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Abu Dhabi, UAEThursday 18 October 2018

Economics 101: The Premier League, the NBA, Capitalism, and Socialism

The English football league espouses a capitalistic approach that proves more entertaining than the US National Basketball Association's socialist take

Leicester City lifting the Premier League Trophy. he occasional rags-to-riches miracle occurs, such as Leicester City’s dramatic capture of the league title in 2016.Getty
Leicester City lifting the Premier League Trophy. he occasional rags-to-riches miracle occurs, such as Leicester City’s dramatic capture of the league title in 2016.Getty

The English Premier League (EPL) and the US National Basketball Association (NBA) are two of the most commercially successful sports leagues in history.

While they share much in common, including their marketing excellence, their key differences accidentally serve as a great pedagogical tool for understanding how capitalism differs from socialism.

Let us start with the EPL, which is closer to the capitalist paradigm. Twenty professional teams compete, with the largest prize going to the winner, followed by some secondary prizes going to the teams finishing second to fifth (qualification for European competitions). Moreover, the bottom three teams are relegated to the English Football League (EFL), which also supplies the three replacements.

The financial rewards accruing to the EPL champions are considerable, including the direct prize money, improved marketing revenues, increased future ticket sales and so on. Similarly, the financial penalty for relegation is huge, due primarily to the loss of TV income.

The EPL has several mechanisms in place to create some degree of equality. These include European Financial Fair Play (FFP) regulations, which aim to limit the operating losses that teams can run; as well as parachute payments for relegated teams to soften the financial impact of departing from the EPL. Moreover, TV revenues are redistributed so that while the best teams earn the highest amounts, they earn less than they would if they were able to freely negotiate directly with media companies.

However, for the most part, clubs are free to spend as much as they want in the pursuit of victory and, once a team is victorious, there is no mechanism in place for bringing its performance down a few notches. Similarly, teams that are bad can expect zero assistance from the EPL as they seek to improve their performance. This is more or less a capitalist system.

As a result, as opponents of capitalism would predict, there is deep inequality in the EPL: a small number of clubs, including Manchester City, Chelsea, and Manchester United, have entered a virtuous cycle of spending and success, while several teams are locked into vicious cycles - akin to poverty traps - eternally dooming them to the status of EPL bottom-feeders. The occasional rags-to-riches miracle occurs, such as Leicester City’s dramatic capture of the league title in 2016. But for the most part, the big prize is reserved for the top dogs.

The advantage of the capitalist system, however, is that everyone tries hard more or less all of the time. With the exception of some dead-rubber ties at the end of the season when players are dreaming of their summer holidays, the lowest teams will regularly strain every sinew in every game in the pursuit of enough points to avoid relegation. The result is highly entertaining games throughout the season, whatever the teams involved.

In contrast, the NBA has adopted a more socialist structure. The 28 teams are fixed, and there is no relegation. Moreover, there is a hard salary cap, preventing top teams from hoarding the best players. And at the end of each season, the draft acts as a highly effective socialist redistribution device: the teams with the worst record are given systematically better access to the best, young players entering the league.

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To the joy of pro-socialists, the system successfully results in a reasonable degree of turnover at the top of the league. The current champions, the Golden State Warriors, were terrible as little as six years ago, while their perennial rivals the Cleveland Cavaliers were also abominably bad around five years ago. The up-and-coming teams at present, the Los Angeles Lakers, the Boston Celtics and the Philadelphia Sixers, are all benefiting from a string of bad years that yielded high-quality players in the draft, while the retirement of top players at the San Antonio Spurs and Miami Heat have pushed them to the downward part of the cycle.

The system’s biggest flaw - which is absent under capitalism - is that under certain circumstances, it creates incentives for bad and, therefore, unentertaining play as teams seek to lose on purpose in the pursuit of good players in the draft. In the latter half of the season, teams that have no chance of winning the top prize will regularly withdraw their best players, and may even play tactically bad basketball, in an attempt to lose games. This is a great source of annoyance to anyone who has purchased an expensive ticket to an NBA game: bad players throwing games.

Cognisant of this threat to their product, the NBA’s management have introduced a raft of countermeasures but every single one constitutes a movement toward a capitalist system, such as weakening the relationship between the number of games lost and a team’s position in the draft.

The EPL’s management, also fearful of the effect of games pitting lambs to the slaughter, have considered socialist interventions, such as the aforementioned FFP.

But the two leagues will continue to act as fascinating microcosms of the pros and cons of capitalism and socialism.

Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.