The economics of sport

October 30, 2010

Sport as we know it today is a product of modern industrialised societies. It was in Great Britain, the cradle of the industrial revolution, where most sports began to be codified towards the close of the nineteenth century. The Duke of Wellington claimed that the Battle of Waterloo had been won on the playing-fields of Eton – in the days of Empire, sport was how the ruling classes trained their sons for their future roles in the army, industry and running the colonies. In the elite British schools the cult of sports, especially rugby and cricket, was given more emphasis than the academic curriculum. Actually, there is another theory which claims that sport was really invented to stop young boys masturbating, but I don’t think we’ll go there.

Initially the biggest conflict was between amateurism and professionalism, as sport, which had begun as the preserve of the upper classes, gradually became open to the working class participation. The sport/media complex has thrust sport into a dominant position in the twenty-first century.  We seem to back be to the Roman idea of bread and circuses. But with globalisation, television coverage, the internet, sports goods manufacturers, corporate sponsorship and government involvement, the reach and impact is far wider than the Romans could have ever have conceived.

Sporting salaries can always be relied upon to provoke outrage. It proves once again that what capitalism rewards is not merit but value added. So much depends on what sport you play and when you were born. Football has no more intrinsic merit than rowing but it does have so much more drawing power. Technology has transformed what sportsmen earn, enabling these modern gladiators to leverage their talent. The ultimate example of this has to be Tiger Woods, who has earned over a billion dollars in his career. Woods is also an example that wealth creation need not be a zero-sum game. He may have earned a lot of money, but that doesn’t mean there is less money for the other players. Quite the contrary; Woods has made the cake bigger for everyone. His recent hiatus was a disaster both for the game and his competitors.

When considering the economics of sport Europe and the United States offer a fascinating contrast. The American sporting model seems almost socialistic. I suppose this is because living under the cutthroat capitalism that is so prevalent in the USA is a bit tiring and they need a break from it. American sports leagues are basically cartels which exclude competition. Professional sports are the only private businesses in the United States that are largely exempt from anti-trust laws. They don’t compete with anyone else outside their borders. The leagues are closed; there is no promotion or relegation. This gives the owners a lot of economic stability. All of the teams have to participate in a revenue-sharing scheme designed to make sure the less wealthy teams get a share of the income earned by the richest teams. The other dominant aspect is the equality. There is a salary cap which limits the total amount a team can pay its players. The draft means that the worst teams, the teams that would have been relegated under the European system, can pick the best college players. How do Americans justify this flirtation with socialism? How can they reward failure? Ayn Rand must be turning in her grave. Well, the argument I have heard to justify this apparent betrayal of free market values is that sport is different to ordinary industries. There is an inherent value in a competitive balance that is necessary to produce the excitement and drama that make sporting contests so special. Sport, unlike trade, is a zero-sum game. Only one team can win and it would be boring if the same teams always won. However these economic policies mean that there is a dearth of truly great teams, what the Americans call dynasties. There is a joy in seeing a team reach maturity – they become part of sporting lore. This is one trade-off you face: greatness or competitiveness.

One other curiosity is the way American franchises sometimes move to other cities. This leads to some anachronistic names. There is no lake in Los Angeles but the Californian team’s name is a leftover of when the team was based in Minneapolis, which is on the coastline of the Great Lakes. And if you can’t imagine the Mormons playing bebop, or doing a bit of free improvisation, that is because the Utah Jazz get their name from New Orleans, the original home of the franchise.

The situation in Europe’s football leagues is much different and parity is not taken seriously by anyone. A few statistics should suffice. In England just four teams have won the Premiership since it was created in 1992 – Manchester United, Blackburn Rovers, Arsenal, and Chelsea. In Spain the situation is similar; Real Madrid and Barcelona have combined for 22 of the last 26 La Liga titles. To put this into perspective 13 different teams have won the Superbowl since 1990. It is true that 13 different teams have won the UEFA Champions league since its current format came into being in 1992. This seems to show that the big clubs have just grown too big for their national leagues. A European Super League has been broached a number of times but there would be huge outcry from the teams that were left out.

The most controversial area is ownership. While there are undoubtedly some colourful characters in US sport, they are nothing compared to what we see in England and Spain, especially the former. There may be a ‘Fit and Proper Person’ test, but as Tom Bower has pointed out, “No other country allows the crown jewels of their major sport to become the uncontrolled playthings of investors whose backgrounds remain untested.” There are a number of competing ownership models in Europe but I have to say I find none of them particularly convincing. England is big on plcs. The good aspect is the stock market demands much greater transparency but they are always vulnerable to takeovers. In Spain the big two are owned by their members. This has many positive features and many English fans envy this system. But I really don’t trust the Chairmen. They are spending other people’s money and they generally find it very difficult to resist the temptation to try to buy instant success and ignore the long-term economic consequences. I am a Real Madrid supporter but I have always felt a bit uneasy about Perez’s economic model. When Real began to be studied at the most prestigious business schools, I thought this can only end badly. Didn’t Enron use to be analysed in this way? And according to the new president Sandro Rosell, Joan Laporta has left FC Barcelona mired with a debt of $563 million. Of course these clubs are too important to fail and I don’t think either of them will be having a fire sale anytime soon.

And most recently we have had these leveraged buyouts. I do pride myself on all the things I have learned about economics over the last few years, but this is one area which has me utterly baffled. The idea that you buy a club by saddling it with debt has always struck me as rather perverse. I suppose the new owners may think the club is badly run and that they will be able to pay off the debt with the increased revenues they generate. I remain sceptical. The most famous example of an LBO is the takeover of Manchester United by the Glazers. The club has had to pay £400m in interest, bank fees and charges, yet the total debt now stands at more than £700m. I am not really sure what motivates the American owners. What makes many people put their (or other people’s money) into a football club? Maybe the Glazers think that in the long run the Manchester brand will be very valuable. Technology could play a key role here. Faster broadband speeds may enable them to own their rights and stream games to fans.

Football is a peculiar business. Many clubs are not run as businesses but for other motivations. Owning or presiding over a club is a massive ego trip and a way of promoting yourself or your political or business agenda. One needs to look no further than Florentino Perez and Joan Laporta.

These debates are not going to go away. I have the impression that if Genghis Khan were brought back to life and became chairman of a club, the fans would vote with their feet. What I mean is that as long as the man from the Mongolian steppes put his money on the pitch, the supporters would not be too worried where or how he had obtained it. Sport has become highly commercialised but I have no particular nostalgia for the golden days of the amateur sportsman. It may not always be ethical, but the competition to succeed among professional sports stars has given us a wonderful spectacle. All I can say is: Show me the money!

Advertisements

Sports quotes

October 30, 2010

Some people think football is a matter of life and death—I can assure them it is much more important than that.  Bill Shankly, Liverpool FC manager  

Talent wins games, but teamwork wins championships. Michael Jordan

Boxing is a lot of white men watching two black men beat each other up. Muhammad Ali

Themost important thing in the Olympic Games is not winning but taking part….The essential thing in life is not conquering but fighting well. Pierre de Coubertin

Golf is a good walk spoiled. Mark Twain

Winning isn’t everything: It’s the only thing. Vincent Lombardi, NFL coach.

You have two sides, one out in the field and one in. Each man that’s in the side that’s in goes out, and when he’s out he comes in and the next man goes in until he’s out. When they are all out, the side that’s out comes in and the side that’s been in goes out and tries to get those coming in, out. Sometimes you get men still in and not out. When a man goes out to go in, the men who are out try to get him out, and when he is out he goes in and the next man in goes out and goes in. There are two men called umpires who stay all out all the time and they decide when the men who are in are out. When both sides have been in and all the men have out, and both sides have been out twice after all the men have been in, including those who are not out, that is the end of the game! A definition of cricket

A lifetime of training for just ten seconds. Jesse Owens

All hockey players are bilingual. They know English and profanity. Gordie Howe

Serious sport has nothing to do with fair play. It is bound up with hatred, jealousy, boastfulness, disregard of all rules and sadistic pleasure in witnessing violence. In other words, it is war minus the shooting. George Orwell

These are my new shoes. They’re good shoes. They won’t make you rich like me, they won’t make you rebound like me, they definitely won’t make you handsome like me. They’ll only make you have shoes like me. That’s it. Charles Barkely,  basketball player.

Sports do not build character. They reveal it. Heywood Broun

Some people believe that if only we didn’t have football, the violence would stop. They think that football, like violent movies, provokes aggression, which would find no expression without it. This is a somewhat puritanical attitude, as if aggression, like sexual desire or any animal desire, were simply something one should suppress, especially, of course, in others. I would take the opposite view: aggression needs an outlet, and the more it can be ritualised, in sport, or theatre, or anything else that provides a substitute for actual murder, the better. Ian Buruma, writer.

 


Price controls Venezuelan style

October 30, 2010

No more nasty capitalist prices

A while back I did a piece on the economic policies of Hugo Chavez. So I was interested to see this poster from a market in Caracas that was posted on economist Greg Mankiw’s website. Hugo and his boys sure know the fair price.


My media week 31/10/10

October 30, 2010

On the Edge website Lera Boroditsky argues that her research does indeed show that language shapes our thought. People who speak different languages think differently and that even flukes of grammar can profoundly affect how we see the world.

Radio 4’s The Media Show features an interview with former newspaper proprietor Conrad Black, a look at I, The Independent’s cut price quality newspaper and a discussion about newspaper paywalls.

Behavioural economics has repeatedly been telling us how badly consumers are at making rational decisions. In this article Matt Ridley argues that civil servants are not immune from their own biases: Studying the Biases of Bureaucrats

And finally The Onion has a video explaining how Alcoholics Anonymous has ruined the lives of many families: AA Destroying The Social Lives Of Thousands Of Once-Fun Americans


Adam Smith and the world he didn’t make

October 24, 2010

Adam Smith was born in Kirkcaldy in 1723. There were two important events that help explain the world into which he was born. The first was The Act of Union between England and Scotland in 1707. This Union was an important factor, both in the rapid rise of British power as well as the Industrial Revolution, which would make Britain the richest country in the world. Simon Schama called it Great Britain plc. And the Scottish economy also thrived and there was also was an intellectual flourishing known as “The Scottish Enlightenment”, in which thinkers like Smith and David Hume helped Scotland punch way above its weight in medicine, science, philosophy and letters. The second event was the incipient consumer revolution. There was a gradual democratisation of consumption as the middle classes and working classes sought to emulate the aristocracy.

 

Smith actually studied moral philosophy at university but his central ideas were to form the basis of modern economics. Everyone who came after the great Scot had to refer to him – either to praise or damn him. Smith had a lot of interesting ideas but I can only list a few here. The idea of the invisible hand is surely his most famous contribution. The idea that through people’s self-interest a generally positive outcome for society could emerge is highly counterintuitive. I am a believer in spontaneous order but it is not easy to sell this idea. The beautiful paradox is that under capitalism where there is no central planner bread arrives at the bakery. On the other hand under communism, which liked to plan down to the last detail, the bakery shelves would often be empty. If you have a more centrally controlled system, you don’t abolish human interest. We have this romantic idea of people pulling together for the common good. Smith was very sceptical about this. For Smith the division of labour was fundamental. Specialisation is the key to generating wealth. The wider the market, the greater the advantages of the division of labour are. Smith described our tendency to “truck barter and exchange.” Unlike most people of his time, he saw that trade was not a war- both sides could end up winning. Wealth was not accumulating land, gold and silver; it was in the great variety of goods that people traded and consumed. There are so many other things I could talk about – the importance of creating a legal framework, property rights etc.

In Germany they talk about Das Adam Smith Problem. This is seen as the mismatch in the ideas Smith espoused in his two great works – The Theory of Moral Sentiments and The Wealth of Nations. I see no contradiction. Smith believed in markets as an efficient way of delivering goods to people. That doesn’t mean that we have to be rabid materialists running up huge debts buying every kind of consumer good.

Smith was not some kind of demented cheerleader for capitalism. He could see many problems too. For example he recognised some of the dehumanising effects of the division of labour. He was also notoriously cynical about the intentions of capitalists, who he knew would engage in unethical behaviour given the chance. And he was right to be suspicious. Capitalists may talk about their love of free markets but they love having a monopoly, subsidies, import protection, tax relief, corporate welfare and any other favours that they can get. Smith then believed in capitalism but not capitalists. Completion is what best serves a country but this can be damaging to individual companies, who then try to protect themselves.

Adam Smith is one of my intellectual heroes. I like to compare him to Jean-Jacques Rousseau, a contemporary of his. Their worldviews are profoundly different. They reflect what Thomas Sowell has called a “conflict of visions.” Rousseau believed in the perfectibility of man. He believed that the noble savage was corrupted by society. Rousseau saw self-interest and development as the cause for social inequalities. Inequalities, that Rousseau believed, did not exist naturally. Smith’s perspective was much more pragmatic.  I think that if you want to understand the world as it really is, Smith is by far the better guide.

I sometimes wonder what Smith would think if he were alive today. After seeing what some of his followers were like Karl Marx reportedly said: “I am not a Marxist.” Maybe Smith would have similar reaction if he saw our twenty-first century world. What I have tried to show is that he was not a dogmatic capitalist. What I love about Smith is his glorious cynicism. I also think his ideas are remarkably prescient. But there is undoubtedly an idealistic element to them. As we can see, many governments only pay lip service to free markets. If you look at trade, you see the United States has some 12,000 tariffs in place. I passionately believe in free trade but I have to admit that it is a utopia. When we are protected from imports, we lose out but the amount seems small. However, the beneficiaries stand to gain a lot and it is in their interests to lobby hard. And, of course, when all these measures are added up, we do end up paying a lot more. Businessmen are very adept at conflating their interests with those of the whole nation. Unfortunately this sophistry appears to have a lot of credence with the electorate, who often support these policies. I would like to live in a world that was closer to Smith’s vision. Perhaps it is just impossible. The best we can hope for is to increase or at least maintain economic freedom, which is the most effective recipe I know for a prosperous and well-functioning society.


Don Boudreaux’s letters

October 24, 2010

Don Boudreaux teaches economics at George Mason University. In his free time he blogs at Café Hayek. And he also enjoys writing letters expounding his views on economic questions. These letters, which deal with common economic fallacies, are usually written to newspaper editors. I don’t always agree with his opinions but I do enjoy his combative style. Here are a few examples:

In your e-mail seeking to enlist my opposition to a policy of allocating water by market pricing, you write: “Moreover, because most residential water consumption goes towards essential uses like drinking, cooking and sanitation, consumer demand for water is unlikely to change regardless of price.”  That is, every drop of water is so essential to every household that even substantially higher water prices will not reduce residential water use.

But then you say “water pricing is most likely to negatively affect low-income consumers.  Raising water prices could mean that some households are denied access.”  That is, higher prices for water will cause low-income consumers not only to use less water in their homes but to stop using water in their homes altogether.

So which is it?  Will market pricing of water affect consumer demand or will it not?

In fact, neither of your scenarios is remotely plausible.  If your first scenario were realistic, then bottled-water suppliers such as Evian could double, triple, or even quintuple their prices without reducing the demand for their products.  If your second scenario were realistic, low-income consumers would prefer to lose all access to water in their homes rather than spend even moderately less on clothing, cell phones, and even pets.

            __________

Sen. Bill Nelson claims that “The ultimate answer to America’s energy needs lies not in oil, but in the rapid development of alternative fuels

How in the world does Mr. Nelson divine this alleged fact?  Does he have expert insight into the full costs and benefits of developing and producing non-fossil fuels?  Has he displayed a unique talent at predicting changes in the technologies that are used to extract petroleum?  Hardly.

After a short stint in the Army, Mr. Nelson spent all of one year (1970) in the private sector (where he practiced law).  From 1971 until today he has worked exclusively in politics.  He has neither experience in the energy industry nor any record of entrepreneurship.  For nearly 40 years – well over half of his life – he’s devoted his career to spending other people’s money.  In short, he has no basis for making this claim.

Mr. Nelson’s “answer to America’s energy needs” deserves no more attention than does any such prophecy issued by a Ouija board or by a witch doctor reading the entrails of a rooster.

As my friend Wilson Mixon, of Division of Labour, points out, these latter methods of prognostication might not be efficient, but at least they – unlike Sen. Nelson – are reliably unbiased.

__________

Attempting to defend intrusion by antitrust bureaucrats into Google’s business operations, Charles Rule writes that “Ironically, many of the most ardent defenders of Google are the same individuals – such as Eric Schmidt, Google’s CEO who was an executive at Sun and later Novell – who devoted so much time, money and effort to pushing the frontiers of the law and government regulation against Microsoft a decade ago” (“‘Trust Us’ Isn’t An Answer,” Sept. 17).

Nothing about this fact is remotely ironic.  Business executives use antitrust to throttle their competitors: businesses accused of antitrust violations point out (almost always rightly) that they are guilty only of unusual success at pleasing consumers, while businesses that are either too lazy or too incompetent to excel in the marketplace turn to antitrust legislation for relief from the rigors of competition.

The real irony is that, for its entire 120-year history of being used to stymie competition and the forces of creative destruction, antitrust regulation continues to be portrayed as pro-competitive.

__________

John Hofmeister builds his case for a U.S. industrial policy on a foundation of falsehoods

The most notable falsehood is Mr. Hofmeister’s assertion that American manufacturing is faltering.  In fact, America remains the world’s leading manufacturing country, one whose manufacturing output continues to increase.  For example, in inflation-adjusted dollars, the value of U.S. manufacturing output in 2007 was 8 percent higher than it was in 2000, 69 percent higher than it was in 1990, and 184 percent higher than it was in 1980.

And while it’s true that the Chinese will one day produce more manufacturing output than do Americans, that eventuality is hardly surprising given that China is home to one-sixth of the world’s population.  Moreover, the fact that manufacturing outputs in newly industrializing nations such as China are growing faster than American output no more means that American manufacturing is in poor health than does the fact that a two-year-old girl is growing faster than her ten-year-old brother mean that the brother is shrinking, is in poor health, or is in need of a ‘height’ policy.

__________

V. Nagarajan suggests that turmoil on Wall Street combines with the fact that most winners of the Nobel Prize in Economic Science are Americans to reveal that economics is a discipline unworthy of Nobelity

While some laureates are indeed undeserving of such high distinction, Mr.Nagarajan’s presumption that Uncle Sam’s economic policies are fashioned after the advice of distinguished economists is unwarranted.

One of America’s greatest economists is my colleague James Buchanan, winner of the 1986 Nobel Prize.  Jim’s life work shows that government officials seek office, not truth – and that success at their venal endeavor too often requires not merely ignoring sound economics but positively fleeing from it as if it were a fast-expanding cloud of anthrax spores.

__________

Your report on Venezuela’s new state-owned cafes overlooks the many ill economic consequences that will be unleashed by these government enterprises and by the below-market prices that they so proudly charge

For example, while it might be true that “The prices are intended to offer a respite from the country’s rampant inflation,” in fact these below-market prices will fuel Venezuela’s inflation even further.  The reason is that Hugo Chavez’s government will almost certainly get the funds it needs to subsidize these cafe sales by using the same method that it increasingly employs to get the funds it uses for its slew of other boondoggles: printing more money (i.e., inflation).

Not even Oliver Stone movie heroes can suspend the laws of economics.

            __________

Julie Sensat Waldren eloquently explains the difficulties of “being green”

For example, consumers cannot possibly know how the environmental impact of disposable cups compares with that of ceramic cups whose production consumes lots of energy.

Contrary to a profusion of claims by naive pundits, the economy is far too complex for any person or even a committee of geniuses to trace the full environmental consequences of any of the hundreds of ordinary decisions consumers and producers make daily.

Economists since Adam Smith have taught that the best we can do is to have well-defined property rights that owners use and exchange as each judges best.

The unplanned result isn’t an earthly paradise, but it’s vastly superior to what emerges when people consciously aim to bring about a specific outcome in the overall pattern of economic activities.    

__________

William Borah unwisely calls for New Orleans to be rebuilt according to “a master plan with the force of law, a plan that the politicians as well as the citizens would be legally required to follow”.  Mr. Borah and all New Orleanians should heed the wisdom of the late Jane Jacobs, one of history’s greatest students of cities. Ms. Jacobs described a city’s “intricate order” as “a manifestation of the freedom of countless numbers of people to make and carry out countless plans” – and she warned that master plans of the sort that Mr. Borah admires will only suffocate this vital source of any city’s life.

__________

To reduce interest-groups’ political influence, Michael Scheinberg proposes “A complete ban on lobbying by lawmakers and government officials for five years after they leave government service and a prohibition against political contributions by industry groups.

Such a ban can’t work. Lobbying is as much a consequence as a cause of a behemoth state that takes from the politically unorganized and gives to the politically organized. To imagine that politicians who possess such power – and the shamelessness requisite to exercising it – will become stewards of the public interest merely by imposing formal restrictions on lobbying is a childish fantasy.

__________

Russ Wise wants insurance rates in Louisiana to be set by Uncle Sam. Mr. Wise’s complaint is not that current rates don’t reflect the cost of supplying insurance. Instead, when he writes that “a federal agency could set rates on a more fair and equitable basis, spreading risk among tens of millions of people instead of just a few thousand,” he’s complaining that residents in places such as Wyoming and Vermont are not forced to subsidize insurance coverage for residents of the hurricane- and flood-prone Gulf Coast. Contrary to his assertion, however, there’s nothing fair or equitable about such forced subsidization. In fact, it would be grossly unfair and inequitable – as well as economically foolish – to force people living in places less prone to flood and wind damage to subsidize people who choose to live on the Gulf Coast.


My media week 24/10/10

October 24, 2010

If you are interested in intellectual property issues I recommend The time is up, publishers. Book piracy is about to arrive on a massive scale.  And in Prospect Tom Chatfield looks at the e-book revolution and asks Do writers need paper?

The BBC/British Museum collaborative project A History of the World in 100 Objects finally finished this week. The final object, which was chosen by the listeners, was a Solar-powered lamp and charger.

On Reason.tv  Zack Lynch looked at How Neuroscience Will Change the World.

This article by Brendan O’Neil looks at the Chilean miners from a different angle – the role of the therapy industry: Chile: solidarity wins out over psychobabble.

Finally The Daily Mash has THATCHER GAINING STRENGTH FROM NATION’S MISERY.