The False Economist

Monday, April 4, 2011

Wayne Rooney curses at cameras AND explains the Ricardian/Malthusian theory of rent economic rents

In the Financial Times, British economist John Kay dicusses that age-old question asked by people who don't "get" sport: Why do modern footballers get paid so much compared to their predecessors ?

In answering he applies the concept of economic rent* to the problem. This issue was  first discussed 250 years ago by James Anderson, a Scottish farmer and economist who put forward his ideas about economic rent in An Enquiry into the Nature of the Corn Laws in 1777. He stated that "it is not the rent of the land that determines the price of its produce, but it is the price of that produce which determines the rent of the land". Seemingly a paradox exists, but, Kay explains, Anderson found that:

"The demand for corn determined how much land had to be cultivated: the worst land that needed to be brought into production to satisfy that demand would earn only the cost of production, and better land would earn rents that measured the value of their superiority. Who benefited from these earnings was a political issue" 

These ideas would go on to form the Malthusian/Ricardian theory of rent although it is believed that Ricardo and others were not aware of Anderson's theories.

So why does Rooney earn relatively more than the great Stan Matthews ? Basically as demand for footballers increase, lower quality footballers are brought in, squads expanded, youth players paid more etc., to meet the demands of the public. The superior footballers (Rooney and to a lesser extent, Titus Bramble) will be able to dictate higher relative wages, although the extent of these is down to the negotiating skills of their agents.

At least, that's my understanding of it....

The other major reason is of course the huge increases in profits generated by clubs compared to the 1950s and the obvious impact this will have on the players.

Kay's article is available here.
Background to the Ricardian/ Malthusian theory of rent available here.

* = The excess payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply.

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