The Olympics, Bernie Madoff and Me

madoffWhat must it be like, I wonder, to be the parent of an Olympic athlete, watching your kid accomplish magnificent feats of almost no social value? When your kid is a taxi driver or a shoe salesman or a carpenter, you can take pride every day in knowing that he or she has taken someone home, or helped someone walk, or given someone shelter. When your kid is an Olympic gold medalist, mustn’t you feel a little sheepish about all the superhuman effort that went into nothing more than taking a gold medal away from someone else?

There are two paths to success in this world. One is to create things of value. The other is to take things of value away from other people. There is more honor in the former.

Most occupations have at least some aspects of both. Even Olympic athletes add some social value when they improve the quality of the competition and therefore improve the spectators’ experience. But the incremental value of a given athlete is almost always very small compared to the alternatives. The Gold, Silver and Bronze medalists all spend ten years in training; if one of them spent those ten years driving a cab, the competition would be almost as exciting, and the world would have ten years’ worth of additional cab rides.

Of course a cab driver can displace other cab drivers, just as one potential gold medalist can displace another. But here’s the key difference: A displaced cab driver quickly finds something else useful to do, whereas the Olympic loser has still wasted ten years of training. [This is all a matter of standard economic theory, usually taught under headings like “Theory of Tournaments” or “Economics of Superstars”, and you can read a bit more about it in Chapter 18 of The Big Questions.]

Most people, I think, want their kids to get ahead by making the world a better place, not a worse one. That’s why parents usually glow with pride when they talk about “my son the doctor” or “my daughter the engineer” but look a little sheepish when they mention “my kid the lawyer”, and change the conversation completely if the best they can come up with is “my kid the Ponzi schemer”. So it should be for “my kid the Gold Medalist”. In terms of social value, a competitor in tournaments is roughly the equivalent of Bernie Madoff.

And what about “my kid the financial speculator”? David Friedman has an interesting post this week where he reminds us that speculators are sometimes more like socially productive cab drivers and other times more like socially wasteful Olympians. When a speculator foresees a food shortage, he hoards food, making more available in the future lean times. That’s a social service and (at least when the speculator is correct) he gets rewarded for his efforts. On the other hand, when multiple speculators compete to be the first to foresee that food shortage, a lot of effort gets wasted. There is little social value in foreseeing a shortage that somebody else was about to foresee anyway—just as there is little social value in winning a race that somebody else would have won anyway.

Authors, too, straddle both worlds. Write a book with a new and valuable idea, and you’ve enriched the world. Write a book with a new and valuable idea that somebody else was about to come up with anyway, or a book that distracts attention from another good book, and you’ve just insured that two authors have devoted a lot of effort to producing one books’ worth of value. Better for one of you to drive a cab.

I, of course, must plead guilty to writiing books. But at least I’m not running around a stupid track all day.

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53 Responses to “The Olympics, Bernie Madoff and Me”


  1. 1 1 lukas

    Olympians provide entertainment to millions of people around the world… is that to be considered wasteful? Of course a gold medal, in itself, has no social value. But a family evening or a pub outing watching the competition for the gold medal certainly does have value.

  2. 2 2 RL

    You write on microeconomics. David Friedman writes on microeconomics. So in some sense perhaps you and David “just insured that two authors have devoted a lot of effort to producing one books’ worth of value.”

    But probe more deeply and you realize no one writes on economics quite like you. And no one writes on economics quite like David Friedman.

    The Bright Conclusion: You both add value to the world.

    The Sad Conclusion: You’re both damn monopolists… :-)

  3. 3 3 Bennett Haselton

    @lukas I think the point is that even if your kid hadn’t become that Olympian providing that entertainment, someone else’s kid would have, and they would have almost certainly provided virtually the same level of entertainment. So your kid didn’t contribute anything by becoming that Olympian.

    Steve — does that mean it might be economically efficient for the government to limit the number of people who are allowed to become speculators? Have a large enough limit that for any foreseeable shortage, there will be enough of them to buy up enough goods to horde to make available during the shortage — but no more than that.

    There will still be a “tournament” problem as people will have to compete to become speculators, but unlike Olympians, the people who compete to become speculators and fail, will have skills that they can apply elsewhere.

  4. 4 4 Fenn

    Any chance you could burn a blog post explaining Friedman’s notion of how a homeowner is better off no matter whether the price of his house rises or drops (from Hidden Order)? Couldn’t wrap my head around that one.

  5. 5 5 Flop

    @Bennett Haselton:
    By that logic, there is no value in any performance. The great actor on the stage or the great musician could equally well have been replaced by somebody else’s kid. As long as the alternative actor or musician is almost as good as the one he replaces, they would have provided virtually the same level of entertainment.

    If we could foresee who would write successful books/be a great musician/be the best althlete etc, then we could easily avoid the waste of training those who will become the second-best. Alas, we don’t know these things a priori–as little as we know the value of a diamond if we don’t observe its market price.

    Lamenting someone’s waste of training to become an olympic gold medal winner is similar to lamenting the waste of having the market determine the opportunity cost of a good through trial and error. If people were happy to watch any runner/musician/artist no matter how good they are, competition would be unecessary and there would be no wasted combined effort in training. But as long as people get enjoyment out of watching THE fasted/most skilled/most daring etc person, competition is necessary to find out who that person is.

  6. 6 6 B. Watson

    How good do you think Olympic athletes are? The best in the world? Probably not, few have considered trying out. If more people tried to become curlers we’d have much better curling. The point is Olympic athleticism is already degraded because the rewards are not really very big. Just some prestige and a long shot at true fame and wealth. The best curler in the world might very well be a cab driver.

  7. 7 7 Al V.

    The Olympics, like other sports, are entertainment. If people are willing to pay for entertainment, shouldn’t the market provide it? And if the market provides sufficient incentives for athletes that they are willing to sacrifice 10 years of their lives for a small chance at fame, hasn’t the market done its job?

    Personally, I’m glad that my children have no interest in competitive sports, as I think the life of a professional athlete sounds horrible, but that’s my opinion.

    Would you argue that if Coppola hadn’t made “The Godfather”, someone else would have made a version almost as good (or maybe not good at all)? Or if Picasso hadn’t painted “Les Demoiselles d’Avignon”, well, there’s always Braque?

  8. 8 8 Steve Landsburg

    Fenn: I’ll add this to my list of possibles…

  9. 9 9 Steve Landsburg

    Al V.:

    And if the market provides sufficient incentives for athletes that they are willing to sacrifice 10 years of their lives for a small chance at fame, hasn’t the market done its job?

    If the market provides sufficient incentives for Ponzi schemers that they are willing to sacrifice decades for a small chance at the big time, has the market done its job?

    The market “does its job” when it provides (expected) rewards that are commensurate with your (expected) social contribution. Tournaments typically fail to do that.

  10. 10 10 Josh

    The term “Socially useful” is interesting to hear Landsburg use in this context. It’s strange how landsburg can at once sound like
    a budding socialist/central planner (which obviously he isn’t) yet at the same time make actual sense. That is, it does seem a little silly to spend 10 years training to increase one’s performance only by a negligible amount.

  11. 11 11 Flop

    Because the best athlete causes the effort of all competing athletes to go to waste, this is an application of Schumpeter’s argument about creative destruction. The gold medal winner is equivalent to the innovative entrepreneur.

  12. 12 12 Harold

    I see the argument, but not sure where it leads us eventually. The enjoyment is what it is only because the competitors are the best available. The incremental value of Usain Bolt is quite small in real terms, but huge in enjoyment terms, because millions of people enjoy watching him. If he hadn’t come along, the total enjoyment derived from 100m running would be considerably less over the last few years.

    It is a vague concept, but the enjoyment is not there if the best possible athletes are not competing. Watching any random selection of people run a 100m race could be just as exciting as the 100m olympic final, but there would be no interest. I think that the continual breaking of records is essential to this interest- it is not just the fastest now, but the fastest ever. I predict that interest and enjoyment will (or has?) fall(en) off if records are no longer broken.

    Of course, thousands of potential gold medallists are cab drivers. Millions are probably scratching a living and have no time or energy for athletics. But somehow they could have been competitors, and didn’t make it, so the current gold medallist is the best of all possible competitors. We only know this because loads of non winners also spend stupid amounts of time and effort trying to be the best.

    Millions of people watch when they could be doing somthing else (going for a run possibly?) Advertisers know this, and are prepared to spend a lot of money to advertise to them. The advertising money spend could perhaps be used as a guide to the enjoyment value of the spectators, using some factor or other. If we divide this among the athletes, I wonder if it works out at value for the time put in.

  13. 13 13 Neil

    That is the beauty of capitalism. It allows each of us to enjoy our own “created value” while decrying the wasteful “rent-seeking” of everyone else.

  14. 14 14 Jonathan Kariv

    Disclaimer:I’m someone that spends a fair amount of time on sports/training so the discussion below is through very tainted glasses but here goes.

    Well the fitness industry is a multi-billion dollar industry. With millions of people trying to buy information on the best way to train for sport x, (if you tell me most people are training to look “good” then bodybuilding is a sport). The information on this that is actually valuble comes from (and pretty much only from) competition like the olympics (and the rest of the elite sporting world).

    Obviously most everyone shouldn’t be training like mr gold medalist does, but tell me with a straight face the something like crossfit doesn’t add value to alot of people (not personally one of them) and tell me with an equally straight face that it would be as good if the standard of olympic weightlifting was sigficantly lower.

  15. 15 15 Ben

    Doesn’t this argument extend to most non-monopoly markets? There’s great benefit in having a clear, lemon-lime carbonated drink, but two of 7UP, Sprite and Sierra Mist are just taking value away from the other one according to your argument, right? So, if there is already a player in the mousetrap market, wouldn’t it would be socially wasteful to build a slightly better one according to your argument?

  16. 16 16 Patrick R. Sullivan

    Has the ghost of John Kenneth Galbraith kidnapped Steve Landsburg and is posting here in his place?

    Bernie Madoff was a criminal who deceived people, deliberately. As surely as the guy on the street who pulls a gun on a pedestrian and asks for his wallet. What has that to do with athletes (aside from the odd fixed boxing match or steroid juiced baseball player)?

    People engage in sports because they’re fun, and the better you can ski down a mountain, swim, or hit a ball with a stick the more fun it is. Why do people go to driving ranges when they’ll never be good enough to compete with Tiger Woods?

    Other people enjoy watching these activities (and have for thousands of years). What other justification is needed; free people choosing freely what to do with their time and energy.

  17. 17 17 neil wilson

    Tiger Woods has created nothing of value. Most anyone with any hobby has created nothing of value.

    If someone told me that my 5 year old daughter could win a gold medal in 15 years and that person would train her for free…. I would say NO!!!

    I would rather have my child have a childhood than train 60 hours a week.

    Steve: weren’t you the one who pointed us to the Tiger Woods apology? These athletes are not like you and me.

  18. 18 18 Josh

    I see two points to your post. Your first point is that there are many people (more than you’d like) who semmingly enjoy activities you deem silly and just not worhwhile (eg racing around a circle and/or watching others do so)for one to spend a large portion of one’s life doing. Your second point is that, even given that people enjoy these stupid things, why don’t the ones who actually perform the silly tasks simply train less and drive a taxi or something in their gained time. My response I guess for the second point might include something like how do you stop people who get paid for and enjoy engaging in silly activities to stop? Or is this simply a situation in your opinion to be lamented?

  19. 19 19 Steve Landsburg

    Josh: No, you’ve missed the main point, which is that markets work well when the reward to a supplier is commensurate with the social value of what he produces, and that tournaments (such as Olympic events) are classic examples of markets where that condition is not met.

  20. 20 20 Steve Landsburg

    Ben: The argument does apply to innovation in general. But there are countervailing arguments in the opposite direction: Each new idea inspires further new ideas (Hey! Those guys are doing pretty well with lemon-lime! Maybe we should think about other citrus flavors!), so the innovator’s reward can *under*state the social value of his contribution. On the other hand, for the reasons you cite, the reward can *over*state the social value.

    The only thing we can say in general is that there’s no reason to expect the innovator’s reward to *match* the social value of the innovation and hence no reason to expect that markets provide the optimal amount of innovation.

  21. 21 21 Steve Landsburg

    Patrick: The argument obviously does not apply to people who are doing sports just for fun. If you’re engaged in an activity for your own pleasure, there’s no reason to suspect you’ll choose the wrong amount of it.

  22. 22 22 Mark

    Going against your argument is that in the communist countries the central governments put more money into training athletes than we in the free market countries ever do. So maybe we are undervaluing their training.

  23. 23 23 Josh

    I see now. The market has not worked well because the supplier could have produced the same performance in 5 years as oppposed to 10, yet assumingly has an incentive to continue training. The incentive I guess is the gold medal. Perhaps the skaters should collude amongst themselves to limit training, but then enforcement would become an issu

  24. 24 24 Ben

    Steve, if you’re right about your response to me, doesn’t that mean that everything has the wrong price attached to it? If you’re an Olympic athlete engaged in another activity for your own pleasure, you will choose the wrong amount of that other activity since the wages attached to your job are too high. If you’re a beverage manufacturer engaged in another activity for your pleasure, you will choose the wrong amount of that other activity since the wages attached to your job don’t *match* the value they provide. Does anything at all in the practical world have the right world social price attached to it under this theory? If not, isn’t that a strong argument for strong-armed socialism?

    …or do I just have to buy Price Theory and Applications to find out? ;)

  25. 25 25 Ben

    Also, athletes inspire each other in exactly the same way that you suggest business innovators inspire each other, which leads to more social benefit in terms of entertainment value. Plus, business innovators get patent protection for their contributions — snowboarders who invent a new trick or athletes who develop a new racing technique have no such protection. So it seems to me that Olympic athletes must be comparatively *more* socially valuable than their business innovator counterparts who have more incentive to produce innovation.

  26. 26 26 Andre

    An athlete who wins a medal is not taking the medal from another athlete. None of them had a medal at the outset. One can argue that by winning, the athlete is preventing another from obtaining the medal. How significant that difference is, is arguable. But it is a difference.

    All of the athletes enter the competition knowing what the terms are. Many athletes surely must know they have no or little chance at best of winning any medal. Did the Jamaican bobsled team actually expect to win a medal? Did that UK ski jumper several Olympics ago actually expect to win a medal?

    Most of the athletes are competing in many events throughout the years. They know where they stand relative to other athletes in general and the elites in particular long before the Olympic Games. Yet, they continue to compete. Therefore, one must draw the conclusion that what drives them is not solely the prospect of winning a medal.

  27. 27 27 Ken

    Steve,

    I think you may have missed the point of sports or at least the Olympics. And I’m not sure that I can articulate it here. But it’s something like this: the west has produced a culture where people strive to be the best at something, almost completely independently of monetary reward. Some activities are more “socially useful” than others, whatever that may mean.

    Also, I don’t have respect for the attempt to change the meaning of a word by adding “socially” in front of it. Most times it means only what the speaker thinks, e.g., you’re saying that the Olympics are not socially useful, so I automatically translate that as: Steven Landsburg doesn’t find the Olympics useful, doesn’t know how to say why they aren’t to anyone else, so uses the distinctly meaningless phrase “socially useful”.

    This drive to be the best, eschewing monetary gain, but gaining glory (however that’s defined), is one of the few defining characteristics of the west. To some, I suspect A LOT, the “glory” is more important than the money once a person earns enough money. What I think of most when I hear people question the value of the Olympics was when Xerxes (I think it was Xerxes) said something to the effect of “How do you beat a people who strive for an olive wreath?” Then Persia promptly got kicked out of Greece, being decisively beat by the Greek hoplites. He couldn’t understand how the Greeks could value something other than money so much.

    Lastly, ou’re a mathematician. I spend a lot of my time around mathematicians. The dismissiveness of sports by mathematicians is almost ingrained. Maybe because many were nerdy weaklings unable to really compete in sports when they were a kid, then spend the rest of their adult life becoming very cerebral, denegrating anyone that’s so course as to play a sport, much less choose a sport as a profession. I’m not trying to insult you because I don’t know if the above pertains to you, but I have just as much disdain for geeks who put down atheletes and soldiers as I do for athletes and soldiers who put down geeks.

    I understand your economic argument, but most economics aren’t intereseted in culture. You even hint at it at the end of your post when talking about books. Which means that you probably discount the relevance of culture. A lot.

    Regards,
    Ken

  28. 28 28 Steve Landsburg

    Ken:

    I don’t have respect for the attempt to change the meaning of a word by adding “socially” in front of it. Most times it means only what the speaker thinks, e.g., you’re saying that the Olympics are not socially useful

    The word “socially” serves a purpose here; it means that we’re comparing the value of the activity to its cost, where the value is the sum of all benefits to all people, where benefits are measured in terms of willingness to pay.

    The dismissiveness of sports by mathematicians is almost ingrained.

    This is really quite irrelevant. Among my friends are economists who are rabid sports fans and love watching the Olympics; that doesn’t stop them from understanding that there are too many competitors and from being proud that their own kids are doing something more useful with their lives.

  29. 29 29 Ken

    “The word “socially” serves a purpose here; it means that we’re comparing the value of the activity to its cost, where the value is the sum of all benefits to all people, where benefits are measured in terms of willingness to pay.”

    Okay, so are the costs greater than the benefits? I’m willing to concede the Olympics aren’t socially useful under that definition.

    “This is really quite irrelevant.”

    As is the fact that you know mathematicians who are sports enthusiasts; so do I. Despite your complaint, it is relevant because you might be trying to rationalize your dislike of the Olympic Games, which is only a guess on my side. You could actually like the Games and are just be trying to stir up a hornets nest. It’s relevant because I was making a cultural point. It’s relevant because in the west the Olympics represent the pure spirit of competition and accomplishment, even if it’s not “socially useful”, and at times out of spite for “social usefulness”. Like Hardy and number theory. It’s relevant because there is a subculture of mathematicians that makes snide remarks about muscle bound athletes and use whatever rational is at hand to disparage them.

  30. 30 30 Steve Landsburg

    Ken:

    Despite your complaint, it is relevant because you might be trying to rationalize your dislike of the Olympic Games, which is only a guess on my side.

    Could be. But in view of the fact that the point I’m making is standard textbook fare, I think that tends to diminish the probability that my understanding of it is colored by my personal enthusiasms (or lack thereof).

    Okay, so are the costs greater than the benefits? I’m willing to concede the Olympics aren’t socially useful under that definition.

    Hold on. You say that as if it’s obvious; it’s not. To prove it, you need first to observe that there is a discrepancy between individual rewards and individual contributions to social value. In other words, you need the full argument from the original post.

  31. 31 31 dave

    where is this subculture and where do i sign up?

    there should be some some sort of trade barrier to muscle bound athletes.
    what are the costs associated with the raising of a citizen that is a number one (fill in the blank) as opposed to one that isnt?
    is it like building a pyramid (scheme)?
    the higher the pyramid block you are, the increasing number of blocks it takes to hold you up?

    who is the undisputed (brain weight not measured) mathematics champion of the world? sharpen your pencils, begin.

  32. 32 32 Larry

    Any one of those gold medalists would have inspired more people to strive harder to succeed than all of the books you’ve ever written.

    And if you put no social value into inspiration, the confirmation of the value of hard work, striving to do one’s best etc, all that the olympics are about and can be applied to any career, then I don’t even know what to say to reach through to you.

    You have very little common sense in knowing what drives human advancement, indeed. Very little for an average person, let alone for a so called ‘author’.

  33. 33 33 JLA

    A lot of the value people gain from watching sports comes from watching athletes break records. Consider how riveting people found the Michael Phelps saga was at the 08 Olympics. If 1 million people each gained $1 of value from Phelps’ effort (this is probably an extremely conservative estimate), that more than compensates for the wages that Phelps’ would-be replacer would have earned as a cab driver.

  34. 34 34 JLA

    I hit submit too quickly.

    To complete my above post, if we shrink the pool of competitors, we likely also shrink the pool of record-breakers, which will decrease (perhaps substantially) people’s utility from watching sports.

  35. 35 35 Steve Landsburg

    JLA: I’m not sure that works. Reduce the pool of competitors and you’ll make the records easier to break. I’m not sure why they should get broken any less often.

  36. 36 36 JLA

    Usain Bolt holds the current world record for the 100m dash at 9.58 seconds. Reducing the pool of tomorrow’s competitors won’t make that record easier to break. The only way to break records is for tomorrow’s top competitors to be better than today’s top competitors.

  37. 37 37 Josh

    JLA,

    Do you think the actual time (e.g., 9.58) actually matters to people? That is, it seems to me that records would still be broken if sprinters trained at more “optimal” amounts, even if the actual record time might be higher (say, 9.6 or whatever it turned out to be). But does the actual time really matter or only that it gets broken from time to time?

  38. 38 38 Jon Shea

    As chapter 18 of “The Big Questions” explains it, the problem with the Olympics (and other tournaments) is that the winner doesn’t displace the losers from completing, and in this way push them into some other productive activity. In contrast a someone who take a job as a circus clown does displace other would-be circus clowns, who presumably go on to become trapeze performers, human cannonballs, or other social productive occupations.

    But surely great athletes do displace other athletes, but they do so further down the ladder. Tiger Woods doesn’t keep Phil Mickelson from playing golf, but he probably does persuade several middling golfers that they don’t have any chance of making it as a professional. I know that the existence of Bjørn Dæhlie and Petter Northug do a lot to dispel any delusion that I might have about making it as a professional cross country skier.

    Can anyone please point me at a slightly more rigorous analysis of the economics of tournaments? Preferably online. Math is fine. I can’t even seem to figure out the right words to Google.

  39. 39 39 Steve Landsburg

    Jon Shea:

    The seminal paper is here:

    http://faculty.arec.umd.edu/cmcausland/RAKhor/RAkhor%20Task7/Rosen81.pdf

    This paper implicitly deals with the issue of inefficient entry to “superstar” professions, but if I recall correctly, the bottom line conclusion is never explicitly stated, so you might have to do a lot of reading to extract it. I’ll search for a more readable reference for you, but all references will ultimately trace their lineage back to Rosen’s paper.

  40. 40 40 Harold

    Lets say right now the athletes all thought “this is too much effort for no purpose” and carried on with their sports in an amateur way, whilst working as taxi drivers. They might be happier – at least the majority who put in superhuman efforts for apparently little reward might be. Their cab fares would be happier, so there is possibly a net gain here. How about the spectators? The central thesis seems to be that they would be just as happy, because they would still be able to watch competition among closely matched near equals. This probably would be true if these attitudes had always applied, and therefore the extra effort brings no extra benefit. However, I think that there would be a much reduced interest in spectating if it were to change now as times get much slower, and records seem unbreakable. This would reduce the pleasure that people get from spectating, so there would be a net cost. This is to say we could have had as much benefit for less cost, but it is too late to go back now.

    If one athlete drives a cab instead of competing, the competition is “almost” as exciting, and we would have 10 years worth of cab rides. How do we know the value of the cab rides is worth more than the incremental extra excitement? If a race is watched by 100 million people, each of whom get a little bit extra excitement, trhat can add up to a lot of value.

  41. 41 41 Ken

    “…the point I’m making is standard textbook fare…”

    I understand your economic point (I think anyway, since I am only n amateur economist). My point is economics seems to be very narrowly defined, ignoring among other things culture, so economics can only answer questions in a narrow scope. Maybe in your post you are talking about this in a narrow scope, but it doesn’t read like you are. I feel like we’re just going around in circles on this point with one not listening/understanding to the other (I concede it could be me not listening/understanding).

    “Hold on. You say that as if it’s obvious; it’s not. To prove it, you need first to observe that there is a discrepancy between individual rewards and individual contributions to social value. In other words, you need the full argument from the original post.”

    Steve, I am now confused. I’m not sure what “it” you’re talking about in your second sentence. Are you talking about cost or benefits or the analysis of both? I was saying that if the cost of Olympic athletes (the cost of training and resources dedicated to allowing them to compete) is more that what people are willing to pay to see this competition, keeping in mind we are talking about hundreds of millions of viewers, then by what you were saying in your post it’s reasonable to conclude that the Olympic Games are not socially useful. Your “Hold on.” statement makes me think I missed a subtle point. Am I?

    On re-reading your post, I am jarred by your equivalence of a ponzi schemer and an Olympic athlete. There is no comparison, in my view, much less equivalence. A ponzi schemer’s entire purpose is to deceive people into giving over their money to the schemer. Olympic athlete operate under no such deception. At no time has anyone been deceived into giving money because of a promise getting an even larger return on that money. The basis of the games is honest competition, whereas the basis of a ponzi scheme is deception. Did you throw this in there to get people riled or am I missing substantive similarities between Olympians and ponzi schemers?

    Regards,
    Ken

  42. 42 42 Steve Landsburg

    Harold:

    How do we know the value of the cab rides is worth more than the incremental extra excitement?

    This is exactly the key question. To see the answer, consider a race with three contestants, all equally likely to win. Spectators collectively pay $3million to watch the race, and the proceeds all go to the winner. With only two contestants, spectators would be willing to pay only $2.5 million. (There are many assumptions here, but the reasoning to follow would apply under very much more general conditions.)

    Then any contestant expects to win $1million on average, and so is willing to forego $1million worth of productive activity elsewhere in order to participate in this race. Presumably they do so. (If it were possible to race while foregoing anything less, there would be additional contestants.) So any given contestant is foregoing $1 million worth of productive activity in order to add half a million dollars to the spectators’ value.

  43. 43 43 Steve Landsburg

    Ken: What’s not obvious is that the cost of the Olympics is more than the benefit (where the benefit is defined as what people are willing to pay to see it). Both the costs and benefits are huge, so it’s not immediately clear which is bigger. See my comment above (addressed to Harold) for a numerical example of how the costs come to outweigh the benefits.

    The parallel between the Ponzi schemer and the athlete is that in both cases, they reap private rewards that exceed the value of their social contribution. Therefore we have too many of both. The optimal number of Ponzi schemers is zero and the optimal number of athletes is positive, but it remains the case that *starting from the equilibrium quantities*, the world would be richer with one less Ponzi schemer and with one less athlete.

    By contrast, competitive markets call forth shoe salesmen and taxi drivers in the optimal quantities. That’s not obvious; it takes a fair amount of proving. But it’s a key and wonderful fact about standard competitive markets, which unfortunately does not carry over to the markets for Ponzi scheming and athletics—and it fails to carry over for essentially the same reasons in both cases.

  44. 44 44 Ben

    Steve, since you’ve agreed this argument applies to innovators as well, why are you sure business innovators are socially valuable on net when their activity is subsidized (via patents) and Olympic athletes’ activities are not? You’ve said that business innovators also cause positive externalities, but so do Olympic athletes (once someone creates a new trick or technique, it is quickly copied even though it didn’t exist before); how are Olympic athletes any less socially valuable than business innovators?

  45. 45 45 Steve Landsburg

    Ben: People who copy an inventors’ innovations usually put them to productive uses. (I copy your better mousetrap and I catch more mice.) Athletes who copy other athletes’ techniques ramp up the level of competition, which could have some social value (if the ramped up competition makes better theater) but for the most part just requires all the other athletes to adopt the same trick, leaving the quality of the competition no better or worse than it was before. In fact, you could imagine that some tricks, once widely adopted, could *decrease* the quality of the competition.

    It is theoretically possible that an athlete’s innovations could create enough social value to justify the effort. But I think it’s more likely you’d get the opposite effect. In either case, though, the main point remains: There is every reason to think that markets provide the right number of taxi drivers, but no reason at all to think they provide the right number of athletes.

  46. 46 46 Ben

    Suppose the scores were never shown at the Olympics; would people stop watching? Spectator sports are all about performance, with the drama of who wins and loses being only a part of their value. When athletes innovate, they improve the quality of performance and enable other athletes to copy their improvement and build upon it. I’ll agree that markets provide the right number of taxi drivers under this argument, but I still don’t see how this argument doesn’t apply directly to business innovators as well as athletes; do you believe that there is no reason at all to think that markets provide the right amount of business innovation?

    Rosen’s conclusion appears to be that the market tends to be increasingly dominated by smaller numbers of extraordinary individuals earning large incomes when the size of the market expands. My understanding is that you say this is bad for tournaments because a small change in talent results in a disproportionately large change in income which gives athletes socially-destructive amounts of incentive to compete with other athletes. But Rosen’s paper seems to provide the counterargument, for athletes as well as business innovators: “Lesser talent often is a poor substitute for greater talent…hearing a succession of
    mediocre singers does not add up to a single outstanding performance” This is not a market failure as you suggest; it is an explanation of why incomes are distributed as they are.

  47. 47 47 Neil

    Ponzi schemes are illegal and tournaments are not. A good Coasian question was asked earlier, but I can’t find it, so I’ll repeat it. If tournaments are so wasteful (costs far in excess of the actual entertainment benefits), why do we have so many of them? Why haven’t we evolved institutions to contain them rather than facilitate them?

  48. 48 48 DividedLine

    If you reduce it enough, anything can be made to look trivial. When I raise my hand to cast a vote, it can be explained in terms of muscles, neurons, synapses, and cells. Not much of a social contribution at all. But it can also be explained in terms of ideas and beliefs, and then it becomes all about social contribution. Something could equally be described as graphite tailings on a piece of paper, or as the equation E=MC2. Excellence is an idea, an aspiration, and an inspiration, not merely pointless repetitive revolutions around an oval.

    As tarnished as they are becoming, there are still very few things in our society that inspire like an Olympic medal. If you ever get a chance, watch people when they are around one. Young and old, they all want to touch it. And they want to touch it because, even as commercialized as it has all become, that medal still represents to people something of the higher aspirations within us. It’s something above simple economics. It’s about meaning, not money. If one doesn’t already appreciate that, there is no logical argument than can persuade otherwise.

    I don’t buy the argument about parents of Olympians feeling “sheepish.” I’ve known several, and never met one that wasn’t proud of their child’s effort and accomplishments. I haven’t seen any on TV this week that look sheepish either.

    While the territory is filled with landmines, I do think a discussion of social value is important, and despite the dangers, the landscape should be traversed. An economics that takes no stock of social value and social considerations is an impoverished economics. But one of the first landmines has to be, is money the only measure of social value?

    What social contribution has Wall St ever provided America? Outside of ATM’s, it’s hard to come up with a clearly beneficial example of financial innovation. Banks close arbitrage opportunities quickly, and one can make a lot of money, but there’s no actual social gain from doing that. One might claim the financial system provides “liquidity,” and one could argue that if people are hanging on to a lot of idle cash there is some social loss, but it turns out just when we needed it the most, that liquidity froze…

    In the meantime, while we ponder these imponderables, I’m a lot more inspired by what I see right now in Vancouver than I am by what I see on Wall St.

    PS. The economics of superstars paper seems to indicate some unusual things about superstar markets. The first part isn’t unusual, as the audience grows, so does the size of the reward (i.e. TV exposure is lucrative for skating). But it also seems to indicate that as rewards go up, there is a customer substitution of quality for quantity (i.e. If you aren’t pretty close to Apollo Ono, benefits aren’t conferred upon you and therefore less talented skaters leave the market in favor of those closer to Apollo Ono.) I’d have to read it again, but the paper almost seems to indicate that the better Apollo Ono is than the rest of the world, the fewer skaters there will be in the sport because there is no real substitute for Apollo (i.e. look at what has happened to golf revenues since Tiger Woods changed his name to Cheetah).

  49. 49 49 Patrick R. Sullivan

    Good point Neil. But, I think I see Steve’s real problem when he says:

    ‘There is every reason to think that markets provide the right number of taxi drivers, but no reason at all to think they provide the right number of athletes.’

    It isn’t a question of providing ‘the right number’. Markets don’t do that. What they do do, is produce closer to ‘the right number’ than any other alternative of which we are aware.

    So, what is the alternative method of providing closer to ‘the right number’ of athletes?

  50. 50 50 Harold

    Steve, thanks for the explanation. I still have some confusion.

    The Olympics used to be purely amateur, and still a great many competitors (usually in the “minority” sports) are still amateur. Does this alter the model? In this scenario, we have 3 competitors who have trained hard but expect no financuial return (again slightly stretching the point, but small returns anyway). The public are still willing to pay $3 million, so we seem to have created a lot of value. Maybe this argument falls apart when we account for where the $3 million ends up.

    If the amateur status were to return to the Olympics, would we still have the wrong amount of athletes? Would the amount of training match the rewards obtained in terms of “glory” and “satisfaction” for the athletes. The athlete may have worked part time instead of full time (cost) in order to compete and get a medal (reward). He must value the medal above the lost income, to account for the possibility of not winning. He gains. The losing competitors presumably lose overall, but gain some compensatioj for their efforts by taking part. The rest of us have lost the benefit of his economic activity, but gained the pleasure of watching the event. Is this the same as the model above, but the paying public only pay the costs of the venue, so in effect they pay nothing, and the athlete gets nothing? As it is a zero sum game, the number of athletes is imaterial, but much pleasure can still be derived. It becomes difficult here to asses how much they would be prepared to pay the athlete, even though they actually pay him nothing.

    In the example, the athlete is willing to forego $1 million of productive activity elsewhere, but what if he was not able to produce $1 million activity? If his productive activity as a cab driver only added up to 0.5$M, then we are all even. I have a feeling this is worked out in the details. Here is another way to put it. Our three athletes in the example could have been cab drivers, and say could have generated $1 million activity. the public are willing to pay $3 million. If the public suddenly become more interested in the sport, and now are prepared to pay $6 million, the amount of economic activity foregone by the athlete is now $2 million. I don’t see how that has come about, since all he has done is still not drive the cab.

    Having looked at my comments here, it seems that the maximum gain is always achieved when the amount paid to the athletes is less, reaching its peak at pure amateurism. This sort of makes sense. Why should we pay huge amounts of money for totaly unproductive activity – which I think is part of Steves point. However, I am not sure that the individual effort of the athlete is the true cost here.

  51. 51 51 Super-Fly

    Flop’s comparison of Olympic athletes to other performers (actors, musicians, etc.) is off. An actor or musician doesn’t have to be a superstar to be successful (in their own definition of the word). They can still entertain people directly (plus, many of them have second jobs, which Olympic athletes rarely have time to do). Furthermore, there’s no limit to the number of actors we can have because if the ‘price’ of an actor goes down, then more people would choose to be screenwriters, directors, etc. There’s a fixed number of awards they can win (unless they make new competitions). Also, actors and singers are not homogeneous. They have different talents which they cultivate. Olympic athletes are required to reach an ideal, so the difference between them is less significant.

    As to the benefits of viewing the Olympics, let’s remember that televising the Olympics means that other shows can’t be televised at the same time. This is a non-trivial factor. I never watch the Olympics; I get no joy out of it whatsoever. On the other hand, I have to wait even longer to see the next episode of 30 Rock (or any other show). This makes me very frustrated (more than you would expect). I would be willing to pay X dollars to have the Olympics removed and 30 Rock put back in its rightful place.

    Lastly, when dictatorships spend alot of money (or use alot of firearms) to train Olympic athletes, they’re artificially inflating the amount of work that everyone in the free world has to do to compete. It’s kind of a jerk thing to do.

    Lastly,

  52. 52 52 Floccina

    The real losses to me are the cases where a player contributes to wins but not to entertainment. For example one might consider Michael Jordan added greatly to the viewing experience of most fans but that Shaquile O’Neal did not. Yet Shaquile O’Neal made a lot of money making one team win over another a zero sum situation.

  53. 53 53 Ben

    Steve, was my interpretation of the application of Rosen’s paper to this argument correct? If not, where in the paper you linked to does Rosen mention market failure, or that skewed income distributions with respect to talent are inefficient?

    Do you agree that the market, even sans-patents, supplies too many business innovators?

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