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December 13, 2017 

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RISK POOLING: Combining the uncertainty of individuals into a calculable risk for large groups. For example, you may or may not contract the flu this year. However, if you're thrown in with 99,999 other people, then health-care types who spend their lives measuring the odds of an illness, can predict that 1 percent of the group, or 1,000 people, will get the flu. The uncertainty is that they probably don't know which 1,000 people, they only know the number afflicted. This little bit of information is what makes risk pooling possible. If the cost is $50 per illness, then an insurance company can insure your 100,000-member group against flu if they collect $50,000 ($50 x 1,000 sick people), or 50 cents per person. By agreeing to pay the cost of each sick person in exchange for the 50 cent payments, the insurance company has effectively pooled the risk of the group.

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Those Astronomical ATHLETE SALARIES

It's a great day to take in a ball game, don't you think? With our hustling, bustling jaunt through the economy, we probably deserve a relaxing afternoon of hot dogs and peanuts with my favorite baseball team -- the Shady Valley Primadonnas. Of course the hot dogs and peanuts are overpriced, and you might need a second mortgage on your house to buy the ticket, but the expense is worth watching of the finest athletes in the world display their world-class athletic abilities. We might even coax an autograph from the Primadonnas all-star centerfielder -- Harold "Hair Doo" Dueterman.

Are These Guys Worth It?

While we thoroughly enjoy the game -- the Primadonnas come from behind to win in the bottom of the ninth -- our favorite player, Hair Doo, strikes out four times and commits an error in centerfield. This raises a really, really important question in the grand scheme of the universe: Is Hair Doo worth his $10 gadzillion salary? Should Hair Doo get 100 times the salary of an average, overworked, underappreciated member of the third estate?

Hair Doo's salary really raises another more general question: Why does anyone get paid what they get paid? Any questions we ask about Hair Doo Dueterman's salary could also be asked about the wage of any average, overworked, underappreciated member of the third estate -- Hair Doo's numbers just happen to be bigger. Because wages and salaries are nothing more than prices, the best place to look for answers is the market.

If you're randomly surfing through this guide, you might want to surf carefully through Fact 2, Our Subjective Values, and Fact 4, Our Monopolized Markets. Both deal with markets and give you a good basis for looking into this earth-shattering question of highly-paid athletes.

The Market Says Yes!

Let's first ponder the supply-side of the market. Hair Doo performs his athletic prowess before thousands of adoring fans -- supplies his labor -- because he's willing and able to take on his designated duties for a mere $10 gadzillion. If Hair Doo wasn't willing and able to play baseball for $10 gadzillion, then he would do something else.

Hair Doo's willingness and ability to play our nation's past-time depends on his opportunity cost of other activities, such as deep sea diving, coal mining, ballet dancing, or game show hosting. By selecting baseball, Hair Doo has given up a paycheck plus any other job-related satisfaction that could have been had from those pursuits. He's decided that his $10 gadzillion salary and the nonmonetary enjoyment of playing baseball outweigh his next best alternative. We should have little problem with this decision by Hair Doo, because we all make a similar choice. We pursue a job or career that gives us the most benefits.

But... (this is a good place for a dramatic pause) ...someone also must be willing to pay Hair Doo Dueterman $10 gadzillion to do what he does so well. This is the demand-side of the process that we affectionately call the market and it deserves a little more thought.

The someone who's willing to pay Hair Doo's enormous salary, the guy who signs Hair Doo's paycheck, is the owner of Shady Valley Primadonnas -- D. J. Goodluck. You might remember D. J.'s grandfather from Fact 3, Our Unfair Lives, a wheat-farmer on the Kansas Plains who had the good fortune homesteading 160 acres with a BIG pool of crude oil beneath. (The Goodluck's still visit the toilet each morning in a new Cadillac. They did, however, sell their ownership in Houston, Texas and bought South Carolina.)

Why on earth would D. J. and his Shady Valley Primadonnas baseball organization pay Hair Doo this astronomical $10 gadzillion salary? D. J. must have a pretty good reason. Let's consider D. J.'s position.

Hair Doo's statistics are pretty impressive. In that past five years he's led the league in umpire arguments, souvenir foul balls for adoring fans, product endorsements for nonbaseball related items, and instigator of bench-clearing fights. All of these have made Hair Doo an all-star, number one, fan attraction.

While Hair Doo may or may not help the Shady Valley Primadonnas win the championship, he does pack fans into the stands. And he's packed fans into the stands for the past five years.

Fans in the stands translates into tickets for the Shady Valley Primadonnas, national television broadcasts, and revenue for D. J. Goodluck. D. J. is willing to pay Hair Doo $10 gadzillion to perform his daring do, because Hair Doo's daring do generates at least $10 gadzillion in revenue for the team. If Hair Doo failed to generate revenue equal to or greater than his $10 gadzillion salary, then D. J. would trade him to the Oak Town Sludge Puppies (the perennial last place, cellar-dwellers in the league), send him to the minor leagues, or just release him from the team.

The bottom line on Hair Doo's salary is the same for any average, overworked, underappreciated member of the third estate -- an employer is willing and able to pay a wage up to the employee's contribution to production. If your job is making $20 worth of Hot Mamma Fudge Bananarama Sundae's each day, then your boss -- Hot Mamma Fudge -- would be willing to pay you $20 a day.

Many Are Worth Even More

As entertainers, athletes are paid for fan satisfaction. The more fans who want to see an athlete perform, the more an athlete is paid. In fact, most athletes, even those who make gadzillions of dollars for each flubbed fly ball, dropped pass, and missed free throw, probably deserve even higher salaries. The reason is competition.

As we discovered in Fact 4, Our Monopolized Markets, the degree of competition on each side of the market can make the price too high or too low. If suppliers have little or no competition, then the price tends to be too high. If buyers have little or no competition, then the price tends to be too low.

In the market for athletes, competition is usually less on the demand side than on the supply side. The supply of athletes tends to be pretty darn competitive. Of course, Hair Doo is an all-star player, but he faces competition from hundreds of others who, can argue with umpires and hit foul balls into the stands.

The demand-side, however, is less competitive. In most cases, a particular team, like the Shady Valley Primadonnas, has exclusive rights to a player. They can trade those rights to another team, like the Oak Town Sludge Puppies, but the two teams usually don't compete with each other for a player's services. There are a few circumstances -- one example is "free agency" -- where two or more teams try to hire the same player, but that's the exception rather than the rule.

With little competition among buyers, the price tends to be on the low-side. This means that Hair Doo Dueterman's $10 gadzillion salary could be even higher. It means that the Shady Valley Primadonnas probably get more, much more, than $10 gadzillion from ticket sales and television revenue. It means that D. J. Goodluck would probably be willing and able to pay more, much more, than $10 gadzillion for Hair Doo Dueterman's athletic services. The only way to find out how much Hair Doo is worth to the Shady Valley Primadonnas is to force them to compete for Hair Doo's services with other teams.

This is a good place to insert a little note on the three estates. Most owners of professional sports teams, almost by definition if not by heritage, tend to be full-fledged members of the second estate. The players, in contrast, usually spring from the ranks of the third. The idea that one team owns the "rights" of a player stems from the perverse, although changing notion, that the third estate exists for little reason other than to provide second-class servants for the first two estates.

Colleges Are Worse

If professional athletes who get gadzillions of dollars to do their daring do are underpaid, how do college athlete's who get almost nothing compare? It depends on the sport.

Big-time college sports, especially football and basketball, are highly profitable entertainment industries. Millions of spectators spend tons of money each year for entertainment provided by their favorite college teams. Star college athletes can pack the fans into the stands as well as star professional athletes. With packed stands come overflowing bank accounts for the colleges.

What do the athletes get out of this? What are their "salaries?" Being amateurs, college athletes aren't paid an "official" salary. They are, however, compensated for their efforts with a college education, including tuition, books, living accommodations, and a small monthly stipend. While a college education isn't small potatoes -- $100,000 plus at many places -- this compensation tends to fall far short of the revenue generated for the school. The bottom line is that big-time college athletes, like the pros, are usually underpaid.

The reason is very similar to that of the professional athletes. College athletics have limited competition among the "employers" but a great deal of competition among the "employees." Many more high school athletes hope to play big-time college ball, than ever realize that dream. And while different colleges may try to hire, oops, I mean recruit the same athlete, the collegiate governing bodies -- most notably the National Collegiate Athletic Association -- limit the degree of competition and fixes the "wage" athletes can receive. You often hear about the NCAA penalizing a college because it went "too far" in its recruiting efforts. This translates into the college paid an athlete "too" much to play, such as new cars, bogus summer jobs with high wages, and cash payments from alumni.

Underpayment is most often a problem for big-time football and basketball revenue generating sports. Athletes in sports with less spectator interest, such as tennis, gymnastics, or lacrosse, actually may be overpaid based on their contribution to their colleges' entertainment revenue.

Here's a tip to keep in mind in the high-priced world of athletics:


A Consuming Tip on Athlete Salaries

  • Athletes are paid based on their contribution to fan satisfaction. If you think athletes are paid too much, then don't contribute to their salaries by attending games or watching them on television. If, however, you enjoy their daring do, and are willing to pay the price of admission, then worry not about their pay.

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