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The economic answer behind superstar salaries

Posted by on September 13, 2018 in Blog, Sport | Comments Off on The economic answer behind superstar salaries

The economic answer behind superstar salaries

Rugby Union’s Premiership season is underway again.

This is yet another professional sport which operates on the principles of socialism: the money all ends up in the pockets of what we might call the “workers”.

In a sport which was allegedly only played by amateurs until the mid-1990s, earnings have boomed. The average salary in the Premiership is over £200,000, and the stars are paid around the one million mark.

As a result of such payments, most of the Premiership clubs are only kept afloat by huge loans from their owners. Their accounts for 2016/17 were released at the end of August. Bruce Craig has put £18m into Bath since 2010. Bristol owe more than £20m. Wasps have liabilities approaching £50m.

But the players’ earnings are mere shadows of those of the top American sports stars. According to Forbes magazine, in the year to June 2018, the 100 best-paid athletes made $3.8bn between them. The boxer Floyd Mayweather topped the list with $285m.

Stars of popular culture pull in similarly staggering amounts. George Clooney earned $239m and Dwayne Johnson was the second highest among male actors at a mere $119m.

These vast sums appear to pose a challenge to economic theory. These players and actors are very good, but they are not so stupendously better than others who get paid very much less. How can this be explained?

The answer was provided in a brilliant article by the American economist Sherwin Rosen as long ago as 1981, entitled “The economics of superstars”.

Rosen based his theory on the fact that activities such as watching a sport or going to a film involve what economists call “joint consumption”.

If I am watching Arsenal, say, on the television, it does not matter how many other people are viewing at the same time. The game is still available for me to watch. In contrast, if I book a table at a popular restaurant or a particular seat on a flight, no one else can use it.

In 1880, if you wanted to hear a particular singer, you had to go to a live performance. Perhaps a thousand people could enjoy the joint consumption of the product. In 1980, tens of millions could watch on television.

Rosen, writing well before the internet, argued that advances in communications technology such as radio and television increased enormously the potential size of markets involving joint consumption. As he put it so succinctly, “the possibility for talented persons to command both very large markets and very large incomes is apparent”.

For example, the football played in England’s Premier League is in general better than that in the Scottish Premiership. But the English league rakes in well over £1bn a year in television rights, and Scotland less than £20m.

It is the combination of the joint consumption nature of these services and advances in communications which mean that a relatively small number of sellers can in principle service the entire market.

The more talented they are, the fewer still are needed. And that’s how they are able to earn so much.

Paul Ormerod 

As published in City AM Wednesday 12th September 2018

Image: Twickenham Stadium by David Iliff licensed under CC-BY-SA 3.0

Unemployment down, GDP up – there’s no logic for a public spending boost now

Posted by on September 6, 2018 in Blog, Economy | Comments Off on Unemployment down, GDP up – there’s no logic for a public spending boost now

Unemployment down, GDP up – there’s no logic for a public spending boost now

Despite the warmth of the days, there is a distinct autumn feel to the mornings.

And in the autumn, thoughts begin to turn to the Budget.

Speculation has already begun about what the chancellor Philip Hammond might or might not do.

For Labour, recent weeks have been dominated by Jeremy Corbyn’s alleged antisemitism and undoubted incompetence. So the anti-austerity tour of Britain by shadow chancellor John McDonnell, begun in Hastings in July, has scarcely obtained a mention in the media.

McDonnell obviously believes that there is a need to “end austerity”. He is far from being alone.

It is remarkable how this anti-austerity narrative continues to pervade political and economic discourse – it is as if the UK were in the grip of a massive recession.

In reality, the economy continues to do well. GDP is now over 18 per cent higher than it was at the trough of the recession in the first half of 2009. Unemployment has fallen steadily since the Brexit vote, and now stands at its lowest rate since February 1975.

The name of John Maynard Keynes is frequently invoked by those who want to “abandon austerity” and increase public spending. Yet in his major book The General Theory of Employment, Keynes stated very clearly: “when full employment is reached, any attempt to [stimulate the economy] still further will set up a tendency in money-prices to rise without limit”.

In other words, according to Keynes himself, at full employment any further stimulus will simply lead to higher inflation, with no benefit to output or employment.

Unemployment is at a 40-year low, while employment is at a record high, with 32.3m people in work – an increase of 3.4m from the depths of the financial crisis. This sounds like full employment in anybody’s language.

The overall shape of the recovery since 2009 has been balanced. Consumer spending has actually grown less than GDP, by just over 16 per cent since 2009 compared to an 18 per cent rise in GDP. Capital investment by companies has gone up by 35 per cent.

Public spending has also risen, but only by seven per cent (all figures after allowing for inflation).

This has been a recovery generated by the private sector.

The same point applies even more strongly to the US. Compared to the low point of the recession in 2009, public spending has actually fallen by three per cent, though there has been a modest rise in employment in that sector of 100,000. In contrast, the private sector has roared away: 19.5m net new jobs have been created since the winter of 2009, and GDP is up by over 22 per cent.

As in the UK, an important driver of the recovery in America has been investment by firms. This has grown by no less than 54 per cent compared to 2009.

There is no case at all for stimulating the economy by increasing public spending (funded by increased taxes) and abandoning so-called austerity, not when the private sector has done such a good job on its own.

As published in City AM Wednesday 5th September 2018

Image: Money by Max Pixel is licensed under CC0 1.0 Universal

 

From Venezuela to East Berlin, people will always choose capitalism over socialism

Posted by on August 29, 2018 in Blog, Capitalism, Socialism | Comments Off on From Venezuela to East Berlin, people will always choose capitalism over socialism

From Venezuela to East Berlin, people will always choose capitalism over socialism

How many people across the world in the history of humanity have fled from a capitalist country to a socialist one?

There was much amusement at the height of the long miners’ strike of 1984/85. A National Union of Mineworkers official from Yorkshire, a crony of Marxist trade unionist Arthur Scargill, sought sanctuary in the Stasi-controlled state of East Germany. He apparently felt unsafe under the jackboot of the Thatcher regime in the UK.

In the 1930s, some tens of thousands moved to Stalin’s Soviet Union, including the father of General Wojciech Jaruzelski, the leader of the last Communist government of Poland in the 1980s.

According to the euphemism used by the late Robert Maxwell in his biography of Jaruzelski, the father then “took a job in the north-east of the Soviet Union”. In other words, he was sent to the Siberian labour camps. He was lucky. Most of the other Poles who moved to the Soviet Union were subsequently shot.

These incidents stick in the mind precisely because they are so rare.

In contrast, when given the chance, millions flee from socialism. Venezuela is but the latest example. According to the United Nations, well over two million people have already escaped, taking with them just whatever they can carry.

The Berlin Wall was constructed in 1961 to prevent people moving from socialist East Germany to capitalist West Germany.

As post-war reconstruction got underway in the 1950s, around 3.5m left for a better life in the West – more than 10m translated into UK population terms. The Wall was built to keep them in.

The problem which the western countries have is not in keeping their own populations in. It is keeping others out, whether it is by Donald Trump’s wall in the US or Matteo Salvini’s refusal to allow boats of refugees to land in Italy.

The reason is simple. Economies based on market-oriented principles work much better than centrally planned ones. Capitalism, for all its faults, offers a much better lifestyle than socialism.

In the 1950s, South Korean living standards were not much better than those of sub-Saharan African countries. Now, South Korea is rich, while the North remains trapped in poverty. High-security levels are imposed by the latter to keep people in place. If they were removed, the country would rapidly become de-populated.

A fundamental concept in economic theory is that of revealed preference. People reveal what they really want not through answers to survey questions, but by their actions. If I say I prefer Pepsi to Coke but always buy Coke, I reveal that I actually prefer Coke.

Given the chance, over the years many millions of people have left socialist countries for capitalist ones. People were even willing to risk death to try to escape the old Soviet bloc countries.

By their actions, people reveal their preferences.

The financial crisis, scandals like Carillion, inequality and homelessness – all these are sticks for “useful idiots”, in Lenin’s phrase, to beat capitalism. But the point cannot be made often enough: whenever people are given the choice, they prefer capitalism to socialism.

As published in City AM Wednesday 29th August 2018

Image: Berlin Wall by Flickr is licensed under CC BY-SA 2.0

 

The economics of tourist overload

Posted by on August 23, 2018 in Behavioural Economics, Blog, Tourism | Comments Off on The economics of tourist overload

The economics of tourist overload

I am in Edinburgh for a few days at the Festival, where even Jeremy Corbyn has appeared. Disappointingly, he was not playing the role of Carmela Soprano, the mafia don’s wife who is always present but never involved.

Previously, I had been on Skye. Last month, I attended a conference in Venice. Edinburgh, Skye, Venice, all these locations bring home directly the problem of tourist overload.

This tendency of tourists to flock to certain places, whilst neglecting most others, raises questions for the economic theory of rational consumer choice.

Skye is very attractive, but so are other Scottish islands. The Piazza San Marco is stunning, but so are the cathedral squares in other Italian cities. From a rational choice perspective, it seems hard to account for the fact that visitor numbers here are so much greater than in their competitors.

The theory does help explain why Skye as a whole is much more popular than, say, Mull. It has a bridge, whereas the other islands have ferries. So less time and effort are required to get there.

But this framework appears to struggle with the massive concentrations of tourist numbers at particular locations on the island itself.

To escape the crowds, I suggested to my wife that we drive down Glen Brittle, an austere and bleak glen which finishes at a dead end.

I was astonished. A few miles along, the single-track road was virtually blocked by hundreds of vehicles, both on the road and balanced precariously on the boggy verges. The attraction was the Fairy Pools, a series of small pools and waterfalls in one of the many streams which flow down from the hills.

Now, there are literally hundreds of such waterfalls in the Highlands, many of which are more dramatic. From a rational perspective, there seems to be no basis for the massive popularity of the Fairy Pools.

But Sushil Bikhchandani and colleagues from the University of California published a paper in the top ranked Journal of Political Economy way back in 1992. It has become very well known in economics.

The specific purpose was to account for “herding” behaviour within the framework of rational choice. Or, as the authors put it, to identify when it is optimal for an individual to follow the behaviour of others without regard to his or her own information.

In their model, an individual has both private and public information and assigns weights to the two when making a choice. A new piece of information arrives, and the weights are updated.

When you read on the internet that the Fairy Pools are fantastic, you increase the weight on the public information which you have. It is easy to see how, in such circumstance, certain things can become incredibly popular. They are not necessarily popular on account of their inherent characteristics. They become more popular simply because they are already popular.

It was consoling, as we pondered how to escape the massive traffic jam in remote Glen Brittle, that rational choice theory is indeed able to explain the phenomenon.

Paul Ormerod 

As published in City AM Wednesday 22nd August 2018

Image: Edinburgh Fringe by Wikipedia is licensed under CC BY-SA 3.0

 

 

 

The intellectual imperialism of economics

Posted by on August 16, 2018 in Behavioural Economics, Blog, Business | Comments Off on The intellectual imperialism of economics

The intellectual imperialism of economics

At this time of year, most people are focused on leisure. The holiday you have just had, the one you are on now, or the one you are just about to go on.

With exquisite timing, the 1 August issue of the top Journal of Economic Perspectives has a symposium of papers about work.

The opening sentences in the summary of the first of these reinforces the impression that economists can sometimes be rather unworldly. This is despite the fact that the author, Edward Lazear, occupies a chair at Stanford Business School and replaced Ben Bernanke as Chairman of the Council of Economic Advisors in 2006.

“Labor is supplied”, the summary proclaims, “because most of us must work to live. Indeed, it is called “work” in part because without compensation, the overwhelming majority of workers would not otherwise perform the tasks”.

It is an excellent illustration of the technique outlined by the 1950s British satirical writer Stephen Potter about how to gain the upper hand in a conversation about business. In his book One-Upmanship, he describes his ‘Economics B’ technique as the ‘Approach of Utter Obviousness’.

To be fair, the paper itself has real content. Lazear points out that economics as a science has made good progress in specifying how compensation and the forms in which it comes influences worker effort.

The results are sometimes surprising. For example, Bengt Holmström, the 2016 Nobel Laureate, concluded his Prize lecture with the statement that “one of the main lessons from working on incentive problems for 25 years is that, within firms, high-powered financial incentives can be very dysfunctional and attempts to bring the market inside the firm are generally misguided”.

The other two papers are much less about conventional economics. They focus on the psychology and meaning of work.

Greg Kaplan at Chicago and San Schulhofer-Wohl of the Chicago Federal Reserve examine how changes in the distribution of occupations since 1950 have affected the aggregate non-monetary costs and benefits of working.

The physical effort of work has obviously declined a lot over the decades, so that is a benefit. But the authors find that the emotional impacts of the changing occupation distribution vary substantially across demographic groups.

Compared to 70 years ago, work has become happier and more meaningful for women, but more stressful and less meaningful for men. And most of these changes are concentrated on workers with lower educational qualifications.

The final paper, by Lea Cassar of Cologne and Stephan Meier of Columbia is even further removed from the traditional areas studied by economists. They tackle the massive topic of work as a source of meaning in people’s lives.

The authors develop an initial theoretical model which incorporates the three psychological needs at the basis of self-determination theory: autonomy, competence, and relatedness. Intriguingly, they suggest that the concept of meaning at work can be examined using existing tools in economics such as labour supply theory and principal-agent analysis.

Economics has a strong streak of confident imperialism. Increasingly, it intrudes into a wide range of other social sciences.

As published in City AM Wednesday 15th August 2018

Image: Holiday by Pxhere is licensed under CC0 1.0 Universal

From supply and demand to game theory, football is full of economics lessons

Posted by on August 9, 2018 in Blog, Sport | Comments Off on From supply and demand to game theory, football is full of economics lessons

From supply and demand to game theory, football is full of economics lessons

The football transfer window closes tomorrow, and the opening days of August have seen the usual flurry of activity at all levels.

The window in the rest of Europe stays open until the end of the month. Do we detect here the hands of Monsieur Barnier, in another dastardly European Commission plot to do us down?

Sadly, the reality is more prosaic. The Premier League clubs themselves voted this year to bring the official Fifa deadline forward. They were concerned about the negative impact of transfer uncertainty and speculation on their players.

Obviously, clubs buy players to try to strengthen their team. And there is no doubt that money talks. The more you can offer in wages, the better the quality of the player who will be interested in playing for you. The more cash you have, the more you can afford to buy them.

The correlation between spend and success is not perfect. But as a rule of thumb, teams in the top six of the Premier League spend on players’ wages at least twice the average amount of the bottom six.

Both the wages paid to an individual player and the amount paid in a transfer fee contain implications for economic theory.

In a modern economy, very few markets operate in complete conformity with the standard supply and demand model of the textbooks. The football market is no different.

All scientific theories have to make assumptions. One of the assumptions in this basic model is that the commodity being traded is homogeneous. In other words, each individual product which is bought and sold in the market is identical to every other one in the same market.

In this idealised world, price is determined by the balance between supply and demand. But products can differ in many subtle ways.

If they differ too much, they are no longer operating in the same market. The journeymen players in Leagues One and Two – the bottom two – are not competing in any way with the likes of Harry Maguire of Leicester and the England team, who is the subject of strong speculation of a bid from Manchester United.

Within the same market, supply and demand get you to a benchmark region, but not to the final price.

Ben Gibson, who has been in the England squad but has not yet played for the national side, has just been bought by Burnley from Middlesbrough. Burnley wanted a good defender. Middlesbrough, which narrowly failed to return to the Premier League last season, needed the cash. So supply and demand played a part in the transaction.

But why was the fee £15m? Middleborough could not have realistically asked for £50m. You get a world-class defender for that amount. Burnley could not have offered £5m. They would have been shown the door.

Supply and demand feature in setting a fairly broad range for the price. But within this band, it was indeterminate. Game theory is needed to understand the process which led precisely to the £15m figure.

Increasingly, a lot of modern economic theory is about bargaining, rather than the basic supply and demand curve. It makes it much more difficult for students, but more realistic.

As published in City AM Wednesday 8th August 2018

Image: Premier League Football Pixaby is licensed under CC0 1.0 Universal

Facebook, facts, and alternative fictions: How to predict the narrative of the future

Posted by on August 2, 2018 in Blog, Social Media | Comments Off on Facebook, facts, and alternative fictions: How to predict the narrative of the future

Facebook, facts, and alternative fictions: How to predict the narrative of the future

Last Thursday, Facebook suffered the biggest one-day loss in the history of Wall Street.

The company’s shares dropped nearly 19 per cent.

Rather incredibly, Facebook reported an increase in revenue of no less than 42 per cent over the same quarter last year, and a rise in profits of 31 per cent.

But the narrative which swept the markets was wholly negative. Investors focused on the less-than-expected growth in new users, and on the company’s projection that its profit margins will fall in 2019 – from its current 44 per cent to just the mid-30s.

A wholly plausible alternative story would have been that the company continued to grow very strongly, but there would be some slow-down from the recent stratospheric rates of expansion. And the board was fully aware of the situation – this was not an adverse surprise.

The facts could have been used in support of either of these narratives. Yet one of them prevailed, and the other got no traction at all.

Objective evidence was perhaps a stronger element in the 20 per cent fall in the Twitter share price the day after the Facebook plunge. The company reported a drop of one million users following its action to delete fake and offensive accounts.

But even here, a different story could readily be concocted. A potentially major problem had arisen, but the company had taken decisive action to deal with it. Further, its efforts to monetise the platform were starting to work.

John Maynard Keynes emphasised the importance of narratives, rather than mere facts, in financial markets. He described what has subsequently become known as the Beauty Contest Game.

In the politically incorrect 1930s, newspapers would run competitions based on pictures of young women in bathing costumes. But the winner did not have to judge which of them was in some objective sense the most beautiful. Rather, they had to guess which one most entrants would select as the best.

Keynes pointed out that this can rapidly become even more complicated in the markets. As he put it so elegantly: “We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

Scientific advances in the twenty-first century are making it possible to anticipate which narrative around a particular event will predominate.

There are two separate aspects of this. The first relates to our understanding of how ideas or stories either spread or are contained across networks of individuals. It turns out that where a narrative gets its initial traction in the network can be much more important than its actual content.

The second of course is the development of artificial intelligence and big data. These technologies enable the networks which connect people, whether on Twitter or in financial markets, to be mapped in detail.

It is not just hedge funds but central banks such as the Bank of England that are interested in these exciting new technologies. There is power to be had in mapping alternative narratives and predicting the future.

As published in City AM Wednesday 1st August 2018

Image: Social Media by Pxhere is licensed under CC-BY-1.0

The UK’s capacity to innovate matters far more than panic over consumer spending

Posted by on July 25, 2018 in Blog, Brexit, Economy | Comments Off on The UK’s capacity to innovate matters far more than panic over consumer spending

The UK’s capacity to innovate matters far more than panic over consumer spending

The debate about Brexit has become mired in a virtually incomprehensible quagmire of detailed and technical negotiations between the UK and the rest of the EU.

Yet the campaign itself in 2016 was dominated by broader questions of political economy.

In addition to the hurly burly of claims about extra NHS spending or Project Fear, both sides took a serious, longer-term view of what was needed to sustain Britain’s prosperity. All this has been lost sight of, but the fundamental issue has not gone away. So does Britain have an economy which is fit for purpose in the twenty-first century?

At one level, the evidence seems to side with the Remain camp. Growth in the UK since the depth of the recession in 2009 has been decidedly unbalanced compared to much of the rest of the EU.

We can break down the growth of the total economy – GDP – into categories defined by who is doing the spending: how much is done by individuals as consumers, how much by firms in terms of capital investment, and how much by the public sector. We also have the net balance between our exports and imports.

Looked at this way, Britain’s growth since 2009 has been concentrated in a seemingly unhealthy fashion on consumer spending. This accounts for no less than 58 per cent of the total growth in the economy 2009-18. Investment by companies takes up another 29 per cent, and there has been a slight deterioration, amounting to just three per cent of GDP, in our net exports.

This is in sharp contrast to Germany. The increase in investment is similar, making up 27 per cent of the total increase in GDP. But consumption is just 32 per cent, and net exports have boomed, accounting for 22 per cent of the increase in German GDP. No wonder President Trump has concerns about German trade surpluses.

This pattern is similar in countries closely connected to Germany. Compared to the UK, increases in consumer spending are only a relatively small part of the total expansion of the economy since 2009 in Austria, Belgium, Denmark, France, the Netherlands, and Sweden.

Surely an economy which relies less on spending by individuals is better placed than one in which they splurge every last penny?

Well, up to a point. For one thing, public spending accounts for a larger proportion of total growth in the Greater Germany group than it does in the UK. The rise in public spending in Britain makes up just eight per cent of total growth. In France, it is 25 per cent.

But the key evidence comes from the US. Here, spending by individuals makes up no less than 75 per cent of the total expansion of the economy since 2009. Yet America remains the most dynamic and innovative economy in the world.

Economic theory has long identified the capacity to innovate as being the key determinant of long-term growth, not who spends what. The debate over post-Brexit Britain should be about how to boost innovation, and whether the European Commission is a help or a hindrance to this.

As published in City AM Wednesday 25th July 2018

Image: Regent Street & Oxford Street by Tony Webster is licensed under CC-BY-2.0

Investors should intervene to stop high executive pay, before the regulator does

Posted by on July 18, 2018 in Blog, Economy, Executive Pay, High Pay | Comments Off on Investors should intervene to stop high executive pay, before the regulator does

Investors should intervene to stop high executive pay, before the regulator does

Shareholder discontent over executive pay continues to rise. Last week, the outgoing boss of BT, Gavin Patterson, was in the firing line.

At the company’s annual general meeting, 34 per cent of investors voted against the remuneration report, which included a £1.3m bonus payment to Patterson.

Concern about top pay has spread even to the regulatory bodies in the United States. Traditionally, they adopt a rather hands-off approach, and yet, when they do decide to act, they act decisively.

About 40 years ago, the typical compensation of a chief executive in America was around 30 times more than that of the average employee. By the mid-1990s, this has risen to a ratio of 100 to one, and now it is some 300 times as much.

True, share prices have boomed over this period, but the rate at which the economy has grown has fallen.

Between 1957 and 1987, real GDP in the US grew by 3.5 per cent a year, but by only 2.5 per cent from 1987 to 2017.

Chief executives have not got better at expanding the rate at which goods and services are produced, but they have got better at free-riding on the rise in equity markets.

Against this background, in September last year, the US Securities and Exchange Commission mandated that companies must disclose the ratio of the chief executive’s compensation to median employee pay.

Some may see this as bureaucratic meddling. But the behaviour of board members both here and in America has given rise to what economists describe as an externality.

The decisions to reward the relative failure on the part of executives have consequences outside of the decisions themselves. So while capitalism is by far the most successful economic system ever devised, the perception that executives are receiving unfair levels of compensation is undermining belief in capitalism itself. This is the externality.

In economic theory, the existence of externalities provides a sound justification for intervening in the workings of the free market.

A fascinating paper published a year ago by Ethan Rouen of Harvard Business School provides strong evidence that unwarranted executive pay levels adversely affect firm performance.

He obtained very detailed data, some of it not publicly available, from the US Bureau of Labor Statistics for 931 firms in the Standard and Poor’s 1,500 between 2006 and 2013, including total employee compensation and the composition of the workforce.

Overall, Rouen found no statistically significant relation between the ratio of executive-to-mean employee compensation and performance. This is telling in itself.

His results went on to show “robust evidence of a negative (positive) relation between unexplained (explained) pay disparity and future firm performance”. In other words, people do not mind high pay – when it can be justified. It is when the snouts are in the trough that resentment rises and performance suffers.

Shareholder opposition to excessive executive packages is certainly rising, but has rarely been decisive. Investors need to act if they are to avoid the regulators really clamping down.

As published in City AM Wednesday 18th July 2018

Image: Fat Cat by Linnaea Mallette is licensed under CC-BY-1.0

Never mind who wins, the World Cup is a treasure trove for curious economists

Posted by on July 12, 2018 in Blog, Economic Theory, Sport | Comments Off on Never mind who wins, the World Cup is a treasure trove for curious economists

Never mind who wins, the World Cup is a treasure trove for curious economists

Our boys make progress – and I don’t mean on Brexit.

On a visit to Glasgow last Thursday, a popular Scottish newspaper had a mock-up photo of Harry Kane lifting the cup. In massive type, the headline shrieked “This Would Be the End of the World”. Yes, it would rather put the Highland Clearances into perspective.

There is a general perception this year that the football has been more entertaining than usual. This is reflected in the fact that the average number of goals per game – 3.18 – is the highest since the 1958 finals.

The qualifiers for the last 16 generally followed the form book, with only three of them – Russia, Denmark, and Sweden – edging out teams placed above them in the FIFA rankings before the tournament started.

But the patterns in the results show once again how close many of the teams are in ability. One team has to win, though it is not obvious which one.

Germany’s own qualifying group illustrates the point. A key concept in economic theory is that of transitivity. It essentially means that preferences should be well-structured.

If I prefer product A to product B and product B to product C, the assumption is that I prefer A to C.

If we carry this over into team sports, it seems logical that if A beats B and B beats C, then A should beat C.

None of these “transitive triples”, as the jargon puts it, were observed in Group F. Mexico beat Germany, who beat Sweden. But Sweden beat Mexico. Sweden also beat South Korea, who beat Germany.

The conclusion is that the teams in this group were very evenly matched. It was largely a matter of chance rather than superior ability that Mexico and Sweden qualified.

In the round of 16, three of the eight games ended in draws and the result was by penalty shoot-out. Two of the others were decided by goals deep into injury time. And one of the quarter finals was won on penalties.

Again, the implication is that there is a great deal of randomness in the outcome. Even in England’s famous victory over Colombia, the opposition goalkeeper got his hand to the final penalty shot but could not prevent the ball entering the net. Move his hand by just a few centimetres, and he saves it.

To round off this football economics analysis, finally and frivolously, is winning the World Cup good for the economy? I looked at the eight years from 1974 when European countries won.

As a control group, I examined the US and Australia, two western economies where soccer is a minor sport. Growth in a World Cup year was higher than in the previous year seven times, and lower nine times. Growth was higher in the year after the World Cup nine times and lower seven. So the pattern here looks completely random.

In the countries which won, growth was higher in the World Cup year than the previous on four occasions, and lower on four. But in contrast to the control group, growth in the year after victory fell six times out of the eight.

Winning the World Cup is bad – or so the statistics say!

As published in City AM Wednesday 11th July 2018

Image: World Cup 2018 by RonnyK is licensed under CC-BY-0.0