Socialism in Sports

by Russ Roberts on April 11, 2006

in Sports

(This post was inspired by a conversation with Skip Sauer of Clemson that should be posted as a podcast here some time next week.)

Baseball season is under way and I heard a radio talk show host say this morning that Pittsburgh has no chance to win the World Series this year or in the foreseeable future. He’s probably right for two reasons. One possible answer is that the Pittsburgh’s franchise is poorly run. But even if it were run brilliantly, the Pirates would have to overcome the disadvantage of being in a small market relative to the Astros, the Dodgers, the Mets or the Cardinals—teams that have bigger fan bases meaning more tickets and more (sometimes much much more) television revenue. There is not a perfect correlation between a team’s payroll and its winning percentage but small payroll teams are on average less successful than high payroll teams.

Baseball does have some revenue sharing but it is small compared to football. So baseball teams from larger cities have an advantage over teams from smaller cities. What is the argument for leveling that playing field? After all, the same logic doesn’t apply to say, manufacturing or financial services. We don’t argue that because New York has a better financial services industry than Kansas City that Kansas City’s financial services industry should get a subsidy from New York in order to level the playing field.

The difference is that sports is a zero sum game. There has to be a winner and a loser in every game. If the Yankees defeat the Royals and every team 11-0 every single game, there’s no pleasure produced. Increasing that edge to 23-0 actuall produces less value. We only watch the Harlem Globetrotters because they make us laugh.

In sports, unlike manufacturing or ordinary industries, there’s an inherent value in competitive balance to produce excitement and drama. So there’s a case to be made for giving Kansas City some of the New York’s revenue stream. One reason is that New York’s revenue stream depends on the rest of the league—it can’t just go out and play games without opponents. The second reason is that without competitive balance, the product does not produce enjoyment for the fans. Though Yankee fans certainly enjoy their 26 World Series championships, if they literally won every year or close to it, even Yankee fans would probably tire of winning.

The competitive analogy doesn’t carry over to financial services. There’s no reason to subsidize Kansas City and penalize New York. That discourages excellence and rewards mediocrity. Unlike the sports example, there is no value to competition per se but rather in what that competition produces—first rate financial services. Unlike baseball, performing twice as well as your competition produces additional benefits in financial services. If a New York financial firm falters either by charging too high a price or providing a poor product, new firms can enter the financial services market in New York and elsewhere to benefit the consumer. It doesn’t bother us at all that Lexus keeps dominating the luxury car industry or FedEx the overnight mail business.

When a New York firm "outplays" a Kansas City firm in providing investment advice or when a California firm outperforms a firm in Maryland in providing good computer software, the consumer benefits. And it’s true when a Chinese clothing manufacturer outperforms one in  South Carolina. Leveling the playing field by putting on tariffs or by subsidizing poor performers makes us poorer, not richer. It punishes success and deters innovation. It leads to higher prices and benefits producers in South Carolina and punishes consumers.

That having been said, sports socialism, especially pure egalitarianism is not a cure-all. Even if the Yankees share their revenue equally with other teams, the beneficiaries of that subsidy may decide to simply pocket it rather than making their teams more competitive.  Revenue sharing does reward mediocrity and punish excellence and as the amount of sharing grows, the potential harm from that perverse incentive gets worse.

Just because the NFL shares its revenues equally doesn’t mean that every team has an equal chance to win. Some NFL teams have no chance of winning the Super Bowl. Some teams have little chance because their coaches aren’t very good. But some have little chance because their owners are content to live off of the other teams. This tension is always present in sports leagues. For the fan, you want the owner of your team to care about more than the money and to be willing to give up profits for a higher chance of winning. A successful sports league picks needs to pick its owners wisely.


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