Economic theory can offer a lesson to struggling football clubs

The expulsion of Bury FC from the English Football League last week continues to generate a huge amount of sound and fury. Regardless of the apparently dodgy nature of some of Bury’s transactions, the simple fact is that the club overspent massively in order to gain promotion from League Two last season. The surge in the costs involved of running a football club has been dramatic. Over the summer, for example, Premier League clubs were involved in transfer deals worth a collective £1.4bn. Marcus Rashford signed a new contract with Manchester United in July worth £250,000 a week, and quite a few players get even more. Professional sporting clubs are an unusual sort of beast from the perspective of economic theory. Economists agree that companies act to maximise profit. The concept is not completely clear-cut – a pricing policy, for example, which gouges customers and increases profits this year may eventually prove disastrous. But generally sustainable profit is the aim. But sporting clubs do not even attempt to maximise profits. Their principal motivation is to maximise costs. Spending more money means getting better players. And better players mean more success on the field.   The correlation between the total amount a team spends on its players and its league position is not perfect, but it is high. It is the principal reason for success. So there is an inherent tendency for clubs to live beyond their means, unlike almost all other businesses. It is performance on the field which matters. The behaviour of clubs, however, nicely illustrates another concept in economics. This is the potential conflict between individual and collective rationality.   It is the collective interests of top soccer clubs to scale down the payments to players. The problem for clubs is that if they offered stars laughably small amounts, say a mere £100,000 a week, other top clubs both here and in Europe would entice them away. It is not in the individual interests of the club to allow this to happen. One possible solution is for the regulatory body of a game to impose a binding salary cap, limiting the total amount which can be spent on a team.   This works well in American football, for example. As an approximation, all the teams spend the full amount. So unlike soccer, where a handful of clubs dominate, success rotates around. There was, in fact, a maximum wage in force in soccer until 1961. It was only twice average earnings, around £1,200 a week in today’s money, and was ended by the threat of a players’ strike. Nowadays, of course, players able to perform in the Premier League are part of a global market. American footballers are not. The game is hardly played anywhere else.   Players with Premier League skills thus are exported to and imported from abroad – what economics describes as a tradeable market. In the lower divisions, however, the players are non-tradeable in this sense. A salary cap, no matter how tightly drawn up, is always open to creative abuse.  But economics suggests that it is the way forward for teams in divisions below the Premier League.
Paul Ormerod
As published in City AM Wednesday 4th September 2019
Image: In Memory of Bury FC by David Dixon via Geograph is licensed under CC BY-SA 2.0

Share this post

ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.