Salary Cap Antitrust Economics

Patrick Smith is a sports writer for the Australian that not only writes well but has insights beyond sport that are well worth considering.

He is a little like a Melbourne version of Roy Masters and, to be brutally honest, writes a whole lot better than the so-called serious reporters that cover the circus that is Canberra.

Today he pointed out that since the introduction of the salary cap into the AFL that the difference between the successful and unsuccessful clubs had been mostly due to the board and management of the clubs.

He then goes on to substantiate this claim.

Clubs with old-school boards selected from old-school networks suffer from chronic under-performance. Clubs that throw out the Rolodex of mates-past and select their boards based on proven individual and team performances are doing the best.

This is only the case because the salary cap and draft systems have effectively evened out the differences in the players. Before the salary cap the historically wealthiest clubs could buy the better players and this covered up in any deficiencies in the board and management.

It goes without saying, by the way, that a crap board will select third rate management. They do this because (a) they don’t know any better, (b) they select mates and mates of mates, (c) they don’t want to be shown up by management, (d) they are primarily there for the development of their own prestige and wealth, and (e) they want to be able to control management when it suits them.

And it is quite ironic that the only time we can get high-level competition in Australian business (and sport is big business) is when there is (a) a very competitive environment for business, and (b) oligarchies are prevented from forming by there being a large number of competing businesses (above 10 at the minimum), (c) artificial caps on business inputs prevent oligarchies from forming through concentration of market share, and (d) the competitive environment puts job-threatening pressures on under-performing boards.

Compare this to our top ASX listed companies. In each sector each team has only up to 3 competitors and there is no real competition; the teams prefer to reap the benefits of collusion rather than genuine customer-benefitting competition.

It has often been said that the Australian market is too ‘small’ to allow genuine open competition and this argument is used by government after government to do nothing about our oligarchies.

This has slowly led to an environment where much of our excess wealth goes into the black hole that is real estate and, worse still, has created an situation where the cost of being in business is so high that genuine exports are almost extinct apart from resources.

Bringing people in to educate them or for tourism isn’t really an export activity; it’s the temporary importation of people and their play money.

Maybe, just maybe, the salary cap system offers us a way out of this oligarchical paradox as a novel form of antitrust policy. I see it as a more comprehensively considered example of what happened to the Bell telephone company in the US.

For example, the banking system could be broken up into a system which limits the fraction of Australian individuals and companies that a single bank could have as customers, to say to a tenth of the available market.

In a genuinely competitive market this would pretty quickly ‘out’ the low quality boards and management teams.

It would also put pressure on the banks to expand internationally. Efforts by them to do so previously have led to disaster after disaster, which only highlights the point.

They failed because the boards, hand-selected from the private schools of Sydney and Melbourne, simply weren’t up for the job.