Thursday, 27 March 2014

Football as a workers cooperative - or lack thereof 2

In a response to my previous post on Football as a workers cooperative - or lack thereof the always interesting Tim Worstall says, at The Pin Factory blog, But football clubs are already effectively owned by the players. Tim writes,
Football does, as we know, come in a number of different forms and codes. It also comes in a number of different organisational forms. The way that leagues are formed, franchises handed out, how teams are promoted and or relegated. And the effect, at least as I see it, is that large numbers of clubs that are supposedly capitalist in their form are in fact workers' cooperatives. Which makes an argument about why there aren't such workers' cooperatives a touch difficult: for I'm asserting that there are.
So far I agree except for the one point: that I think most clubs, European ones at least, are, in effect, workers' cooperatives. I agree entirely that in legal form they are not. There's a few fan cooperatives but no workers' ones. But pure legal form isn't quite, to my mind, the total definition. Of importance is to look at the flows of money. If the money flows as if an organisation were indeed a workers' cooperative then I'd be inclined to call it one even if the legal form wasn't so. And even a brief look at football club accounts shows that almost all of them make a loss almost all of the time. That's certainly not what we would imagine to be a defining feature of a seris of capitalist organisations. Further, the money all ends up in the pockets of the players.
Now why do I disagree with Tim? Why do I say there are no worker cooperatives in sport? The short answer I think is the definition of "ownership". For ownership you don't follow the money. The basic definition of ownership I'm using is that of Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", Journal of Political Economy, 94: 691-719) who define the owner of an asset as the person who has residual rights of control over the asset; that is whoever can determine what is done with the asset, how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Note, for completeness, that the legal scholar Oliver Wendell Holmes Jr. states that the rights of ownership are
[...] substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))
What is important for our purposes is that ownership is not defined with regard to income.

To see why income is not a feature of the definition of ownership ask yourself what would happen if I have the control rights over a piece of land which is currently being used to grow politicians. The profits from the sale of politicians, say $1000 per year, goes to Tim. He has the income rights. Now let us assume that Eric Crampton, the smart lad that he is, has worked out that as cabbages are smarter than politicians they are worth more. So profitable are cabbages that Eric would be willing to rent the land for $1200 per year. Eric makes this offer to Tim who thinks its great but can not doing anything about it because he does not have control right over the land. (One such right is the right to rent out the land.) I on the other hand can agree to the rental deal as I have the control rights over the land. I get to make the decision as I am the owner. As an aside note that this example shows why ownership and income rights normally go together: income rights give you the incentive to do things, control rights give you the ability to do things. For efficiency reasons you normally want both of these rights to be held together.

Another way to see why economists define ownership in terms of control right is to consider the fact shareholders of a firm have both control rights and income rights. Income rights meaning they get a part of the firm's profits. Now consider a manager at the firm who is on an incentive contract which says he will receive a (small) part of the firm's profits so that his interests are aligned with the shareholders. Both the shareholders and the manger have income rights (claims to part of the firm's profits) but only the shareholders are considered owners. This is because they hold the control rights.

Also in a workers cooperative payments to workers are normally roughly the same. Some worker cooperatives do require all staff to be paid the same wages while others have a limit on the range of pay offered. Such a limit is normally expressed as a ratio of the highest paid worker to the lowest paid, e.g. 3:1 or 4.5:1 or some such ratio. Also an owner's allocation of the "profits" of the firm will be proportionate to that owner's labour input, so for similar labour inputs, owners receive a similar allocation of "profits". Thus overall compensation is commonly roughly equal. Ricketts (1999: 20) explains the situation as ``[f]urther, to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest." Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: ``[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]"

Clearly equal payment is not the case for football clubs. Some players earn a lot more than others. Given heterogeneity among playing talent there is large variation in earning potential. This acts as a disincentive to the formation of a worker cooperative, with its equality of payment, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream. Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.

The question of ownership comes down to who has the control rights and the "who" isn't the players. The money may end up in the pockets of the players but that just makes them very well paid employees, not owners. They don't have the control rights.

Note that if by capitalist Tim means profit making, I make no such assumptions. The owners of the clubs may be trying to maximise profits, or they may be trying to maximise their utility. For my argument it doesn't matter.

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