The Economics of Sports

0:00So it's my pleasure to be here today with Frank Daumann. And you come to us from the land of Schiller and other great scholars, Jena, Germany. That is true. And you have a book coming out now on the economics of sports. Yes, I do. Tell us a little bit about that book. Well, that book deals with the economics of sports, as you said. I use economic tools to explain patterns in sports. So first of all, I try to figure out how sports work from an economic perspective.

0:45And one of the chapters is about the relationship between state and sports. So that means the state has a deep influence on sports. If you look to the building of arenas or stadiums and stuff like that, the state subsidizes that sport clubs stays in different regions. And there are other regulations like, let's say, if you want to sell the TV rights, the sports companies, the sports clubs can sell these rights as a monopoly, so therefore the The prices are very high and you have kind of, yeah, let's say diversion of wealth from the seller to the buyer and stuff like that.

1:50Yes. Now, sports are very popular in Germany, as in all over the world. Yeah. What's the main sport in Germany? It's soccer. Yeah. Yeah. Why do you say soccer instead of football? Yeah, you know, there's always a difference between football and soccer in America, and if you say football, nobody knows it. Okay, so soccer, right. And now, are the teams directly subsidized by the state or not directly? They are private teams, right? Yeah, it depends. They are private, but they are directly subsidized. They got subsidized by special tax forms. There are special tax patterns because they don't have to pay the full amount of taxes.

2:37There are lower rates for taxes. And sometimes the communities give them money, subsidize them by building the stadiums and stuff like that. So it's kind of a local patriotism. Go Go, our team. So people get taxed to support the... That's true. To your mind, this creates certain distortions. Of course. What kind? Yeah, if you look to other forms of private engagement, if you look to other interests in the private sector, they are not subsidized, but sports is subsidized. So this is a kind of discrimination. And there are a lot of people in the community who are not interested in sports, why should And do you find that people make decisions to become, to make their profession sportsmen, they might otherwise go into some other profession?

3:42It depends. You have to think about that, that formation of becoming a sports star is a very, let's Let's say a very long time, lasts a long time, and there are a lot of difficulties to come, to become a professional. So I guess one point is that the clubs subsidize the formation of players. So they put money, let's say the money in a pool, and they raise, let's say 10 or 20 for 100 young players to get them to be professional. From this 101, let's say 99% drop out because they have no potential for that.

4:35And if one stays, that's enough. So if you want to become a player, a professional player, you have to neglect your other educations. So, that's the problem. We made a study about football players in the so-called semi-professional leagues. They earn about, let's say in dollars, it's about $3,000 or $4,000. It's not too much if you look for their career, which lasts for at a maximum of 10 to 15 years. And what What they do is not to save money for their after sports career, so they drop out with let's say 35, but they have no other education.

5:22Yes, right. So they sink to the bottom. Yeah, that's the problem. You know, everything you're describing, you know, this is very familiar to Americans, this is essentially the system that we have in this country. Now I suppose that from an economic point of view, people would argue that, well, sports benefits everybody to such an extent. It's not provided in sufficient quantity on the free market, so that's why we have to have government subsidies. Yeah, you are talking about the argument of external effects. It's a kind of you integrate foreign people, you teach rules which are in sports and should be in democracy as well and stuff like that. But I believe if you look to empirical studies, you couldn't find that this is true. They say if people or young guys are playing sports, they are not so violent.

6:25But often the opposite is true. They play sports and the result is that they are more So I guess this external effect thing is not true. You cannot prove that from an empirical point of view. The only thing that stays is success in sports. If the American baseball team wins the World Championship, is there a kind of common property? Everybody, every American is proud of the American team. This is something like a collective good.

7:15This is, I guess, the only thing you could use as an argument to intervene from a governmental side into the sport. That's the only argument. But if this is the case, you could go there and could say, the state pays, let's say, ten million dollars for each gold medal, which is won during the Olympic Games. That would be enough, and this way you would have a kind of a private production, but it's governmentally financed. Yes. That's enough to create the collective good, and you don't need this argument to justify this pervasive intervention, this massive spending that goes on. Have you looked at the history here? When did this begin in Germany?

8:09It began after the Second World War. In the early times, after the turn of the centuries in the 1960s and 1910 or stuff like that. The whole sport was on an amateur basis in Germany, on an amateur base. So after turning to a professional base, which started in the 1960s, the intervention grew more and more. So it was initially the professionalization of sports. It was initially a business, a private business. It's a private business. And then the state jumps in and says, this is a great business. This is just what we need to boost our morale. Yeah. There is one argument. They say if you could bring, let's say, the Olympic Winter Games to Munich, the region will have so much profits that the state should invest a little bit.

9:05a bit. I think they have to invest about 3 billion euros. Well, it's not less, and therefore they think they get more in return. That hardly ever happens, actually. I mean, most people that have the Olympics end up losing money overall. Yeah, we have done research in that field and we find out, we ask people, how much would you pay if the Olympic Winter Games would be in Munich? in Munich. And they said, we aggregate this number, and the result was that the whole German population would pay about 68 millions, 68 millions in comparison to 3 billions.

9:52So I think there is no kind of, let's say, collective good in this way. Yes, it is, but there is no ability, no desire to pay for that. So, to your mind, you can have a complete free market in sports? Of course. Why not? Of course, there should be a free market. The result will be that some forms of sports, like in Germany, perhaps baseball or stuff like that, which has little The spectator numbers will vanish. So another like soccer will dominate the scene. But that's a problem. It's not a problem because that's a market. And I guess the main institution should be the spectator, the consumer. And if there are no consumers, there is no need for producing such stuff.

10:51Well, your prior research before getting interested in this topic of sports, you had done some very important articles and work on Hayek as a thinker. Yeah. Hayek has done a lot of contribution to the Austrian methods. And I guess Hayek is a little bit misunderstood in his, yeah, let's say, in his evolutionary theory. So, I try to figure out the relationship between the rules and evolution theory. I think that's very interesting stuff to understand how social networks, how markets work.

11:44How do you find Hayekian theory to be doing in German academia today? Not good. In Germany, we have the mainstream-like neoclassical theory, and it's mathematical and empirical founded. There is no big room for Austrian scholars in Germany. So you're fairly isolated, fairly alone. Yeah. But that gives you a special niche market, right? Yeah. It's like you're playing a special sport by yourself. That's true. You know, somebody asked me over the weekend, actually, I was in Florida at this Mises Circle, Who are the great German economists?

12:52So there don't seem to be too many great German economists, it seems like in our history, right? Well, you have to think about that the German economic theory was dominated in the early 20th century or in the late 19th century by the so-called historical school. and this historical school tries to figure out laws on the base of empirical data and I guess this was a fight between Menger on the one side and Schmoller and these guys on the other side and all these old German traditionalists, they are vanished so their importance is not too big now.

13:45The Schmalerites who are not currently dominating German academia. Nobody knows about Schmaler anymore. But we had a deep influence on economic thinking, and in the later time, I think you have to exclude the time from the 1920s to 1950s, and later you have a lot of German influence in the mainstream economics like Richard Seltzen or let's think about SIN and stuff like that. Two names just occurred to me actually, Ludwig Erhard and Wilhelm Rübcke.

14:30Yeah, but Ludwig Erhard was more a politician and less an economic thinker. His works were based on Müller Amarck, who introduced, who made the foundation of the social market theory or social market system. And Willem Röck was a member of the, yeah, let's say a member of the Freiburg School. There was also Walter Eucken. Yes, of course. Yeah, he was very important and some other guys in this Freiburg circle. But in terms of German Austrian school

15:15style economists, we have very few today. Yeah. Do you know the work of Philip Baggis? Oh, Baggis. Oh, never heard. Okay. Sorry. Okay. That's okay. He's very young and he's coming along and doing wonderful work. He just finished a book on the euro. Okay. Which I will show you here shortly. So it looks like there's a lot of room within German academia for improvement. Of course. Of course. What is your next, now that you've finished economics and sports, What's next for you? Well, we made a study about, yeah, that's a very strange topic, but I will mention it. We made a study about the market of burials.

16:01Oh, wonderful. That's fascinating. Yeah. That was very interesting because the German market, well, I came to the topic because I'm watching this HBO series, it's called Six Feet Under, and therefore I was interested in how this works in Germany. So we made a study about that and we published it in the last year, and it was very amazing because we had a very big echo in the press and everywhere. So what's interesting is that the German population grows older and older, but the market volume is going down because more and more people get the so-called social burial. It's paid by the taxpayer. And therefore, yeah, the market changes a little bit. We have new inventions in coffins and former times used to produce the coffins in Germany. Now it's a turn to to produce the cuffins in Czechoslovakia and stuff like that because they are cheaper and stuff like that.

17:14That's very interesting. That is very interesting. Yeah. And there's an element of socialism, too, to study and the effects of that. Well, that's fascinating. Yeah. These are great topics, actually. I'm drawn to these things that seem to, for example, today on the Mises homepage, we ran an article on the plastic surgery industry in the United States as being a wonderful And I guess it's one of the hugest markets you can imagine, because people try to get along with these, let's say, with these shapes you see in the newspapers and stuff like that. So, therefore, they invest a lot of money in that. I think that's a very good example of the free market in operation because the government doesn't subsidize it and therefore it works very well.

17:59and the Newspapers and stuff like that. So therefore, to invest a lot of money in that. I think that if you are a doctor or you have done surgery, you have to go in this market to make a lot of money. Are you speaking about Germany or the United States or the world? The United States and Germany as well. Germany is for plastic surgery is very popular. You have to have a high average income level and therefore in this connection. Maybe you could make an article, an argument that the state should subsidize this too because there's so many positive externalities associated with more beautiful people. That's a good argument.

18:44But for some reason the state's not interested. Frank, thank you so much for visiting with me today and I understand there's a possibility coming in the future for some months and that's very exciting to me. It's a pleasure to have you here. Thank you very much.