Monday, January 31, 2005

What's the matter with the market?

If you ever took Econ 101, and even if you didn't, you may be aware that economists believe that markets work. What this means is not that markets are always and everywhere perfect, but that with a few exceptions (called "market failures") markets successfully sum up the judgements of individual consumers with respect to the value of what producers produce. Changes in market prices therefore reflect consumer judgements about the usefulness (or desireability) of various products: for instance, if consumers prefer ballpoint pen A to ballpoint pen B, then consumers will buy more of pen A, and its price will rise relative to pen B's. This change in price has the happy consequence of increasing the income of pen A's producers, providing them with both the means and the incentive to produce more of pen A. Notably, this same price change has exactly the opposite effect on the producers of pen B, constraining both their ability and their desire to produce more of pen B. And what's true for ballpoint pens is true for everything (or nearly everything); markets turn the disaggregated preferences of consumers into a signal/resource amalgam that indicates what producers should produce, provides them with the resources to produce it, and rewards them for doing so. Hence, economists are very skeptical about any assertion that we would all benefit from conducting fewer or our affairs through market interactions. They are also a bit gullible when assessing the prospects for conducting more of our affairs through market interactions. Many have trouble seeing much of any downside; they are true believers in the invisible hand.

The trouble is, markets don't seem to work when you consider sports. Prices for the services of professional athletes are often demonstrably out of whack with the contribution such athletes are likely to make to their teams (the ostensible consumers). And what exactly are professional athletes supposed to be contributing, anyway? Are they employed to help win games and championships, or are they mere cogs in a commercial machine oriented toward fattening the bottom line? It does no good to assert that professional athletes are meant to do both, because the two are fundamentally distinct: you can make money without winning games (or so goes the lament of the Cubs' fans), and you can win a championship and still lose money (at least according to Wayne Huizinga). What goes for athletes salaries (the price of their services), goes for those of coaches and excecutives as well. In sports, there is a clear, well established, easy to observe, universally accepted measure of value (winning), and there is also a system of prices that seems to have precious little to do with this system of value.

But that's not all: as Bill James rightly argued, this system of prices is parasitic upon this system of value. Who would want to watch professional sports who does not believe that the athletes are sincerely devoted to winning games? Conversely, many are earger to watch the sincere efforts of amatuer athletes. The system of prices in sports, and the businesses which are based on it, need the sporting interest. The sporting interest doesn't need any prices. Moreover, the price system always threatens to undermine the value system, to spread cynicism and even encourage outright corruption, and to thereby (ironically) undermine itself. In sports, the invisible hand finds no home.

Why should this be? What makes sports different from ballpoint pens? One possibility would be "market failure." Usually, economists use this term to describe the exceptional circumstance where certain goods either are not or cannot be priced. For instance, there are unpriced externatlities, like pollution, that result because some goods (like clean air) are not traded on markets. Our desire for clean air does not register with the broader system of markets, and so the invisible hand cannot guide producers to fulfill this desire. But given the fact that seemingly everything about sports has a price attached to it, including bonuses for actually winning championships, market failure does not seem a likely explanation. Indeed, so plentiful are the prices, and so readily available all seemingly relavent information (like, say statistics), its would be easy to conclude that sports markets should be highly efficient. The disconnect in sports between price and value thus seems all the more embarassing. But perhaps the problem isn't sports at all; maybe there's something the matter with the market.

This blog is about sports and its about bread. I'll give my two cents on players, teams, scandals, and the whole amazing and inane world of today's American sports - a far more powerful circus than anything the Romans came up with. It's also about bread, about money, about how we organize our collective life, and about the bizzare and mystifing ways we describe this collective life to ourselves. The distinction (and potential conflict) between value and price, so easy to see in sports, is hardly limited to sporting pursuits. If you've taken Economics, think of this as a different take on what game theory can be.