What Economics Can Learn From The World of Sports

imageTwo economic indicators are broadly used to measure the health of our economy: GDP to measure wealth and performance, and the unemployment rate to measure participation. Unfortunately, with these two metrics guiding our economic policy, an economy of alarming wealth concentration has been the unintended consequence. The President has called income inequality and upward mobility the “defining challenge of our times”. The political right seems to be in agreement, but is nervous as to how it can be addressed without increased political centralization and the stifling of personal freedom. To this political debate I offer the following thought; that the economic model we seek balancing performance, competition, freedom, participation, local and global forces is already modeled for us by the world of sports.

The Sports Economy

In the world of sports there are two complementary economies with very different purposes:

  • An Economy with Broad Participation that Grows and Develops Talent: In the world of sports, each of us has to start somewhere – and fortunately at the youth level there are several platforms that accept players where they’re at and help develop them for the next level. Some youth leagues teach the fundamentals while others foster a high level of competition. In order to protect its integrity and purpose, each league has the ability to set its own rules, including who is and isn’t allowed to participate. For example, in order to participate at the high school level, players are required to be enrolled in the school they’re representing, maintain a certain grade point average, and be between certain ages. The number and variety of leagues creates a system of broad participation, which often means audiences that are relatively small compared to the number of players participating, and so money is not a major factor in youth and local sports.
  •  An Economy With Elite Competition and Builds Wealth and Performance: At the professional level, talent is aggregated from many different places and put on display for a much broader audience. The system that focuses millions of people (from those packing stadiums to following on television to playing fantasy sports) on just a handful of players creates a funneling effect that concentrates wealth into a few people’s hands. This concentration creates the incentives where the competition is fierce, performance is elevated to the highest level, and only the most talented and dedicated can make it.

The Larger Open vs. Protected Economy Debate

In the world of economics, the debate over which of the above models to favor is not new. To favor the latter, one large open economy of aggregated markets, is to encourage the highest level of competition on the basis of price and quality. With some exceptions, Adam Smith in The Wealth of Nations largely favored such an open economic system:

 “To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”

Meanwhile to favor the former, several smaller protected economies, is to encourage developing internal capacity and participation. E.F. Schumacher in Small is Beautiful, defended this need for small economies that encourage participation:

“What I wish to emphasise is the duality of the human requirement when it comes to the question of size: there is no single answer. For his different purposes man needs many different structures, both small ones and large ones, some exclusive and some comprehensive. Yet people find it most difficult to keep two seemingly opposite necessities of truth in their minds at the same time. They always tend to clamour for a final solution, as if in actual life there could ever be a final solution other than death. For constructive work, the principal task is always the restoration of some kind of balance. Today, we suffer from an almost universal idolatry of giantism. It is therefore necessary to insist on the virtues of smallness-where that applies. (If there were a prevailing idolatry of smallness, irrespective of subject or purpose, one would have to try and exercise influence in the opposite direction.)

The question of scale might be put in another way: what is needed in all these matters is to discriminate, to get things sorted out. For every activity there is a certain appropriate scale, and the more active and intimate the activity, the smaller the number of people can take part, the greater is the number of such relationship that need to be established.”

 Our Current Economic Situation and the Road Ahead

 If our sports leagues at every level (youth, high school, college, professional) decided to use player competitiveness as the sole means for determining participation, it would dramatically alter the sports landscape. The winners would clearly be experienced, elite players who can now play in markets previously closed to them. Up and coming local players would be the immediate losers as they get out-competed for spots on their local teams at every turn. Over time everyone would lose. Without boundaries such as age and school participation, there would be little to distinguish between the high school, college, and professional levels – and this blurring of levels would inevitably lead to consolidation of these sports markets. Therefore, rather than having a smooth “career path” from amateur to professional levels, a large gap would develop between the elite who play the game and everyone else who is forced to watch from the sideline.

In my opinion, this example illustrates the folly of our current economic policies to completely remove economic boundaries between markets. With the signing of every free trade agreement or currency consolidation, governments forgo the tools they need to protect local participants and grow local talent. Predictably, with small closed markets now consolidating into a large open one, a few global companies are able to dominate entire industries and replace a multitude of local counterparts that provided a middle-income pathway to wealth for many. As discussed earlier, the combination of large markets and fewer beneficiary participants creates the consolidation of wealth that everyone is concerned about today.

The good news is that the needed remedies for our current economic issues can be enacted at the local level. From spending to zoning laws, tax incentives to local currencies, our government institutions are given the authority and tools to balance competition and participation in their own local economy. Our experience with sports shows us that there is room for both a large open market as well as smaller protective markets. Like league commissioners, it is time that all levels of government start taking responsibility for the rules of their own economic game.

7 thoughts on “What Economics Can Learn From The World of Sports

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