time, I was at peace with this guilty pleasure, as I lived under the sheltered delusion that the negligible effect on my health was the primary human impact at stake.

I have since learned otherwise. The two countries that grow the most cocoa, Cote d’Ivoire and Ghana, are infamous for allowing child and forced labor, poor working conditions, and extremely low wages. In 2001, growing concerns about these conditions motivated the U.S. House of Representatives to pass a bill that would have given the Food and Drug Administration $250,000 to develop “slave-free” labeling requirements for chocolate products.¹⁶ The legislation was abandoned only because Hershey, Nestlé, Mars, and the other chocolate companies fought back. With the help of two trade associations looking out for their collective interests, they hired a team of lobbyists, including former senator Bob Dole, and succeeded in defeating the bill.

At first, these companies may appear to be makers, not middlemen. And it is true that in mixing cocoa from West Africa with sugar, milk, and other ingredients, shaping those confections into bars, and putting them in pretty wrappers, they are very much producing something new. Yet much of the value they provide comes from their ability to procure ingredients from around the world and then deliver finished products to retailers and consumers. These companies thus embody an important and pervasive feature of today’s middleman economy: actors that are both makers and middlemen. Without belittling the other functions that they play, recognizing chocolate giants as part middlemen is key to mapping the increasing number of nodes involved in production and the reasons we are often so disconnected from and ignorant of the people and places behind the goods we consume.

One way giant chocolate middlemen helped secure their victory on Capitol Hill was by promising they would do better. In 2001, along with members of Congress and nonprofits devoted to eradicating child labor and improving working conditions, these companies entered into an agreement that was supposed to usher in a new era. The agreement included numerous and detailed provisions for reducing and eventually eradicating troubling labor practices in chocolate supply chains. The heads of Nestlé, Hershey, and Mars all signed the document, signaling their purported commitment to meeting these goals.¹⁷

Two decades later, child labor remains rampant. The initial draft of a 2020 report funded by the U.S. Department of Labor and conducted by researchers at the University of Chicago found widespread problems in Cote d’Ivoire and Ghana, which continue to produce roughly 60 percent of the world’s cocoa. According to the draft report, the proportion of children (ages 5 to 17) in the area involved in the production of cocoa actually increased from 31 percent in 2008–09 to 41 percent in 2018–19.¹⁸ The last published study, which the Department of Labor conducted in conjunction with researchers from Tulane in 2015, also found an upward trajectory. According to that report, in Cote d’Ivoire and Ghana alone, 2.3 million children were working in cocoa production, and more than 2 million of those child workers faced hazardous working conditions.¹⁹ Sexism also appears to be widespread, with woman providing more of the labor while receiving far less compensation for their efforts.²⁰

Extensive on-the-ground research conducted by the Corporate Accountability Lab sheds further light on the problems endemic to cocoa production today. A report summarizing the Lab’s research and findings suggests most cocoa farmers are paid far too little for the goods they produce. This results in rampant poverty in addition to accentuating the pressure on farmers to hire the cheapest workers possible, such as children and those forced into labor. Most chocolate middlemen also remain unable to identify the origins of much of the cocoa they use. According to the Washington Post, in 2019, Mars could trace the origins of only 24 percent of its cocoa. Hershey and Nestlé did somewhat better, but both could trace less than half of their global cocoa supply to the farms where that cocoa was grown.²¹ Godiva is even more derelict. A cohort of nonprofits gave Godiva the “Rotten Egg Award” before Easter 2020, “for failing to take responsibility for the conditions in which its chocolates are made, despite making huge profits” and providing almost no information about the origins of the cocoa in its products.²²

According to the Corporate Accountability Lab, one reason the past two decades yielded so few improvements is the proliferation of third-party certification schemes.²³ Rainforest Alliance, Fairtrade International, Fair Trade Certified, and Cocoa Life are among the third parties that purport to “certify” cocoa.²⁴ There is some evidence suggesting that when cocoa is certified, farmers do earn a slightly higher income from selling it. Nonetheless, when Corporate Accountability Lab researchers engaged in extensive consultations with the farmers, they found “virtually imperceptible differences between certified and uncertified farms in terms of living incomes, poverty, education, access to healthcare, farmer bargaining power, or access to information.”²⁵

Buying “certified” cocoa allows large chocolate companies to signal virtue, creating a semblance of concern for the well-being of those who labor to produce the cocoa on which they depend. But as reflected in the persistence of problems on the ground and the widespread ignorance among chocolate companies regarding the true origins of the cocoa they use, efforts to tack on labels without shortening supply chains rarely suffice to bring about meaningful accountability.

Concerned consumers and nonprofits have sought other avenues for promoting transparency and accountability. In a series of lawsuits, consumers sued Nestlé and other major chocolate middlemen. The consumers claimed they never would have bought the chocolate had they known more about the conditions of the laborers farming the cocoa that chocolate contained, so, under California law, the companies had an obligation to disclose this information to prospective buyers. As someone who loves chocolates and abhors child labor, this seemed like a reasonable claim to me.

The court disagreed. The federal court that issued the final ruling in the suit acknowledged that “ch...

Table of contents

• Cover
• Title Page
• Dedication
• Contents
• Preface: The Quiet Transformation
• Part I: Tracing Food from Farm to Table
• Part II: The Rise of the Middleman Economy
• Part III: The Dark Side
• Part IV: Direct and the Path Forward
• Conclusion
• Acknowledgments
• Notes
• Index
• About the Author
• Copyright
• About the Publisher