Sunday, 10 July 2016

Why There Are Too Many Sports Participants In The World

What do sugar, salt, rapists and breast cancer have in common? Answer: You can have too much of all of them, but in different degrees. Any incidence of rape or breast cancer is too much, whereas with sugar and salt, healthy amounts are good for you, and excessive amounts are bad for you. Sports stars are like sugar and salt - in moderation they are a good thing, but in excess there is superfluity, which amounts to a bad thing.

What do we mean, though, by excess? Quite simply, it's easy to imagine excessive sports stars, just like it's easy to imagine excessive amounts of pretty much anything. A world in which 90% of people were sports stars or taxi drivers or carpenters would be fraught: we'd have too few doctors, shop workers, chefs, farmers, and so forth. So it's easy to imagine what having too much of an occupation means.

It's then easier to ask, is the current number of sports stars too large? Consider if we just replaced one random tennis player and added one financial advisor to the market - the loss to the sport would be meagre (he or she would just be replaced in the hierarchy by another, slightly less good player) but the gain in the business sector would be significant.

Financial advisers have much better market incentives than sports stars. The rewards of a financial adviser (or a coffee grower, or a butcher) depend on the price of their supply per unit, which depends on the price consumers are willing to pay, which depends on the signals in the market of supply and demand. That's a sure fire way of producing neither too many nor too few of them.

Sports competitors are not constrained by anything like the same mechanism. Because of this, the reward of being a sports competitor is out of line with the value of his or her contribution. The many losing sports participants are contributing in an environment in which they are making up the numbers for the winners. This doesn't make them worthless, it just makes them too numerous.

Because we could remove 10% of all sports participants and still have the sport enjoyed almost as much, the top sports stars that reap astronomical rewards for adding only slightly more value to the sport do so at the expense of other competitors. A financial adviser, on the other hand, only reaps rewards to the same extent that price signals dictate, meaning there are almost no deadweight financial advisers in the same way that there are deadweight sports participants. The reason being, deadweight financial advisers would find the market dictates they do something else, whereas deadweight sports participants merely remain in the pool as losers.

For further reading, check out this blog in which I explain why top sports stars are overpaid.