One of the oddities of sports economics is that American leagues are generally highly regulated, even socialistic, while the Europeans are unsentimental adherents to ruthless free markets. Add in the theorem of a Nobel laureate and it only shows even more how the economics of sport defy rationality.   

 

NFL Commissioner Roger Goodell and quarterback Andrew Luck, the first pick of the 2012 NFL Draft.

NFL Commissioner Roger Goodell and quarterback Andrew Luck, the first pick of the 2012 NFL Draft.

By the time Andrew Luck graduated in 2012, he had broken all records as Stanford’s quarterback and was the hottest property in American football. His reward was to be indentured to the struggling Indianapolis Colts for four years. The annual NFL Draft gives the first pick of the new players to last year’s bottom team. The Colts had propped up the league the previous season, and they didn’t hesitate to requisition Luck.
To European sensibilities, this system seems bizarre. Imagine if the young Steven Gerrard had been told that he couldn’t sign for his beloved Liverpool, but had to serve time with some feeble team at the other end of the country, like Swansea, say, or Hull. Not only would this strike most non-Americans as illegal and immoral – it would be more than human nature could bear.
It’s tempting to compare the collectivist regulation of American sport with the capitalist spirit that operates in the rest of the sporting world. Isn’t it ironic, commentators sometimes quip, that the world bastion of economic competition has centrally planned sporting institutions, while the more socialist countries of Europe subject their sports to the rigours of the free market? (See the recent comment from The Atlantic.)
However, this does little justice to the real sporting differences between America and other countries. In truth, spectator sports in the U.S. have always been unapologetically commercial. American professional teams are money-making enterprises. In Europe and elsewhere, the big clubs stand on top of “pyramids” built out of amateur sports clubs, and are traditionally governed by the same bodies, such as the Union of European Football Associations (UEFA) or the England and Wales Cricket Board (ECB). But American pro sports teams have always had private owners. Bodies like the NFL and the NBA are associations of these owners, and have no connection with amateur sport. (Have you ever noticed that American professional sports, with the possible exception of basketball, are just too hard for ordinary people to play? In Britain more than 2 million people play in an organized football match every week.)
It’s the American owners’ associations that impose the draft system, along with further measures like transfer fees, salary caps, and so forth. The rationale is to maintain a competitive balance between teams, lest the paying public lose interest at too many one-sided matches. The American courts (unlike their European counterparts) have generally been lenient about these restrictions on the players’ rights to trade their skills, taking the view that they are justified by the needs of the sport.
So why don’t bottom-half teams lose their final games, to improve their position in the upcoming draft – why not “Suck for Luck,” as some NFL teams’ fans urged towards the end of the 2012 season? Apparently this isn’t a serious issue in the NFL, but in basketball the NBA has taken steps to discourage “tanking” by distributing draft picks among the lower teams by lottery – so they can’t be sure that coming bottom last will help. The Australian Rules Football authorities have an even more ingenious solution. They determine draft picks by a complex formula based on a number of factors – and then keep the formula secret, to stop clubs gaming the system.
Curiously, there is little evidence that the draft and allied devices really do anything to enhance competitive balance. The win-loss statistics have never changed much when the rules have been relaxed to allow greater player freedom. This might look paradoxical, but there is an elegant theoretical explanation – indeed, so elegant that it won Ronald Coase the Nobel Prize for economics in 1991.
Coase’s Theorem generalizes an insight first used to explain baseball player trades (by Simon Rottenberg in “The Baseball Players’ Labor Market,” published in the Journal of Political Economy in 1956). Let us enter the weird and wonderful world of sports economics. According to Coase’s Theorem, the ownership of legal rights never makes any rational difference to their economic deployment. An example will make the idea clear. Suppose WindCo wants to build a wind turbine near Jane’s house. Jane goes to court, arguing that they have no right to make noise in her space. WindCo responds that it’s a free country for normal amounts of noise. It looks like the court will decide whether the turbine goes up, right? No. According to Coase’s Theorem, the legal ruling won’t make any difference to the skyline.
This might seem illogical, but look at it like this. There must be some amount of profit WindCo will make from the turbine – call it £X per annum. And there must also be a sum that signifies how much Jane wants to avoid the noise – £Y per annum. The turbine’s being built depends only on whether X is bigger than Y, not on what the court says. Even if the court finds for Jane, the turbine will go up if X is bigger, for then WindCo will buy Jane off and still make a profit. And even if the court finds for WindCo, there won’t be a turbine if Y is bigger, for then Jane will be prepared to buy Windco off. The court can decide who has to buy off whom, but not whether the turbine goes up. (What if Jane is too poor to pay? Concentrate. We’re doing economics here. No bleeding hearts. If Jane is poor, the sum Y that she’ll be ready to pay to avoid the noise will be smaller, and the turbine more likely to go up. You might think that’s a shame, but it doesn’t affect the analysis.)

Now let’s do it with football players. Suppose that Andrew Luck is worth $Y per annum to the Indianapolis Colts owner, but a larger $X to the owner of a big city team, where he will put more bums on expensive seats. Then it doesn’t matter if Luck is initially drafted to the Colts. Economic rationality will direct him to the big city club, who will be ready to offer the Colts more than they themselves can earn from Luck’s services. (In fact, Luck just finished his third season with the Colts and has done very well, leading his team to a winning record and a spot in the playoffs in each season. I can’t help that. We’re doing economics here. He may still be with the Colts in practice, but it’ll never work in theory…. And as it happens, the Indiananapolis Colts are a relatively prosperous team – their 2012 wooden spoon was an anomaly – who make good money out of Luck’s talents.)
Suppose we do have a genuinely poor club, and it does sell on its fancy draftees to its richer competitors. Won’t this still end up helping competitive balance overall? After all, these sales themselves will be a source of income, which the poor clubs can then use to boost their playing strength. But we’re going round in a circle. The original point was that the owners of poorly supported clubs will make more money by pocketing their draft windfalls than by spending them on high-end players who won’t boost gate receipts enough. So, while the draft system may indeed transfer some revenue to the poor clubs – maybe even helping them to stay in business – it won’t have the intended effect of making them stronger on the field.
Of course, all this assumes that the owners of professional sports teams are after money and not glory. And even by the standards of economics that’s not very realistic. It may have been different in the early days, but now a large proportion of U.S. pro teams are rich men’s playthings. Of the current owners of major league teams, 34 are on the Forbes 400 list of the richest U.S. billionaires. When property mogul Donald Sterling was forced to sell the Los Angeles Clippers after being caught making racist remarks, it was the recently-retired Microsoft chief executive Steve Ballmer who forked out $2 billion to take the team off his hands. These guys aren’t going to peddle their draft picks for a few extra bucks. What they want is to rub shoulders with stars on the winners’ platform.
What about the fans, whom this whole spectator circus is ultimately supposed to benefit? In the short term, rich sugar daddies can seem to be on their side. Instead of trying to drain every last cent out of their franchises, they will boost their teams’ finances and invest in winning. But sugar daddies can be fickle, and relationships can turn sour.
For example, H. Wayne Huizenga is a capitalists’ capitalist. Starting with a single garbage truck in 1968, he spent the next three decades building up (and then selling) three successive billion-dollar businesses (Waste Management, Blockbuster Video, AutoNation). He is also a sports enthusiast, who bought the Florida Marlins baseball team in 1993 and backed them all the way to a World Series victory four years later. But that winter he fell out with the Miami-Dade county authorities, and in a fit of pique sold off all his victorious players. In 1998 the Marlins won just 1/3 of their games and became the only World Series champions to come bottom of their league the following year. If you are seduced by a rich suitor, you’ll do well to remember that he’s likely to lose interest in you one day.
The best deal for the fans undoubtedly is to own the club themselves. This is common, if not normal, in European soccer leagues. The German Bundesliga requires all clubs to be majority owned by their members, and the two Spanish giants, Real Madrid and Barcelona, have similar ownership structures. By contrast, fan ownership is almost unknown in America. Still, the single exception is instructive. The Green Bay Packers is the most successful team in NFL history. Although the population of their home town is only just over 100,000, they have finished the season as champions a record 13 times, most recently in 2010. (The Chicago Bears are next with 9.) There is little doubt that this anomalous success owes something to the 360,584 Packers owners spread throughout Wisconsin and the mid-West. No one owner is allowed to hold more that 4% of the shares.The advantages of fan ownership are obvious. All revenue is directed towards the future good of the team, and there is no question of a peeved tycoon packing up his toys and going home.
Sadly, there seems little hope of fan ownership spreading. If anything the trend is in the other direction. The English Football League used to proscribe dividends for club shareholders, but this rule was dropped when the Premier League was formed in 1992. And the American NFL positively requires that at least 30% of each franchise must be owned by a single individual. (The Green Bay Packers are protected by a special “grandfather” clause recognizing their historical idiosyncracy.)
If fan ownership is out, I think I’d rather have profit-maximizers than dilettante billionaires. Maybe the profiteers will sell on their top-heavy talent, in line with Coase’s theorem, and keep the small clubs small. But the European soccer leagues suggest that fans are prepared to tolerate a fair amount of competitive imbalance, and in any case there is always relegation – or the American equivalent of franchise relocation – to eliminate teams that really can’t cut the mustard. A more important point is that properly hard-headed entrepreneurs will want to do as well as they can for their clubs. After all, from their point of view, their clubs are capital assets. So they have a direct interest in enhancing their value, as opposed to exploiting them as a status symbol.
Once more, sports may point to a general moral. Communal ownership often works best overall, but short of that we will do better with proper competitive capitalism, not capricious plutocracy. It’s better to be ruled by the rational pursuit of profit than jerked around by the whims of the super-rich.

 

David Papineau is professor of philosopher at King’s College London and the CUNY Graduate Center. He tweets at @davidpapineauThis post first appeared on his blog about sport and philosophy: More Important Than That.