Economics of Sports - Essay Example

FOOTBALL INTRODUCTION The ”economics of sports begun with Simon Rottenbergs’ seminal paper on the baseball players market in the Journal of Political Economy 1956” (Sloane, 2006, ¶ 1). Being such, it is safe to claim that the “academic interest on the economics of football dates as far back as the mid-1950s” (Dobson & Goddard, 2001, p. 1). The economic interest on the sporting game is sparked by the observation of the dynamics of individual players and the team itself, “the interactions between co-operative and competitive modes of behaviour that professional team sports tend to generate, make this particularly fertile territory in which to explore the perennial questions about incentives, effort, risk and reward, which lie at the heart of all economic inquiry” (Dobson & Goddard, 2001, p. 1). Although, the stark similarities of concerns between economics and sports made the union possible, Peter Sloane (2006) noted that the apparent similarities should not be over emphasised, as there are intrinsic dissimilarities between sports and conventional industries. Notwithstanding the issue between economics and sports, the more important question that needs our attention is whether football clubs are profit maximisers or utility maximisers. PROFIT MAXIMISATION AND UTILITY MAXIMISATION As we try to understand the goal of each football clubs involve in the world of sports, perhaps, the more important matter that we have to take under consideration is the idea that these clubs are in themselves govern by economic and marketing principles that are basically govern by researches and studies that give credence to the claim made by each the theories. But are the theories really of minimal flaws? To begin with, if one will go over the literature on profit maximization and utility maximasation theory, regardless of the strand of both theories, on thing that is noticeable in the study is the used of mathematical formulations in support of their claims. I am raising this point on the supposition that in the world of Economics and Finance, a theory is made more tenable and believable if there are strong mathematical formulations and explanations that support the theory (Cubitt & Sugden, 1994; Friedman & Sandow, 2003; Bouchard, 2002;Lee, 1979:Portes 1968). And again, this is regardless of the position that one may be taking. In the entry of mathematics in the realm of the market, of finance and economics, one can get the sense that one is no longer dealing with an erratic and unpredictable realm. Rather, the presence of mathematical explanations for the credibility of the theory regarding the movements of the market underlie the fact that studies undertaken in order to understand the movements and dynamics of the market is , perhaps, as precise as some of the physical sciences. Which is, on the other hand, a cause of trepidation and relief at the same time and of equal measure. Trepidation because, the exactness and precision of mathematics is technically incompatible with the actual dynamics of human behaviour. Since, in understanding human behaviour one ought to use a different set of parameters (Hempel & Oppenheim, 1984) that will allow the researcher some knowledge regarding it. Relief, on the other hand, comes to the fore because with the mathematical formulations employed in apprehending the market, investors and all the other players may be able to make a rational decision regarding their businesses and investments. But what really moves an individual to invest and become a player in the fast phase business world? PROFIT MAXIMISATION Theory of profit maximisation may come in different forms. One may align with firm- as –contract theory, agency theory, shareholder theory and many more. But one thing that connects all these theories together as falling under profit maximisation theory is the fact that it supports the claim that “the measure of success for manager and corporations is profit” ( Cragg, 2002, p114). This particular tenet is considered already as the normal and traditional appreciation of the market. In fact if one is to ask many senior managers of various corporations, perhaps one will find that most will agree on the supposition that return on investments is the surest empirical evidence that will allow one to measure the company’s performance in the market. This is not astonishing since, indeed, Return of Investments (ROI), Return on Capital Employed ROCE and Cost Benefit Analysis (CBA) are some of the measures develop in order to know whether there is really success. More over, financial remunerations, which are gained in business, are undisputable measures of success. And in light of this business reality, there is no wonder why managers keep their allegiance to the shareholders rather than to the customers since the shareholders are technically the principal, owners of the company. As such, “the business judgment rule that gives management exclusive authority for the conduct of the affairs of a company but requires that they exercise their responsibility with the exclusive financial interests of the companys shareholders in mind” (Donaldson and Preston, 1984, p 184). UTILITY MAXIMISATION Utility maximisation theory is on the other side of the spectrum of investors’ motivation. Under this particular theory, it is assumed that investors have responsibility to maintain and pursue goals that will ensure the “happiness, pleasure and utility of the chooser” (Leightner, 2005, p 375). And at the same time, it recognises that the chooser is capable of “rational-decision”(Cubitt & Sugden,1994) thus, will be making pertinent marketing decisions not solely on the basis of profitability but also on the basis of community responsibility. This idea is supported by the Pareto optimality which states that “Pareto optimality is the notion that we should take any action that would increase someone’s utility without decreasing someone else’s utility.(Leightner, 2005, 377). Utility theory, as such, moves away from the myopic perception of the market and moves towards a more integrated approach. In this particular theory, investors or stakeholders are no longer limited only to those persons who have financial interests or gain from the company. Instead, under this particular theory, all individuals that come within the purview of the company are considered as having some ‘stakes” at its movement. As such, the company is no longer merely financially responsible to the investors but also socially responsible to the society as a whole. The difficulty in judging and plotting this particular theory lies on the fact that it is anchored on the supposition that managers, investors and all the other players in the market are capable of making rational decisions. This is a bit difficult to measure. Since, rationality is not something that can be quantified or qualified. Are we to assume that consequences of the judgment are to be considered as evidence for rationality? If such is true, then, utilitarianism ought to be true as an ethical standard. The point that I am merely trying to raise is the notion that the idea of utility presents the truism of the inherent difficulty in coming up with a measurable means of knowing what is it that will maintain the happiness of the individuals and the harmony of the society. THE BALANCE Profit maximisation theory and utility theory are two separate and distinctive theories that will enable us to understand the sentiments and movements of all the players in the market. How ever, the problem lies on the fact that both are on the extremes. Profit maximisation (PM) is measurable while utility maximisation (UM) is unquantifiable. PM is myopic while UM is broad and all encompassing. UM is based on rational choice while PM is based on financial gain. And in this kind of scenario, I believe the challenge among the scholars is to be able to come up with a theory that will be able to combine the strengths of these two theories. Since, the combination of these two is more adept to the real scenario of the business world. For the business world is governed both by individual persons who are rational beings and the vested interests of the investors – return of investment. IN FOCUS: FOOTBALL CLUBS FOOTBALL CLUBS: RPOFIT MAXIMISERS It is claimed that the moment that fans paid the ticket, football had entered the realm of economics. As such, scholar like “Rottenberg is consistent in claiming that team owners are rational profit maximisers.” (Sloane, 2006, p 12). And in fact, “the 92 league clubs of England and Wales generated more than one billion pound of income during 1999-2000” (Fact Sheet 10, ¶3.6). this is not something astonishing for modern football has evolved into a business enterprise and no longer just a club. This is for the simple reason “that the pursuit of profit maximisation is the unifying characteristic of all private sector business organization” (Palmer & Hartley, 2002, p. 71). Thus, working solely towards one definitive goal – increase of profit at a minimal cause. The idea, which is often referred to, as “profit maximisation” has indeed become an integral part in business enterprise that success in businesses is measured in terms of its profit. However, do we attribute profit maximisation on football clubs because of the presence of some individuals who are into business? This is being asked on the premise that there is a study, which shows that there is no significant evidence presenting the fact that football clubs are solely interested in making profits just like any conventional industries. More over, we can observe in the league, people who are willing to cash out from their wealth just to make sure that the club maintains its stature like And that they have entered the game with the simple love for it. FOOTBALL CLUBS: UTILITY MAXIMISERS Football clubs are utility maximisers. This is on the basis that chairmen and directors of clubs are simply lovers of the game. They gain their wealth not from the game it self, but on other businesses they have. In fact, “chairmen and directors with controlling interest in football clubs are usually individuals who have achieved success in business in other fields. Their motive for investing may include a desire for power or prestige or simple sporting enthusiasm: a wish to see the local club succeed on the field of play.” ( Dobson & Goddard, 2006, p 8) These together with love for the game make these people invest on clubs even if studies show it is not wise to invest one’s money in football. Since, “Football has not offered the return on investments as predicted by analysts.” (Fact Sheet, nd, ¶ 11.2) More over, football club is now utilized as part of one of fundamental factors that provides social cohesion in Britain. It is claimed that, ”in contemporary politics, sport is now also being analysed in terms of its potential to promote tolerance, improve health, and develop social skills as well as to combat social poverty, unemployment and social exclusion. Further more, it is argued that the impact of sport particularly football extends to spheres that are hard to reach through some traditional political activities” (Committee for the Development of Sports 1998 and The Football Task Force 1999a cited in Tacon, 2005, p 7). As such, the sport is one of the tools they are using as they create programs that will In fact,”the current Blairite administration has identified football as an important political tool and a key, integrative, feature of a modern, regenerated and rebranded Britain.” (Fact sheet 10,nd, ¶ 3.11). It is not that football clubs are saints. But it is more on they see themselves as concrete, real members of the locality where they belong, of the country that they are playing. “It is not the wages or profit that drives them, Even today one can still find examples of major investors - Jack Walker at Blackburn; Jack Hayward at Wolves; Matthew Harding at Chelsea - who spent millions at their own clubs for little apparent financial gain. (Fact Sheet 10, nd, ¶ 2.4) It is the love for the game itself. The bigger and wider arena, that the culture of soccer permeates is not just the stadium where they actually fight their games. Rather it is on the effects that they have in the lives of their follower who just like them is as possesses and ardent in their love for football. This may be too dramatic or too emotional but the tie that binds the fans to the game, to the team is their emotional attachment, identity, and loyalty to it. CONCLUSION Free market is rooted in “voluntary relationships” (Williams, 2004, p 41) thereby encouraging people to “to pursue their own interests” (Flew, 2004, p73). However, at the same time, the moment that they do that they enter a “system that is based on greed, selfishness” (Shenfield, 2004, p 117). Football is a sport and an enterprise that recognises responsibility not only to one’s self but to others. (O’Keefe, 2004). As such, I think, the question that we should be addressing is not the debate between profit maximisation or utility maximisation. Rather, the question is “how can football clubs bridge its two natures – as social institution and as financial institution?” REFERENCES: A. BOOKS Dobson, S. & Goddard, J. (2001). The economics of football. London: Cambridge University Press. Donaldson, T,& L. E. Preston. (1998). "The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications," in Clarkson, 1998. O’keefe, D. (ed). (2004). Economy and virtue: Essays on the theme of market and morality. London: The Institute of Economic Affairs. Palmer, A. & Hartley, B. (2002). The business environment 4th edition. London: The McGraw-Hill Companies. B. ARTICLES Bouchard, B. (2002) “Utility maximisation on the real line under proportional transaction Costs”, Finance Stochast,6, pp 495 – 516. Cragg, W. (2002) “Business ethics and stakeholders theory”, Business Ethics Quarterly, Vol 12, Iss 2, pp113 – 142. Cubitt, R., & Sugden, R. (1994) “Rationally justifiable play and the theory of non- Cooperative games”, Economic Journal, 104, pp 798 – 803. Flew, A. (2004) Selfishness, exploitation, and the profit motive. In D. O’keefe (ed) Economy and virtue: Essays on the theme of market and morality. London: The Institute of Economic Affairs. Hempel, C.G. & Oppenheim, P. (1984). “Studies in the Logic of Explanation” In J. Ziman (ed) An Introduction to Science Studies: The Philosophical and Social Aspects of Science and Technology, Cambridge: Cambridge University Press Lee. L.W. (1979)”A theory of management and its implications for capital structure and merger”, Southern Economic Journal, pp 107 -118. Leightner, J. (2005) “Utility maximization, religion , and morality”, Journal of Economic Issues, Vol XXXIX, No 2, pp 375 – 381. Portes, R.D. (1968) “Input demand functions for the profit constrained sales maximiser income effects in the theory of the firm”, Economica, pp. 233 – 248. Shenfield, A. (2004). Below the angels: Morality and capitalism. In D. O’keefe (ed) Economy and virtue: Essays on the theme of market and morality. London: The Institute of Economic Affairs. Williams, W. (2004). Markets: Morality versus efficiency. In D. O’keefe (ed) Economy and virtue: Essays on the theme of market and morality. London: The Institute of Economic Affairs. C. ELECTRONIC SOURCES Brown, A. (nd). Thinking the unthinkable or playing the game? The football task force, new labour and the reform the english football. www.footballrearch.org. Accessed on October 26,2006. Conn, D. (nd). The new commersialisation. www.footballresearch.org. Accessed on October 25, 2006. Fact Sheet 10: The new football economics. www.le.ac.uk. Accessed on October 25,2006. Hamil, S. Football clubs as social or financial institutions? www.footballresearch.org. Accessed on October 25,2006. Sloan, P. (2006). Rottenberg and the economics of sports after 5o years: An evaluation. International Association of Sports Economics. Paper no. 06- 08. www.le.ac.uk. Accessed on October 25,2006. Tacon, R. (2005) Football & Social inclusion: Evaluating Social Policy. www.footballresearch.org. Accessed on October 26,2006. Read More