Freeman

ARTICLE

In Praise of Athletes' High Salaries

The Explosive Growth of Athletes' Salaries Indicates That We Have Become More Prosperous

AUGUST 01, 2000 by WILLIAM L. ANDERSON

Filed Under : Scarcity, Education

While teaching in public schools many years ago, I found that almost all teachers believed they were underpaid and underappreciated. Things probably have not changed. My colleagues expressed their sentiments by hanging a newspaper editorial on a bulletin board in the teachers’ lounge that condemned the high salaries of professional athletes.

“Americans do not value education,” the editorial opined, citing as proof the fact that “a mediocre halfback in the NFL” was paid more than three times the average teacher’s salary. The statement had its desired effect, judging from my colleagues’ responses to the disgruntled editorial writer.

The message was clear: Americans have their priorities wrong. If they truly valued education more than professional sports, teachers would be paid more than professional athletes. People recoil at the high salaries players receive, salaries that seem to be out of kilter with what the rest of us earn. In an extreme example, Michael Jordan was paid $36 million to play his last season with the Chicago Bulls of the National Basketball Association. Even most medical doctors fail to earn such a sum during their entire working lives. That athletes are much better paid is prima facie evidence that people in this country have no appreciation for what is really important. Thus the state should force the right values on us.

Even while more and more Americans attend professional athletic events, the athletes and their sports are under greater attack. Furthermore, the off-field behavior of many athletes—including the commission of serious crimes in some well-publicized cases—allegedly demonstrates that we should not be paying great sums of money to people who are not proper role models for our children.

Some of the details of the editorial are true. In fact, the gap between the average salaries for teachers and professional athletes in the last two decades has grown considerably. Yet, incredible as it may sound to the average person, this is a positive sign. Far from being an indication that people are worse off, the explosive growth in the salaries of professional athletes, as well as the overall surge of professional sports, demonstrates that individuals—including teachers—have become more prosperous.

Such a statement flies in the face of conventional understanding. After all, macroeconomic statistics like the consumer price index allegedly tell us that real incomes have fallen for the past three decades. Not only is it difficult to argue against such numbers, but for those of us who believe in limited government, there is also a dark satisfaction gained by showing that living standards are down as government intervention in the economy has increased.

The Power of Economic Analysis

The praxeological tools of economic analysis,* however, are much more powerful than numbers created by the U.S. Department of Labor, and while we would like to be arguing that the expansion of the state in recent years has meant an absolute decline in living standards, perhaps there is another case to be made. We should be telling the world that free-market capitalism has succeeded despite the ubiquitous intrusions of government.


* Ludwig von Mises’s term for the science of human action is praxeology.

 


To understand how the increases in the salaries of professional athletes demonstrate that all of us are better off, we turn to an old issue: the diamond-water paradox. In The Wealth of Nations, Adam Smith asked why a diamond could fetch much more money in the marketplace than could water, despite the fact that water was much more necessary for human existence.

The solution to the paradox came from the “marginalists” of the mid and late nineteenth century, including Carl Menger of Austria, William Stanley Jevons of England, and Jules Dupuit of France. Value, they astutely pointed out, is determined by the usefulness of the marginal available unit of the item in question, or marginal utility. An individual imputes value to a particular unit of water, not to the overall characteristics of water itself.

Because water is plentiful and diamonds are scarce relative to water, in normal cases a unit of water will not be valued as highly as a diamond. However, if someone were wandering in the desert, dying of thirst, he might very well be willing to trade a beautifully cut diamond for a canteen full of water!

Diminishing Utility

Take a desert traveler who stumbles on an oasis. He pulls a bucket of water from a well and drinks to quench his thirst. After he has drunk to his fill, he uses the next bucket of water to fill his canteens, while the bucket after that goes to watering his pack animals. Each successive bucket is applied to lower valued uses.

We next apply this example to one’s income. Assume that Joe is a teacher and is paid once a month. His first payments go to those things that are most essential to his well-being: rent (or house payment) and food, along with other bills that must be paid immediately. In other words, Joe applies his income in an ordinal fashion, going from his highest valued to his lowest valued priorities. It is only after those things that are essential to him receive payment that he can apply his leftover income to less important things like entertainment, eating out, and the like. The vast majority of people will spend their incomes as Joe does.

This brings us to spending on education versus spending on professional sports. If the editorial writer is correct, the majority of Americans not only rank spending on tickets for professional sports events ahead of spending on education for themselves and their children, but also likely will spend more dollars on athletics than education.

Even without resorting to a bevy of statistics, one can surmise that the conditions required to make the editorialist’s statement true simply do not exist. Take public education, for example. The budgets of most state governments devote more than 50 percent of their funding to education. If one includes the added expenditures for private education, the numbers become enormous.

According to the 1999 Statistical Abstracts of the United States, total expenditures in 1995 on private and public education at all levels was $532.4 billion. In contrast, Americans spent $57.2 billion on movies (including video rentals) and $13.1 billion on commercial sports (including horseracing).

What’s more, Americans on average spent approximately 10.7 percent of their 1995 income on education. This was not a radical departure: the share of income spent on education in 1980 was 10.1 percent. Comparing education payments to expenditures on other things, one finds that people spent more only on food ($690.5 billion), housing ($688.2 billion), and medical care ($766.2 billion).

Listing education spending has two drawbacks. First, since utility is ordinal and not cardinal, the numbers themselves do not measure utility; at best, they are a representation (or proxy). Second, most education expenditures come from taxes, which are not voluntary payments. However, since the critics whom we are answering have insinuated that Americans do not pay enough taxes for education in proportion to what they pay to see athletes, it is appropriate to list tax payments along with voluntary payments for private education.

Therefore, one cannot conclude from these numbers that Americans rank professional sports above education. However, how does one square the fact that many professional athletes make huge salaries while most teachers make about $40,000 a year? For example, in 1995 the average salary for a major league baseball player was $1.1 million, while the average pay for a player in the National Basketball Association was $1.9 million. The average salary for a National Football League player that year was “only” $714,000.

To most observers, the difference between the salaries for professional athletes and teachers seems to reflect mistaken priorities. However, to an economist this disparity is explained by the law of diminishing marginal utility.

More Teachers than Athletes

People who can qualify to be teachers are relatively more abundant than athletes who can withstand the rigors of professional sports. Furthermore, the professional athlete operates in an arena in which he (or she, as women’s professional sports are increasing) can entertain large numbers of people at one time. For example, it is estimated that more than a billion people worldwide see the Super Bowl. The best lecturers may speak before a few hundred listeners, and most teachers teach 25 students or so at a time.

Each year more than 40,000 people receive Ph.D.s in the United States, while perhaps 40 rookies may make it into the NBA. For the few who do make it into the pros, their expected tenure is short, maybe a few years on average. A teacher, on the other hand, may be able to practice his profession for up to 40 years. Nor do most professional athletes strike it rich. The vast majority work in the obscurity of minor league sports or other relatively low-paid positions, such as a golf professional at a country club. In other words, the multimillionaire athlete is the great exception, not the rule.

If one can get past the feelings of envy regarding the highly paid but often publicly immature athletes, one sees that the only way for the escalation of high salaries to continue is for society as a whole to become wealthier. As noted, individuals generally put spending for sports events far down on their list of priorities.

That being the case, it is obvious that greater sums of money are poured into professional sports because people have increasing amounts of income left over after paying for their highest values. The pattern of sports salaries bears this out.

Babe Ruth made his highly publicized $80,000 a year in the late 1920s, an astounding salary at that time. However, even accounting for inflation, Ruth’s salary today would hardly place him near the top of the baseball payroll. Even as recently as 1985, the average salary for a player in the NBA was just $325,000. If adjusted for inflation, that figure in constant dollars for 1997 would be $414,000. Yet, the average NBA salary in 1997 was $2.1 million.

Unless U.S. society has undergone a sea change in preferences in the last 15 years, the pay increase for NBA players could have come about only because Americans had also gained in real income. Likewise, the proliferation of minor professional sports—like arena football—means that Americans have even more disposable income than before and can afford to pay to see such sports. Otherwise, these teams would drown in red ink and be out of business.

Such analysis most likely will not satisfy those social critics who believe unless government guides our every thought, we will always make bad decisions with our money. If one examines the spending patterns of most people, however, one finds that perhaps the fears that individuals have their priorities in the wrong place are unfounded.

Finally, let’s apply the analogy of the canary in the coal mine. Before the invention of technical devices to detect odorless but deadly methane gas in deep mines, miners kept a caged canary nearby. As long as the bird was alive, gas was not present. However, if the bird died, it was a signal to the miners to get out immediately.

Likewise, we find that professional sports acts as a bellwether to our overall well-being. Highly paid athletes and the proliferation of professional teams are a signal that we are all better off. If those salaries begin to fall or large numbers of teams go bankrupt, however, beware: harder times are ahead for all.



Find a Portuguese translation of this article here.

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August 2000

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