#52. The economics of football – a load of balls

Behind the scandals and the allegations swirling around the game of football, the real problem has been hardly discussed at all by commentators. At the heart of the problem is a basic matter of economics.

FIFA has a monopoly, and behaves much as monopolists usually do. The power and near-immunity from consequences of any cartel on this scale is such that the near-inevitability of abuse is hard-wired into the structure.

The axiom that “absolute power corrupts absolutely” is as true of economics as it is of government.

Much the same, unfortunately, is true of the national leagues, which function as price-fixing cartels, to the enormous detriment of the football-loving public.

In fact, elite football is a copybook example of how damaging monopoly can be, and why competition can alone protect the consumer. Though it seems unlikely that anti-competitive behaviour in football can or will be – err – tackled, the lesson which this teaches is applicable far more widely.

That lesson is that, whilst competition promotes the best interests of the consumer, monopoly and oligopoly do the opposite.

* * * * *

The football world has been shocked, though seemingly not altogether surprised, by the investigations into FIFA, the governing body of the global game. Whatever the outcome where FIFA is concerned, it is to be hoped – though, sadly, not expected – that regulators will take a closer look at how the professional game more generally is structured.

Unfortunately, historical timing makes it unlikely that Adam Smith (who was born in 1723 and died in 1790) was a football fan. Otherwise, since he was born in Kirkcaldy, he might have supported Raith Rovers, which was not in fact formed until 1883.

But Smith’s strictures on cartels have remarkable applicability to football today. One of his most famous observations is that “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

On another occasion, Smith referred specifically to butchers, bakers and brewers, pointing out that it is not through the benevolence of these tradesmen, but through competition, that the interests of consumers are protected.

To appreciate quite how true this is, just imagine if all the bakers in the country got together into a cartel to control the sale of bread. The result, beyond a doubt, would be “a conspiracy against the public”. Prices would be fixed at high levels, and quality standards would very probably deteriorate as well.

In Britain, we had something not too far from this with the Corn Laws (1815-46), implemented by a Parliament of landowners to fix the price of wheat. Today, thankfully, the authorities would not allow something quite this blatant and this damaging to happen.

FIFA, on the other hand, has a near-total monopoly of world football. Ultimately, the real problem with FIFA lies not in dubious practices, or in the behaviour of individuals, but in its status as a global football monopoly. There is only one FIFA, and only one World Cup. So, whether you are a supporter or an advertiser, it is – so to speak – “the only game in town”, and is priced, accordingly, in a monopolistic way. In the absence of genuine competition, of course, influence – however obtained – becomes far more important.

Just as serious, where customers are concerned, is the way in which national elite football leagues function as blatant cartels, and it seems unarguable that the consumer – in this case, the football fan – suffers gravely as a result.

* * * * *

In economic terms, the suppliers – that is, the football equivalents of Smith’s bakers, butchers and brewers – are the clubs. These clubs compete strenuously on the pitch, but as businesses they do not really compete at all. Instead, they are organised into leagues – which function as price-fixing cartels.

What ought to happen, if free market principles applied, is that each club would sell, independently, the television rights to its home matches, with sharing arrangements operating for the small number of games staged at neutral venues. The broadcasters could thus drive prices downwards by setting individual suppliers – clubs – against each other.

The cartelisation of football does not, unfortunately, stop there. The collective sale of broadcasting rights is restricted to two or at most three broadcasters, and rights to individual matches are sold as aggregates rather than separately.

Just imagine if the rights to each game were sold individually, and to at least two competing broadcasters – the cost of watching football would fall dramatically.

* * * * *

None of this is going to happen, of course. The football industry would be vehemently opposed to the injection of competition in this way, arguing that its revenues would collapse.

Indeed they would, because the whole point of a cartel is to fix prices at artificially high levels. Of course, the clubs’ costs would collapse as well, because wages and transfer fees are themselves inflated by the monopolistic fixing of football’s income at artificially high levels.

Spare a thought here for the spectator, be he or she watching from the terraces, on television at home, or in a bar or pub. Even if nothing can – or rather, will – be done to get the ordinary fan a better deal, we should never forget that anti-competitive structures, not individual behaviour, are the real source of the ills in the game.

In this respect, football is no different from other aspects of the economy.

Competition is the best friend of the consumer.

Monopoly is his worst enemy.

#51. Hopes and fears in corporatist Britain

Though 63% of the electorate did vote for other parties, David Cameron looks politically unassailable, and cannot be held to ransom either by backbench Conservatives or by the SNP.

The big question now is whether Britain strikes out in a new direction, or continues along a corporatist route which has created a low-productivity, debt-dependent economy.

* * * * *

Hindsight is wonderful thing, and in this instance tells us that we should not have been all that surprised by the outcome of the general election. There was a huge (14.4%) swing against the coalition, but David Cameron’s genius lay in ensuring that the entirety of this pain was inflicted on the hapless Liberal Democrats. His party’s own vote, meanwhile, increased fractionally in a climate of fear that Labour’s economic wrecking-ball might swing into action with the help of the invading Scots.

Of the 14.4% of the voters who deserted the coalition, very few (a net 1.5%) switched to Labour, the rest going to the SNP, the Greens and, above all, UKIP. Britain’s quirky electoral system took care of the rest, ensuring that the Conservatives secured a Parliamentary majority with less than 37% of the vote, whilst UKIP’s 12.6% – 3.88 million votes – resulted in just one seat in the Commons.

The first-past-the-post (FPTP) system has its defenders – mostly in the established parties which it benefits – but can hardly be described as democratic. It is particularly unsuitable in a country which also lacks a separation between the executive and the legislature. As a result, Mr Cameron – like Tony Blair and Gordon Brown before him – can now exercise almost unlimited power even though 63% of the electorate voted for other parties.

* * * * *

Be that as it may, the selection of a new government creates both hopes and fears. Some of the fears are justified, but others are unfounded. Mr Cameron is not going to be held to ransom by his own MPs, for two reasons. First, such is the fragmentation of the opposition that it is hard to see any sort of Parliamentary coalition being formed against him.

Second, Mr Cameron’s success makes him a giant amongst midgets in a political elite remarkably devoid of talent or charisma.

The SNP’s 56 seats confer little or no Parliamentary power on the Nationalists, whilst the government has time enough to finesse the promised referendum on Europe.

Hope, of course, is pinned primarily on the fact that the Conservatives can now govern without the brake so often imposed on them by the Liberal Democrats. This, optimists think, may now enable the government to cement the economic recovery, and to tackle the issue of immigration.

With this come justified fears, many of them concentrated on the contradictory promises made during the election campaign. The government is committed to eliminating the fiscal deficit, and to legislating to tie its own hands over the big money-raising taxes, none of which must be increased.

But, far from specifying the cuts that will be necessary to make the numbers add up, the government is instead committed to handing out money, notably to the NHS, pensioners and first-time house purchasers. This suggests that unprotected departmental budgets may face severe cuts, most notably in the funding of conventional defences which have already become dangerously inadequate.

* * * * *

To look at how this might pan out, our best guide is the observation that the Conservatives, like Labour, are a corporatist party.

Whilst commentators examine every political twist and turn to determine whether Britain is moving to the Right or the Left, the far more relevant direction has been the shift towards corporatism and away from individualism.

Corporatism, it must be noted, is by no means confined to the private sector, but emphatically includes state organisations as well. The remarkable immunity to consequences that has protected irresponsible bankers and miss-selling businesses has applied equally in instances of public sector failure, of which Stafford and Rotherham are but two examples.

Essentially, corporatism empowers the big battalions, be they private or state, and confers enormous powers, privileges and immunities on those who run them.

This said, it is the power of the private corporates that needs to be subjected to particular scrutiny in the current environment. This will, for instance, be the touch-stone where the European Union is concerned. The corporate elite is strongly in favour of continued membership, which provides both market access and a price-lowering supply of labour. What the elite does not want from Europe is interference in Britain’s deregulated financial services industry, which is one of the key-stones of the ‘corporate economic preference’.

This economic preference is internally-contradictory, in that it wants both low-cost labour, on the one hand, and free-spending consumers on the other. It is this contradiction that has mired Britain in debt, because low-earning workers can only be high-spending consumers as well if the gap is filled by borrowing.

Successive governments have delivered this combination, together with the deregulated banking “flexibility” needed to fund it through easy lending. They have also delivered extensive corporate immunity, and huge state subsidies in the form of “corporate welfare”. The latter was estimated at £35bn by a recent study, a number which does not include the additional subsidy provided by in-work benefits paid to millions of low-wage workers. It is striking that, despite the minimum wage, zero-hours contracts and unpaid internships continue to be tolerated.

You will not need to be told that I dislike corporatism – in principle I am always on the side of the individual, not the organisation – but I should stress that, objectively, corporatism is bad for the economy, and for society more broadly.

In economic terms, corporatism is bad because it stifles competition, and also because it promotes a low-wage, high-consumption economy, surely a dangerously-conflicted economic model.

Obviously, the combination of cheap labour, high consumption and easy access to borrowing has driven Britain (and, for that matter, America) dangerously into debt. But it has also biased the economy away from output that can be marketed globally, and towards internally-consumed services instead. Since 2000, manufacturing output has decreased by 26% in real terms, and the broader category which I call “globally marketable output” (GMO) has fallen even further.

For these reasons, Britain now needs to borrow £100bn annually from overseas just to keep the consumption party going. Strikingly, the trade deficit is now compounded by big net outflows of interest and remitted profits, reflecting the role played by asset sales, as well as by borrowing, in an effort to sustain an economic system that, whilst internally contradictory, suits the corporate play-book to a T.

* * * * *

Could it be different? The answer is yes, but defying the corporatists would involve an unprecedented political conversion back to the individualism that, in the past, was an integral part of Conservative DNA.

Britain could, for instance, redress the balance by increasing the minimum wage, enforcing the law rigorously, and encouraging employers to pay the living wage. All of this would help the economy by increasing earned (rather than borrowed) spending power.

At modest cost, the small- and medium-sized businesses which drive innovation could be exempted from the archaic and increasingly iniquitous system of Business Rates.

The “revolving doors” between government and the corporate world could be blocked by setting a high (but strict) limit on the earnings of those who leave government for the private sector. The message would be that government service can (and should) be rewarding – but is not a road to riches.

Government could strengthen competition laws to benefit the consumer. It could vow to clamp down on corporate misbehaviour, dropping the seemingly-innocuous term “miss-selling”, and holding executives, rather than hapless shareholders, responsible when misbehaviour occurs. It could apply the same logic to the public services, to ensure that senior managers are held responsible for major failings.

It could prosecute tax-evaders as rigorously as it already prosecutes those who cheat the welfare system. It could end the “non-dom” tax concession, because opportunity – rather than tax-shelter – would be the offer that attracts desirable foreign investors to Britain.

In order to finance industrial regeneration, government could start to tap the vast amounts of potential investment locked up uselessly in the “capital sink” of an over-valued property market. It could inject high-return stimulus by enabling local authorities to go back to building affordable properties for rent (something which could, in part, be funded by dropping the HS2 white elephant).

Please note that none of these proposals involves “attacking the rich”, because better treatment of working people, and the injection of earned (rather than borrowed) spending power into the economy, does not require an incentive-eroding onslaught on the successful.

Meanwhile, the interests of the corporatists – be they private or state – should be subordinated to the good of the country as a whole.

* * * * *

These are things that could be done, all of which would stimulate investment, innovation and skilled employment. They are workable but, it must be admitted, are extremely unlikely to happen.

It is no consolation at all that the ‘low-wage, high-spend, borrow-the-difference’ model will in due course be brought down by its own contradictions.

#50. Everyone a loser

There can surely be no-one – politician or voter, investor or trader, bookmaker or punter – who really knows exactly what the outcome of the general election is going to be.

There is, though, one depressing prediction that can be made. It is that the result will be bad for Britain. Whilst it is obvious that a hung Parliament would create damaging uncertainty, the campaign has surely made it equally clear that neither of the major parties really offers effective leadership either. Their numbers do not add up, their policies do not address the critical issues, and substance has been ousted almost entirely by trite symbolism.

This being so, we really need to think about how to reform the processes of politics and government in order to make them fit for purpose.

Numbers that don’t add up

In terms of descent into trivia and avoidance of substantive issues, the campaign behaviour of both major parties has been deeply depressing. At the very least, the public is entitled to no-nonsense proposals in three main areas – tax, spending and debt; foreign and defence policy; and the economy.

No such clarity has been provided by parties whose policy vagueness has been leavened only by waffle and by trite, meaningless symbolism. Moreover, any government formed after the election will already have bound itself hand and foot with unwise, populist promises.

Starting with the fiscal situation – the balance between revenues, expenditures and borrowing – both of the major parties have behaved with lamentable irresponsibility.
Both claim a determination to eliminate the deficit. Both have promised not to increase any of the big money-raising taxes. Both have promised to spend more on the NHS. Both have offered hand-outs in other areas. Yet neither has admitted to planning any significant cuts in spending on public services.

Almost unbelievably, the Conservatives plan to tie their own hands by law, whilst Labour boasts an even more surreal plan to carve its own promises in stone.

The abdication of responsibility

Believe it or not, there have been two collective failures bigger even than the attempt to dupe the voters over fiscal matters. First, the economy is an obvious area in which fundamental issues have been ducked. Second, on matters of defence and foreign policy – in other words, of Britain’s security and standing in the world – there has been a deafening silence punctuated only by gimmicks.

Neither party has addressed the glaring weaknesses in conventional defences, yet both have committed to the vastly expensive replacement of Trident. Neither has ruled out cutting numbers of soldiers, aircraft and ships even further. Neither has had anything worthwhile to say about the threats posed by Russia and Islamic fundamentalism.

Labour’s sole foreign policy commitment has been a promise to appoint “envoys” to promote religious and sexual freedom, something which isn’t exactly going to set ISIS or Mr Putin quaking in their boots. The Tories have their own gimmick, promising to create an award for service in the reserves. For that matter, neither party has really had much to say about the EU – though David Cameron has promised a referendum, the proposed date (2017) is far enough away to achieve nothing other than investment uncertainty.

In short, the parties’ very limited commitments on defence and foreign policy have been a triumph of symbolism and waffle over substance. There might be envoys and a new medal, but there is no strategy for defeating ISIS or restraining Russia. Britain is to replace Trident without even plugging the maritime air surveillance gap that could enable an enemy submarine to track the deterrent boats from their own doorstep. The Navy is to have two aircraft carriers, but without the vital escorting ships and, very probably, without adequate numbers of aircraft either. There is not even a commitment to spend the NATO-required 2% of GDP on defence.

The economy – a policy black hole

And then there’s the economy, where again we have had waffle about incentives and apprenticeships instead of a debate about how the economy is supposed to function. As you will remember, my previous article set out a stripped-down, “at-a-glance” contrarian view of the British economy, which explained that the strategies of successive governments have been asinine.

To leave you in no doubt about this, let me just point out that we have let productivity and living standards drift whilst producing too little, consuming too much, and plugging the gap with borrowing and the sale of assets.

Far from promising to free up some of the vast potential investment buried in the “capital sink” of overvalued property, our politicians actually want to inject further demand into a supply-constrained housing market by offering “help” to first-time buyers.

There has been no serious discussion of how to rebalance the economy away from debt-purchased, internally-consumed services and towards the production of things that foreigners – upon whom Britain depends for imported food, energy and manufactured goods, and for £100bn annually of new debt – might actually want to buy.

Getting a grip

In sum, then, the politicians – and, more pertinently, the political system – are failing Britain, perhaps as never before.

What is needed now is new way of doing politics. That isn’t going to come from the incumbents, or from within the corporatist system itself. It can only come from the public, perhaps through a charter movement of the type I’ve described before.

If there is any optimism to be found in the present situation, it is that the unfitness of the major parties to govern has been laid bare.