Mitt Romney vs. Joe Paterno

What do Mitt Romney and Joe Paterno have in common? They both devoted substantial fractions of their careers to promoting wasteful competition — Romney at the Olympics, and Paterno at the Penn State football program. How do Mitt Romney and Joe Paterno differ? Romney, unlike Paterno, devote a substantial fraction of his career to promoting healthy competition at Bain Capital.

To understand what’s wasteful about Penn State football, think about what life will be like now that the program’s been eviscerated. The overall quality of college football will decrease — but not by much. Any titles Penn State might have won, someone else will win instead, and the games leading up to those titles will be almost as fun to watch. But Penn State has reaped enormous rewards over the decades in exchange for its relatively small contribution to the quality of college football — and has plowed a substantial fraction of those rewards back into the program in order to maintain the flow of revenue. In short, Penn State football has sucked up a lot of resources while providing relatively little in return.

That’s an exception to the general rule that competitive markets do a spectacular job of matching private rewards to social contributions. The price of an orange reflects what someone is willing to pay for that orange. Orange growers care directly about prices and therefore care indirectly about providing value for consumers. Therefore the market provides neither too many oranges nor too few.

That’s not idle speculation; it’s the bottom line of a somewhat subtle argument that’s in all the economics textbooks. But an argument is only as good as its assumptions, and the assumptions of this argument fail spectacularly when a single champion can serve the entire market — as in football, where there’s no limit to the size of the television audience for a winning team, or the Olympics, where there’s no limit to the size of the endorsement market for a single gold medalist.

As a result, society is probably overinvested in athletic contests. People love the Olympics (I’m on notice from my wife that I won’t be hearing much from her until they’re over), and therefore the Olympics ought to exist. But they should probably be scaled down a bit. Cutting out 10% of the competitors would reduce the quality of the spectacle only slightly, while freeing up a lot of resources for valuable alternative uses. Although economic theory provides excellent reasons to believe that markets provide just the right number of oranges, just the right number of cab drivers and just the right number of electrical engineers, it provides no reasons at all to believe that markets provide anything like the right number of championship-level athletes.

This means that long before many of us had ever heard of Jerry Sandusky, we already knew that Joe Paterno had devoted his life to a socially wasteful activity. By winning championships, he redirected a lot of income to Penn State. But redirecting income is not the same thing as creating it. If Paterno hadn’t been winning championships, someone else would have.

Now, I don’t think we should be too quick to criticize people for responding to the incentives that were handed to them, but I do think there’s something unseemly about devoting your entire life to a socially wasteful activity. That’s why Paterno’s life was not a heroic one, even absent all the recent scandals. And for exactly the same reasons, Romney’s tenure at the Olympics was unheroic. The Olympics were already bigger than they should have been, and Romney made them bigger. That’s bad. A lot of people got rich, but much of that came at other people’s expense.

By contrast, as a venture capitalist, Romney was in the business of creating wealth, not just redistributing it. You create wealth when you nurture firms that survive by fulfilling consumer demand in ordinary (non-tournament) competitive markets. You create wealth when you shut down firms that are swallowing more resources than their output is worth. You especially create wealth when you innovate — whether that innovation takes the form of new technologies or new patterns of trade. You create wealth for consumers when you outsource jobs to more efficient producers.

It’s sadly ironic, then, that Romney is being touted as a hero for his socially wasteful years at the Olympics and a villain for his socially productive years as a capitalist. Should we blame the schools?

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70 Responses to “Mitt Romney vs. Joe Paterno”


  1. 1 1 Mike H

    Presumably, his year as a presidential candidate and 4n (where -1<n<3) years as a president is even more wasteful, for the same reasons?

  2. 2 2 AC

    I think you would find a lot of socially wasteful market activity if you looked closely. Academia, perhaps? (I say that as a big Landsburg fan.)

  3. 3 3 Paul Grayson

    Steve, I have never understood what is going on with the demand side of this argument. If gold medals attract too many competitors, shouldn’t consumers and contest organizers realize that they can offer cheaper prizes? (Olympic “gold” medals are, in fact, only gold-plated these days.)

  4. 4 4 Steven R

    This is a strange argument regarding Penn State. How many billions are spent on all sorts of entertainment each year? Are all forms of entertainment “socially wasteful”? How does one measure the “social contribution” of entertainment” How can one even begin to determine how much is too much – especially if all the transactions are voluntary?

    On 7 weekends a year, 50,000-70,000 people would pay approximately $50 a ticket and make the not easy drive to State College to spend the day and watch football (actual attendance is +100,000 but I’m assuming a substantial portion of those attending are students or live locally). Clearly it was providing a substantial return to the people that enjoy it or they wouldn’t bother going and spending the money.

  5. 5 5 Chas Phillips

    The sole mission of the NCAA ought to be assuring that athletes are limited to four years of varsity competition–that’s it; free markets will take it from their. But the notion that Penn State’s football program redirected rather than created revenue is worth a closer look. Some questions: what percentage of football revenue is used for purposes other than perpetuating the football program? What impact does the football program have on the willingness of alumni to provide contributions for the University’s general fund? How would the alumni (the largest part of the football program’s customer base) choose to spend their entertainment dollars if PSU football did not exist and isn’t that group best qualified to determine the value of this form of entertainment? How much ancillary revenue does the program create in and around State College for local businesses and wages for the employees of those businesses? How do the most successful PSU players figure into all of this, those who sign large NFL contracts and provide highly valued entertainment to millions of fans? The world would be infinitesimally poorer had Ernest Hemingwaynot lived and, following your logic, he may also have been pursuing a socially wasteful market activity. The sales of his novels did not increase the publishing pie but, rather, redirected revenue that would have been spent on the novels of others to the purchase of his. It is hard for me to believe that the question of the social value of PSU football is as simply answered as you suggest.

  6. 6 6 Steve Landsburg

    Chas Phillips:

    The world would be infinitesimally poorer had Ernest Hemingwaynot lived and, following your logic, he may also have been pursuing a socially wasteful market activity. The sales of his novels did not increase the publishing pie but, rather, redirected revenue that would have been spent on the novels of others to the purchase of his.

    This is correct. A best-selling author can serve a million readers just as easily as he can serve a thousand, which is the key step in the argument.

  7. 7 7 loveactuary

    I agree that Romney should be hailed for his venture capitalism and less for his Olympics leadership, but I’m all with Chas above. Coming from a college football town myself I take issue with:

    ” Penn State football has sucked up a lot of resources while providing relatively little in return.”

    I know PSU fans who are (remain) would say that the program does and did bring them enormous gains, regardless of this recent turn of events. The utility gained through the excitement, the close victories experienced with friends and families, is inimicable.

    There has been Plenty returned for the resources devoted, even if they cannot be counted in dollars, and the removal of on-the-book wins and championships will not take those moments and years away.

    I don’t propose that it is the efficient amount of resources spent for the benefit reaped, but in my opinion you overstep when you say “…providing relatively little in return.”, even though the word ‘relative’ here is pretty safe for you.

  8. 8 8 Bradley Calder

    Is the tournament problem apply when people offer prizes (x prize etc.) to accomplish a goal?

  9. 9 9 Bradley Calder

    Professor,

    If I could make a post request, I’d like to hear your thoughts on Charter Cities. Thanks!

  10. 10 10 Robert

    This argument reminds me of an argument about rent seeking. I once heard someone make the claim that students attempting to gain admittance to Harvard are rent seekers and thusly Harvard is creating a tournament that is socially wasteful. There are a limited number of spots available for admittance and hundreds of thousands of students are competing against each other. It is a tournament and the number of competitors is not limited. Shouldn’t we limit the number of students competing for admittance to Harvard? With less competition, we won’t have as many students losing in the tournament of gaining entrance to Harvard. And its not like any one of these students is likely to improve the quality of Harvard education/prestige.

  11. 11 11 Roger

    So you like oranges better than sports. But why? If you did not have oranges, you would just eat something else. Most people eat more than they need anyway.

  12. 12 12 Ken B

    re 5 & 6: Shouldn’t one better say that Hernest Emingway, who wrote the less successful and less impressive For Whom the Bell Rings was the one who wasted his time and efforts?
    Or consider Danny Kaye and Satchmo, linked by Steve recently. Were their efforts wasted, would we have been equally well served by Donnie & Marie Osmond?

  13. 13 13 Ken B

    I hope I will be allowed this followup to 12 Monty Python http://www.youtube.com/watch?v=eCM2nEBE0RY

  14. 14 14 justin

    And if Penn State football never existed then the quality of college football wouldn’t have changed much either. The players would have simply played elsewhere. But I guess we can ignore the benefits it infers to hundreds of thousands of PA residents and 40,000+ students if we violate the Landsburg rule- that when you do cost benefit analysis you have to count ALL the benefits.

  15. 15 15 Josh

    so in other words should we actually welcome some
    sort of collusion in these tournament markets? E.g., athletes colluding amongst themselves to not workout as hard /train less
    Often, etc.? The athletes in theory should be no worse off as long as they could keep everyone in line. But then again like any collusion there would be an even greater incentive for some then to work harder to grab the top prize since it would be easier in this sort of colluding environment. Hmm.

  16. 16 16 Matthew

    Steve,

    Where are you reading that Romney made the Olympics bigger? My understanding his that he managed the Salt Lake City Olympics and then left. I don’t think one man has the power to add events.

    In your post, you recognize that the Olympics ought to exist. If it ought to exist, putting them on is a good use of resources. If Romney’s involvement helped the show happen, then his involvement is a good use of resources.

    I agree with your point that generic athletic competitions at the margin don’t add much, but your Romney/Olympics example isn’t a good one. The Olympics are no generic competition. If you scrapped the Olympics, a lot of people would be upset. If you scrapped the arena football league, few people would so much as blink.

    Matt

  17. 17 17 Todd

    @Robert #10

    Admission to Harvard is not an example of tournament problem wastefulness like football or the Olympics. Both cases do involve a large number of competitors striving for the same goal, and the final product (a championship or Harvard graduating class) would see only a slight reduction in quality from reducing the number of participants.

    The difference is that Harvard graduates, unlike losers in football or the Olympics, have not wasted their time if they fail to get into Harvard. Their effort is still valuable, and they will go to a slightly less prestigious school and improve the quality of graduates at that school. In athletics, the losers get little or no reward (generally speaking) and provide little or no social value. Not so with college admissions.

  18. 18 18 Steve Landsburg

    Paul Grayson:

    Steve, I have never understood what is going on with the demand side of this argument. If gold medals attract too many competitors, shouldn’t consumers and contest organizers realize that they can offer cheaper prizes?

    Here’s an ultra-simple example: Suppose one comedian serves an audience of a million people, each of whom is willing to pay $1 a month to buy his albums, etc (which he produces at zero cost).

    A second comedian is able to provide performances for which those same million people will pay $1.02 a month.

    If the second comedian enters the market, the first comedian cannot survive. No matter how he prices his services, the second comedian will charge one penny more and drive him out of the market. So the second comedian enters, drives the first comedian out, and earns $1,020,000 in revenue, of which $20,000 represents his contribution to social value and $1,000,000 is a transfer from the first comedian. If the cost of entering is anywhere between $20,000 and $1,020,000, then the second comedian enters, and the entry is wasteful.

  19. 19 19 Ken B

    @Steve, re 18. Why would I abandon the $1 comic for the $1.02 comic? Because my consumer surplus is greater. So under your example 1M people perceptibly boost their consumer surplus.
    I don’t see a term for that in your sums.

  20. 20 20 Rob

    Steve,

    Can the tournament approach also be applied to an academic/author who devotes a lot of time to writing a spectacular book, but that is only marginally better than the next best book?

  21. 21 21 Steve Landsburg

    Rob:

    Can the tournament approach also be applied to an academic/author who devotes a lot of time to writing a spectacular book, but that is only marginally better than the next best book?

    Absolutely.

  22. 22 22 Steve Landsburg

    Ken B: The $1.02 comic gives you two cents more value and charges you two cents extra for it.

  23. 23 23 Nathan

    Mr Landsburg seems to be confused about exactly what it is of value that sports teams create. It’s not simply a feeling of amazement at the physical abilities of the athletes (though that’s a part of it). There’s also the feeling of comraderie and loyalty that comes from supporting a team from your area and sharing in their victories and defeats.

    If you eliminate a team, all the best players may simply transfer to another team, but the fans for the most part won’t. In other words, football teams are not close substitutes for each other. Just ask a Red Sox fan if they’d be equally happy to cheer for the Yankees.

    For an Australian example, the Australian Football League is investing a ton of money in starting up two new teams. Why? Because they know that by giving more areas a local team to cheer for they will expand the total number of football fans rather than simply stealing fans from their other clubs.

  24. 24 24 Steve Landsburg

    Nathan (and loveactuary): Insofar as teams serve local audiences, I think you are right. But much of Penn State’s revenue is derived from serving a national audience, which suggests that there’s still a considerable incentive to overinvest.

  25. 25 25 Fenn

    “Now, I don’t think we should be too quick to criticize people for responding to the incentives that were handed to them”

    Hence so many libertarian economists teaching at public universities?

  26. 26 26 Ken B

    re 22: Where do you get that? You had an equilibrium (of sorts, just one comic servicing us all), a new arrival, and a sudden mass switch. Nowhere can you claim the new comic has priced away my surplus increase. You need an equilibrium with competition for that.

    [This is similar to the example in AE I disputed with you years ago. You argued a new aquarium was a complete waste, neglecting to sum the extra utility of those in the queue. Only the tail of the queue was in equilibrium.]

  27. 27 27 Robert

    @Todd #17

    So when Penn State does not win a National Championship, there has been no benefits that is measurable at all? When it comes down to discussing sporting competition, economists like to point out we are only “redirecting resources”. If a sports franchise comes to town then resources that would be spent on going to the movies becomes resources exerted supporting the sports franchise. Funny, I thought economists were trained in revealed preference.

    The absurdity of my example is there to show the absurdity of this post. Hardly any reasonable person will claim the tournament of Harvard leads to social wastefulness because not winning at Harvard does not imply you have made efforts that are pointless. People see the human capital gains and strike down the argument I presented.

    Dr. Landsburg should verify that the Harvard example I posited can also demonstrate this problem with Tournaments if you accept the assumption that the end goal is to get in to Harvard. Now if I accept that the end goal of an FBS school competing in football is to win a National Championship, then I can accept Dr. Landsburg’s post as being a thorough argument. I do not buy the assumption. If I suggest that an FBS program is used as a vehicle for the larger university to increase donations, increase student quality, and increase academic reputation would that be completely unreasonable? You might want data to back the claims up, so here is a recent paper on this: http://www.nber.org/papers/w18196

  28. 28 28 Nathan

    Steve: It’s unsurprising that with increased labor mobility team support becomes more geographically dissipated. This doesn’t mean that those fans are just as happy to support any team. For example, I moved to Canberra with my wife for her work. Our local AFL team is now the Giants, but I still support the Adelaide Crows because that was my local team growing up. That support isn’t transferable to another team.

    I imagine something very similar is happening with PSU. People support them because they grew up in the area, or they went to college there, or their family all support them, or whatever. Geographical proximity is a big part of it, but there are other factors that can count towards a person having ties to a team that makes it *their team* in a way that competing teams cannot substitute for.

  29. 29 29 Steve Landsburg

    Nathan:

    Geographical proximity is a big part of it, but there are other factors that can count towards a person having ties to a team that makes it *their team* in a way that competing teams cannot substitute for.

    A fair point. Thanks.

  30. 30 30 Steve Landsburg

    Ken B: My ultra-simple example assumes that everyone values the comedian equally, and that he extracts all of the surplus.

  31. 31 31 Ken B

    @Steve: Boy, do I have a can-opener to sell you!

  32. 32 32 Martin-2

    You or someone else once applied this argument to websites like Groupon. Has the internet increased the prevalence of tournament markets?

  33. 33 33 Michael

    1) Are there any papers outlining the distribution of losses/gains due to tournament-style competitions (of any sort)? The logic is clear but empirical evidence is always interesting.

    2) I think Nathan’s point about sports teams not being perfect substitutes for each other is very important. As a Penn State student, I’ve seen first hand just how bonkers people go over football here, and by comparing my experience with college football fans here v. other schools or v. professional football fans, it’s clear that the Penn State fans take it to another level of devotion. Granted, if football didn’t exist at Penn State, the students would surely find some other shared experience around which to rally, but football is particularly good at capturing the social attention of large populations of students.

  34. 34 34 Ken B

    If Steve is right about the comic then reversing the sequence, if the better comedian is there first and ‘goes Galt’ then there is no loss. Isn’t this just waht Krugman argued a few days ago?

  35. 35 35 Alan Wexelblat

    Good lord there’s so much wrong with this column that I don’t even know where to begin. The basic premise, which I take to be “activities that consume resources to produce materially noticeable goods are better than activities that produce ephemera,” is probably correct or at least arguable in its general form. You miss out massively, though in the framing supports.

    “there’s no limit to the size of the television audience for a winning team”

    You obviously don’t mean that literally, as there are a finite number of humans, of whom far fewer own devices that will let them watch sporting events of whom far fewer are interested in sporting events, football in general, college football in general, Penn State football in specific, etc. The audience is quite limited, to the point where those with the transmission rights undertake all sorts of activities to induce artificial scarcity, such as home-city blackouts and online exclusives or delays.

    “as a venture capitalist, Romney was in the business of creating wealth, not just redistributing it”

    Erm, maybe. What Romney is getting kicked for (and somewhat rightly so, speaking as a person in the financial industry) is the model of heavily leveraged target-financed buyout that was originally operative in the LBO scams of the time. (LBOs today are significantly different, but we’re talking about Romney’s Bain heyday.) It’s quite reasonable to argue that a fully debt-financed hostile takeover deal destroys wealth rather than creating it. You can also argue that it redistributes the wealth since it turned many profitable companies into debt-ridden bankrupt shells, from which the Bain limited partners had sucked all the money. If you’d like to explain how that particular model of LBO “creates” wealth I’d be happy to debate it with you.

  36. 36 36 Martin-2

    Alan Wexelblat – “activities that consume resources to produce materially noticeable goods are better than activities that produce ephemera”

    I actually don’t see this argument made anywhere.

  37. 37 37 TravisA

    Shouldn’t participants in a tournament only invest as much money as the expected return from winning? Consequently, the amount of resources invested in winning by all participants doesn’t exceed the amount won. Thus the tournament isn’t wasteful on an aggregate basis

    Limiting the number of participants would just mean that each remaining participant would expend more resources to win the tournament. Thus the only way to avoid zero sum expenditure of resources would be to choose winners by lottery. I doubt you’d get many viewers for that!

  38. 38 38 Matthew

    Alex,

    Give some specific examples of the LBO scams that you speak of.

    Matt

  39. 39 39 Ben

    In your comedian example, the key fact is that the first comedian is driven out of the market. Who, exactly, did Joe Paterno drive out of the market?

    More generally, it seems that the social loss of the tournament aspect is just the earnings of the lowest-cost producer in the market. This is a MUCH different argument than the one you’re making, which assumes (clearly falsely) that a very small group of nearly-uniform-earning producers serve the entire market (whichever market that might be).

  40. 40 40 Maznak

    Steve, assuming that sports entertainment is unregulated industry, are you saying that it is an area where free markets actually fail? Maybe each newcoming “slightly better” athlete is generating enough marketable excitement that her inclusion is fully justified… Unlike the case of say taxes, I do not see where the distortion of the ‘correct’ equilibrium comes from.

  41. 41 41 Martin-2

    Steve – “in football, where there’s no limit to the size of the television audience for a winning team…”

    As Alan points out, the audience is limited by Earth’s population among other things. This is what I already assumed, but do you mean there’s no marginal cost to the team when more people watch them on TV?

  42. 42 42 Steve Landsburg

    Martin-2:

    do you mean there’s no marginal cost to the team when more people watch them on TV?

    Yes.

  43. 43 43 Steve Landsburg

    Alan Wexelblat:

    The basic premise, which I take to be “activities that consume resources to produce materially noticeable goods are better than activities that produce ephemera,”

    Not only is this not the basic premise; it’s (in my opinion) indefensible.

  44. 44 44 Steve Landsburg

    Martin-2:

    You or someone else once applied this argument to websites like Groupon. Has the internet increased the prevalence of tournament markets?

    I suspect so, though I cannot prove it.

  45. 45 45 Steve Landsburg

    Ken B:

    Boy, do I have a can-opener to sell you!

    Come now! Some people claim that certain types of markets always yield optimal outcomes. I produce an admittedly unrealistic example in which exactly such a market does NOT yield an optimal outcome. This suffices to show that whatever argument these people had in mind is not in fact correct, and that at the very least, if they’re going to resurrect their argument, they’re going to a) need some additional assumptions and b) need to explain exactly what the argument IS. You then (implicitly) criticize my example for being unrealistic.

    It’s as if someone had said that the number 8,498,234,561,433 is even because it ends in a 3. I point out that the number 13 ends in a 3, but it is not even. You object that we were talking about 13 digit numbers, not 2 digit numbers. (Analogue: You object that we were talking about examples with heterogeneous consumers, not homogeneous consumers.) True, my example is very different from the application you might have had in mind — but if my example fulfills all your stated assumptions without fulfilling your conclusion, it’s perfectly relevant.

  46. 46 46 Alan Wexelblat

    Steve: OK then I got sufficiently boggled by the errors that I missed the fundamental point. I re-read you to say “society is probably overinvested in athletic contests” and you contrast the marketplace in such contests with the marketplace in oranges, a material good. If your argument is not equally applicable to other non-material items (education, arts, and scientific research to name just a few) then I do fail to grasp what you’re getting at.

    Matthew: assuming you mean me when you say “Alex” (my name is Alan) I suggest you read any of a number of fascinating histories such as “Barbarians at the Gate” that chronicle the abuses of LBOs in the 80s and 90s. If you’re not up for novel-length reading, Wikipedia provides a concise, if necessarily incomplete, listing. (See https://en.wikipedia.org/wiki/Leveraged_buyout and scroll down to the section headed 1980s). As I work in financial services today I see various regulations and changes that have been put in place in the past 15-20 years specifically to correct these abuses.

  47. 47 47 Ben

    Alan, it’s not equally applicable to other non-material items. A high school teacher produces teaching (a non-material item) but teaching quality decreases with the number of students served (at some margin). So, the argument doesn’t apply to high school teachers; the marginal teacher reduces the number of students per teacher and therefore adds value. The same logic applies to janitors and other people providing services that can only serve a limited number of consumers.

    But, I’m not convinced that Steven’s argument is even applicable to the examples he gives. In the case of the comedians (comment 18), the transfer from the first comedian to the second comedian is not $1,000,000 as Steven claims. It’s $1,000,000 minus the value of the first comedian’s time given that the second comedian has captured all of the first comedian’s market share. In Steven’s idealized world, the first comedian is now unable to earn any money at all. I can’t think of any real-world tournament where that comes close to being true.

  48. 48 48 Steve Landsburg

    Alan Wexelblat:

    If your argument is not equally applicable to other non-material items (education, arts, and scientific research to name just a few) then I do fail to grasp what you’re getting at.

    The argument is specifically applicable to markets in which a single seller can supply the entire market at the same cost as supplying a fraction of the market. Art is probably not an example (a single painting cannot simultaneously be viewed by everyone in the world). Education is probably not an example (I cannot fit the whole world in my classroom.) Comedy *is* an example, because one comedian starring on HBO can be seen by tens of millions just as easily as by tens of thousands, and the production costs are pretty much the same either way.

  49. 49 49 Paul Grayson

    Steve, regarding comment 18, thanks, the comedian example cleared up my confusion perfectly. I was starting to agree with TravisA in comment 37 – it seems like comedians should be mindful of their chances of getting usurped and put less effort into entering the market. But then we would still end up with something obviously suboptimal, because what the consumers get from two comedians in competition is likely to be of far lower quality than what they would get from either one alone. Right?

  50. 50 50 Silas Barta

    Pedantic, but it annoys the heck out of me: Romney was in private equity (PE), not venture capital (VC).

    PE: Buy out and streamline existing established businesses.

    VC: Invest seed funding in very small, shakier businesses in an attempt to make them huge.

    Also, and less pedantically, there’s a lot of talk that his particular work in PE wasn’t really wealth creating, but of the form “raid a pension fund, sell the assets, pay out the money, throw the workers on the feds via PBGC, and run away” or alternatively “load up on unsustainable debt to pay out a huge dividend and then stiff a union in bankruptcy court”.

  51. 51 51 Steve Landsburg

    Paul Grayson: You are right that comedians should be mindful of their chances of getting usurped and put less effort into entering the market, which means that my analysis was incomplete. You are also right that we nevertheless still end up with something suboptimal, or at least with something that we have no particular reason to believe is optimal. But I don’t understand this part:

    what the consumers get from two comedians in competition is likely to be of far lower quality than what they would get from either one alone.

    The assumption is that consumers patronize only one comedian, namely the one who is giving them the best deal (i.e. the highest excess of value over price). So the social value of two comedians is exactly equal to the social value of the better of the two.

  52. 52 52 Mike H

    What are the preconditions for a tournament market to happen? It seems like you just need economies of scale for these inefficiencies to start appearing.

  53. 53 53 Ken B

    @Steve re 45: I thought you were using the comic example to illustrate your Paterno point.

  54. 54 54 Steve Landsburg

    Ken B:

    I thought you were using the comic example to illustrate your Paterno point.

    Indeed I was. There is no limit to the television audience that can be served by a single football team.

    As Nathan has pointed out above, much of the social value of the team is local, and the argument doesn’t apply so well to that component, which dilutes my conclusion. But there’s also a global component.

  55. 55 55 Ken B

    OK Steve, but then look back at the discussion. You asserted all the value got swallowed up. I objected with the usual point about consumer surpluses, so you stipulated we all have the same preferences. In that case yes, all the surpluses can get appropriated. But then your example is even less like the Paterno thing. It was at that point I mentioned can openers …

    Plus of course all your functions are now discontinuous. That surely plays hob with all the market/maximization arguments anyway (I don’t know, I’m asking, but I guess so).

  56. 56 56 Mike

    “But I don’t understand this part:

    what the consumers get from two comedians in competition is likely to be of far lower quality than what they would get from either one alone.

    The assumption is that consumers patronize only one comedian, namely the one who is giving them the best deal (i.e. the highest excess of value over price). So the social value of two comedians is exactly equal to the social value of the better of the two.”

    I think you are implicitly assuming that the talent is innate and competition will not add value. Tell me if the following model makes sense:

    Comedians exert effort to produce certain quality of comedic material. The price they charge is proportional to the quality. So say the quality q = a*e and the cost to him is c/2*e^2. a is the return on his effort and c is the cost. Assume price will be equivalent to quality so that his revenue is q*A where A is the number of paying customers. If the comedian is optimizing he will set
    his effort to a*A/c.

    Suppose there is a second comedian(B). Her effort is eb. Her utility will be A*b*eb – d/2*eb^2. The viewers will choose only one comedian with the highest quality.

    For the first comedian to get the full market share he needs to exert effort to make sure a*A*e – c/2*e^2 > b*A*eb – d/2*eb^2. subject to a*A*e – c/2*e^2 > 0.

    The competition will lead to greater effort (and social utility). In this setup however to get the second comedian to participate you need to introduce some noise into the quality (e.g. q = a*e + error)

  57. 57 57 Steve Landsburg

    Mike:

    I think you are implicitly assuming that the talent is innate and competition will not add value.

    Yes, I was assuming this, and I applaud your attempt at a better model, which looks reasonable to me, though I haven’t had time to think about it carefully. I hope to find that time!

  58. 58 58 August

    Steve,

    Steven R’s comment is completely correct. Plus, when you make the claim that society has over invested in the Olympics, you are making the claim that you know what the optimal level if investment is in the Olympics, which I would have to disagree with, on the basis that no one like possibly know that information.

    Finally, people spend money on the goods and services that they value and, hence, improve their lives. When people make the choice to spend their money and/or time at the Olympics, they are sending a signal to the Olympic committee that they have produced something that they value and have therefore benefited from spending their money/time on watching it. People freely make those choices. I don’t think it is up to us to claim that this money/time could be spent more wisely in other ways.

  59. 59 59 August

    Also, sorry for any weird typos. I sent that through my phone!

  60. 60 60 Steve Landsburg

    August:

    when you make the claim that society has over invested in the Olympics, you are making the claim that you know what the optimal level if investment is in the Olympics

    This of course is false. I don’t know the optimal amount of litter in the street, but I can still know that in the absence of penalties for littering, there will be too much of it.

    I don’t think it is up to us to claim that this money/time could be spent more wisely in other ways.

    You’re saying that it’s not up to us to try to figure this out???!?!?! So you’re opposed in principle to the very idea of inquiry?

  61. 61 61 Bob Murphy

    SL wrote:

    There is no limit to the television audience that can be served by a single football team.

    I’m having trouble with this part of your argument, Steve, for at least two reasons:

    (1) It is clearly a false statement, taken literally. So what are you actually trying to say? That MC becomes zero at a point where there are still additional consumers in the market?

    (2) I don’t see why the size of the market is relevant to your basic argument. Suppose there is one guy on planet earth who likes comedy. Right now he pays Louis CK $10 a month to deliver what he values at $10 in comedy services. I come along and offer the guy $11 of comedy per month, and charge him accordingly. But I spend $5 a month reading books with dirty jokes in them. So I am socially wasteful, right? If so, notice there is a market of size 1 in this example.

  62. 62 62 Bob Murphy

    SL wrote: You’re saying that it’s not up to us to try to figure this out???!?!?!

    That is clearly an overinvestment in punctuation.

  63. 63 63 Paul T

    SL: “To understand what’s wasteful about Penn State
    football, think about what life will be like now that the
    program’s been eviscerated. The overall quality of college
    football will decrease — but not by much… Penn State
    has reaped enormous rewards over the decades in exchange
    for its relatively small contribution to the quality of
    college football… In short, Penn State football has sucked
    up a lot of resources while providing relatively little
    in return.”

    Which reminds me of something from your book (not an unusual
    occurrence) – is this case a parallel to the competition
    among the peacocks, for the longest tail?

  64. 64 64 Steve Landsburg

    Bob Murphy:

    (1) So what are you actually trying to say? That MC becomes zero at a point where there are still additional consumers in the market? Yes. There might be some other technical conditions also; I’m too rushed at the moment to figure out what’s the minimum you can get by with. The places to look for precise statements are in Sherwin Rosen’s paper on superstars and the literature that followed thereon.

    (2) I don’t see why the size of the market is relevant to your basic argument. Suppose there is one guy on planet earth who likes comedy. Right now he pays Louis CK $10 a month to deliver what he values at $10 in comedy services. I come along and offer the guy $11 of comedy per month, and charge him accordingly. But I spend $5 a month reading books with dirty jokes in them. So I am socially wasteful, right? If so, notice there is a market of size 1 in this example.

    Right. And you are serving the entire market. It’s not the market size per se that matters; it’s the ability of a single supplier to serve everyone.

    What matters, ultimately, is this: When I enter the market, do I supply a few customers and drive the price down a tad, which is merely a pecuniary externality, or do I take over the market and drive out another guy, which is a non-pecuniary externality?

  65. 65 65 Martin-2

    I now come in my former governor’s defense. Romney managed the Olympics, Paterno coached a football team. Your argument draws a parallel between an individual football team and an individual Olympian. While one additional Olympian may be socially wasteful, the Olympics on whole still creates a surplus (at least, you haven’t shown that it doesn’t). Since Romney was in charge of the entire event and not just a single athlete you can’t conclude that his activity was wasteful.

  66. 66 66 Steve Landsburg

    Martin-2:

    Since Romney was in charge of the entire event and not just a single athlete you can’t conclude that his activity was wasteful.

    A fair point. I was assuming, based on casual reading of some news clips, that Romney had actually caused the Olympics to expand, but that might be wholly untrue.

  67. 67 67 Martin-2

    Steve – If “expanded” means Romney increased the number of competitors from the same countries for the same events then your argument holds. If he increased the number of events, or allowed more countries to participate, or increased seating capacity then I don’t think it does. New Indostania might be better off with 5 Olympic javelin throwers and 300 rejects than 6 throwers and 350 rejects but maybe not 0 throwers and 0 rejects.

    Not that I know what actually happened.

  68. 68 68 iceman

    I agree that everyone running a dash, or maybe even an offense, is essentially doing the same thing and just trying to execute slightly better. But at least in moving beyond sports, it seems there’s also a temporal issue involved with entertainment preferences. E.g. even if we all agreed one comedian is ‘the best’, they can only serve the entire TV market *on a given night*. (This also ignores any distinct demand for live entertainment). One can only enjoy the same routine / style or read the same favorite book so many times. SL’s own reading list suggests there is considerable demand for variety.

    There’s also something to be said for the inherent value of the *process* of striving for personal excellence (in relative terms). Creative people have an innate need to create.

    That said, it sure does seem like there are far too many mediocre movies made, at considerable expense.

  69. 69 69 Nick

    Hi Steve,

    If we assume a repeated game (as the olympics and penn state footbally obviously are) then don’t the first people – who presumably know they’ll never be the best – never enter in the first place?

    This would be a good example of why most tournaments (world cup, olympics, and commonwealth games) are fairly heterogeneous (different years/sports/etc) and competitors rarely rise up.

    However, improving the existing spectacle through expanding the number of sports is not necessarily wasteful? i.e. providing a new platform for curling spectators to watch canada win at the international level (I know its winter olympics…)

    Thoughts?

  70. 70 70 Eric

    Are you assuming that 100% of sports’ value is entertainment? If so, I think this a bad assumption.
    It seems to me that – besides entertainment – sports are like big experiments that provide insights into how to optimize various situations.

    An obvious example: athletic competition offers insight regarding which training methods yield optimum athletic performance.
    A less obvious one: team sports offer insight regarding leadership, motivation, planning, scheduling, teaching, etc. Much of this is portable to business, family life, education, etc.

    If it weren’t for the competition, how would we know which diet/exercises make for the most strength/speed/dexterity/flexibility/whatever? We could run some lab experiments, and those experiments might yield some recommendations. But without the awesome incentives of sports, how could those experiments ever find the BEST techniques? In this way, sports serves as a kind of multi-decade optimization problem where the incentives for the participants are off the chart.

    The best competitors are essential for learning the optimum methods. We have no way of knowing who the best competitors are in advance; thus, we must attract many, many participants. To do that, we must have outsized incentives (money, fame, glory, etc.)

    Now, obviously the drunk with his face painted on Saturday afternoon is not explicitly interested in creating an incentive to attract the best competitors. But his attention and his ticket purchase have that effect. Maybe humans are wired to bestow glory on the winners of arbitrary skill competitions; maybe the benefit of this wiring is in the knowledge gained from the experimental nature of the competition.

    What am I overlooking?

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