Sports, Fairness, Incentives, and why the Free Market wins

It seems that both the NFL and the NBA are headed towards lockouts. Indeed, this is common in American sports, in the last 25 years every major American sport has been disrupted by industrial action, and this threat reoccurs every time the collective bargaining agreement is about to expire. In Britain this could never happen. Why? And, more importantly, what does this say about government regulation versus the free market?

In both countries, the teams extract as much money as possible from fans, via the free market. Note that this has nothing to do with costs, the owners are not running a charity, and will not cut prices just because their costs fall. There is therefore a revenue “pie” – not a fixed pie, by any means, as revenues can and do change – but a revenue “pie” nonetheless, which the teams distribute: some they take as profits, some they spend on capital investment, some goes as player wages, etc. Naturally the players, individually and collectively, want as much of the pie as possible for wages, and the owners, individually and collectively, want as much of the pie as possible for profits. All this is common between the two countries.

But what is different is the legal framework. In England there is a free market, in the USA the government allows a monopoly union to get together with the owners and form a Collective Bargaining Agreement (CBA) which will set terms and conditions across the industry, regardless of what an individual player or team may wish to agree. And provided it fulfils certain conditions, this CBA cannot be struck down as a restraint of trade (what they call anti-trust in the US). So for example, the NFL CBA says you need to be 3 years removed from high school to play in the NFL, and so in 2004 no team could employ Maurice Clarett, even if they wanted to. In Britain this would be a clear restraint of trade.

Now let us give this situation the leftist critique. Free market exploits workers, advantages of capital, etc, so the English system will be unfair to the players. By allowing enforceable collectively bargained measures across the industry, the US system will strengthen the hand of the players, who will therefore get better terms and conditions, etc. Yet exactly the reverse happens: players in England get a higher proportion of revenues in salary, are not subject to a draft, and do not have fixed years under the control of a team before they become free agents. It seems that once again the free market works in practice, but not in theory.

What is missing from the leftist critique is incentives. Now that the owners have the ability to form a legally enforceable cartel, they will, and they will lock out the players until they can get terms suitable to them – in particular, every US sport has some version of a salary cap, that will prevent teams from spending more than some set amount, or at least penalise them if they do. Clearly this puts the owners at a far better situation than in England, where both a lockout and a salary cap would be illegal.

But what about the players? Don’t they have the incentive to fight back? Well, only to an extent. Because the union represents the interests of its membership (i.e. current players) and not the interests of all labour – in particular it does not represent the interests of future players. This is exacerbated by the fact that players’ careers are short, so their time horizons are much shorter – losing one season salary hurts the players much more than losing one season’s profits hurts the owners. As a result, the incentives will always cause the union to sacrifice the interests of future workers, to protect the interests of current workers. So for example, in MLB a player must spend 3 years at minimum salary, then 3 years at salary set by an arbitrator, before he can become a free agent. This helps the teams hugely, barely hurts you at all if you’re a veteran, hurts you a bit if you’ve been in the league 3+ years, and totally screws you if you’ve been in the league 3 years or less (which is the entire careers of most players). But by the time you have enough influence in the union to do something and complain about it, you will either have qualified for arbitration, or be out of the league!

And it gets worse, because every few years the CBA will need to be renewed, and both sides will of course be fighting for the best deal possible, and so there are these periodic periods of industrial action, where both sides lose.

Finally, every so often we hear calls for there to be some kind of salary cap in this country, because oh isn’t the American system so wonderful. As always, this is a story of bootleggers and baptists: a combination of deluded ideologues who actually think a salary cap would improve general welfare, and shills pushing the interests of ownership. The facts are clear: the players do much better under the free market than with labour regulation, unions, and the possibility of a CBA.

So far, so good. But what I find extraordinary is that people who agree with me so far suddenly start running off the rails when I take the next logical step and say – “and so of course the same will be true in other industries.” Suddenly, there are all kinds of ad hoc reasons why that can’t be the case, and talking about irrelevant things like the players being wealthy and so not deserving sympathy. Instead, look at what US law does, structurally – it allows the teams to form a labour monopsony, and then the union acts to screw prospective workers and favour the incumbents. Note that without labour monopsony, there aren’t any unions. Now look at what happens when there is a true labour monopsony – for example, education. Teachers have huge job security, are paid mostly on seniority and get great benefits, but it’s harder and harder to become one without irrelevant qualifications. Note that the best schools don’t care about those qualifications. And note too that when the government tries to undermine the monopsony, the unions squeal like stuck pigs. But I don’t think I’m going to convince many leftists of this analysis.

Where I really don’t think I’m going to convince leftists is when I apply this model to politics as a whole. To me it is pretty obvious that once you give the government (or anyone) the power to mess around with the rules, it will get captured by special interests. For example, government borrowing has shot up during the 20th century. Why? Mass democracy. What do voters care if future generations have to foot the bill? OK, they care a bit, but not as much as the unrepresented future generations do.

Therefore the solution is to leave as much as possible to the free market, which wins not only on grounds of efficiency, but also on grounds of fairness. Government can only be a force for good when it sets a small number of bright-line rules, which do not change over time, but are enforced energetically, constantly and impartially. And that, and this post, are probably as good a summary of my political views as I am ever likely to write.

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