How Austrian Economic Theory Explains the NHL Lockout

Instead of a central bank manipulating the price of money, a league tries to control the price of labor through collective bargaining.

The fourth—and presumably final—sports lockout of the 2011-2013 biennium came to a quiet end on Sunday morning when the National Hockey League and its players union agreed to a new 10-year collective bargaining agreement (which is really an eight-year deal since either side can opt out in 2020). Like the previous NBA and NFL lockouts, the common NHL storyline is that league owners overplayed their “leverage” in trying to break their respective unions, eventually agreeing to new deals that seemingly could have been reached much earlier in the bargaining process.

There is, however, an economic explanation for the recent lockout mania that parallels Austrian business cycle theory. The Austrian theory holds that government manipulation of interest rates leads to a period of malinvestment followed by liquidation—the boom-bust cycle. The sports business cycle operates along similar lines, only instead of a central bank manipulating the price of money, a league tries to control the price of labor through collective bargaining. Each such attempt inevitably results in a period of malinvestment followed by liquidation—the lockouts—before the cycle begins anew.

Even folks not versed in Austrian economics seem to instinctively sense there is a business cycle, especially as it applies to the NHL. Much of the initial social media reaction to yesterday's announced settlement was, “See you at the next lockout in 2020.” This isn't cynicism. The 2012-2013 lockout marked the third consecutive occasion where the expiration of the NHL's labor agreement resulted in a management lockout. After the prior lockout in 2004-2005, the NHL's leaders claimed they finally had a rational system in place to “control costs” and maintain 30 competitive franchises. Yet eight years later, those same leaders claimed that system had failed and a new round of central planning was necessary.

The core of this central plan is of course the “salary cap,” a complex price-fixing scheme that proponents—including some libertarian sports fans, judging by my Twitter feed yesterday—argue creates a “level playing field” for all teams. As the theory goes, by eliminating the wide payroll disparity between wealthy, big-market teams and struggling small-market clubs, the cap creates a stable, more competitive league. The cap is, in effect, no different than playing rules or other joint policies adopted by the league for the mutual benefit of all member clubs.

What the salary cap fails to account for, however, is the role and importance of entrepreneurship. Just as players on the field exhibit different skill and experience levels, so too do general managers and team executives vary wildly in their abilities. The cap is based on the myth that given the right combination of rules and regulations, even the most ineptly managed club can field a potential championship team. (Other elements of collective bargaining, such as player drafts, actively subsidize mismanagement by rewarding poorly performing clubs with priority access to promising new talent.)

Like government regulation, collective bargaining regulation—which, let's not forget, can only exist because of federal labor laws—leads to all sorts of unintended consequences. In the NHL's case, Los Angeles Times sports columnist Helene Elliott noted today, the salary cap's promise of cost certainty “imploded when teams realized they could dipsy-doodle around the cap by signing players to absurdly long deals that tailed off dramatically in the later years.” For example, the Washington Capitals—owned by Ted Leonsis, who has now presided over three lockouts, including one as owner of the NBA's Washington Wizards, without producing a single championship—signed star forward Alexander Ovechkin to a 13-year extension in 2008. At the time, Leonsis claimed he was a “risk-taker” who saw nothing wrong with making a “long-term investment” in building a championship club. Four years later, Three Lockout Ted was back hiding behind NHL Commissioner Gary Bettman, joining his fellow owners in claiming the system was broken yet again due to overspending on players.

For most lockout-addled NHL fans, Bettman is the fiendish cartoon supervillain behind these lockouts, the man who enjoys nothing more than depriving loyal fans of their beloved hockey. Bettman has been at the NHL's helm for more than two decades, an outlander who came from the NBA—run by Bettman's mentor and the template for modern sports commissioners, David Stern—with dreams of turning hockey into the Next Big Thing. Bettman presided over a massive (and ill-conceived) franchise expansion into the southern and western United States, all the while consolidating more league operations and power within his own office.

Bettman's real adversaries in these work stoppages aren't players, but the owners and general managers who stand in the way of his perfectly planned league. Allan Walsh, a longtime NHL player agent, noted in September that “Gary dislikes most of his general managers as much as he loathes agents.” In an ideal world, Walsh suggested, Bettman wants to negotiate all player contracts himself, eliminating competition among franchises altogether.

That may not be as crazy as it sounds. One way to break the sports business cycle would be to abandon the franchise model altogether and restructure the NHL as a single entity. In fact, Bain Capital proposed to do just that during the 2004-2005 lockout, offering $3.5 billion for all 30 NHL teams. Under Bain's management, the NHL would have been a single corporation with 30 divisions, as opposed to a cartel of 30 partially merged firms. As Deadspin's Barry Petchesky observed, this would have turned NHL teams into “[f]ast-food franchises, if you will, with extremely limited autonomy.”

But the fast food model has proven highly successful and adaptable to other industries. It's the sports franchise model that's unstable and impossible to replicate in other markets. Even if most cartel arrangements weren't criminalized under antitrust law, it doesn't make sense to maintain separately owned firms that attempt to fix labor costs at the aggregate level for eight or 10 years at a time. As the NHL has demonstrated, you end up spending so much time, energy, and resources just to manage the cartel, you lose sight of producing your product—and ultimately, satisfying your customers.

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  • Fist of Etiquette||

    GO PENS.

  • Rufus J. Firefly||

    Are Rick Kehoe and Pierre Larouche still playing?

  • ||

    You're the best Bellows!

    http://www.youtube.com/watch?v.....redirect=1

    Greatest Pens moment ever

  • Fist of Etiquette||

    One way to break the sports business cycle would be to abandon the franchise model altogether and restructure the NHL as a single entity.

    They have pretty tight control as it is, remembering for instance MSG trying to maintain their own web presence separate from the league and supposedly almost losing the Rangers over it.

    I don't know how the league would consolidate the franchises, but it would probably be a positive thing, which alone means the NHL will never do it.

  • LiberTarHeel||

    "One way to break the sports business cycle would be to abandon the franchise model altogether and restructure the NHL as a single entity."

    Yes, if the sport is viewed simply as a business model to be tweaked for maximum profitability. The problem with the NHL is too much corporatism, not too little. Salaries are bloated all out of proportion, and all associated costs follow. The sport is distorted beyond recognition, becoming a cult, rather than entertainment. The end result is a pale, bloated imitation of what once was. Baseball and basketball are the prime examples, with football close behind. The only thing "saving" hockey is its relatively small fan base; but it's still a dysfunctional parody of its former self. But hey: as long as there are "butts in seats", professional sports, like professional politics, will continue to stink on ice.

  • ||

    MLS uses a franchise system of sorts, the league holds all player contracts.

    I'd rather see free market hockey. I would guess that would mean 15 to 20 teams, mostly in the north east.

  • Whiterun Guard||

    With the exception of the shoehorned in love story (which is pretty brief), Goon is superior to Slapshot in every way possible. And this is from someone that has ALWAYS hated that stupid Stifler guy.

  • Bee Tagger||

    Go on, starring Matthew Perry.

  • Whiterun Guard||

    I have no idea what you're talking about.

    But Goon has Stifler, Sabretooth (II) and Tig from Sons of Anarchy in it.

    And Georges Laraque who re-enacts his fight with Ivanans apparently.

  • Fist of Etiquette||

    Does he wish his opponent good luck before?

  • Average Dude||

    Yes. Yes he does.

    And let's not forget a great cameo for the Trailer Park Boys.

  • Bee Tagger||

    http://www.imdb.com/title/tt23.....n_al_tt_1M

    I think there's a running joke that involves calling the show Goon instead of Go On. I heard it on Comedy Bang Bang.

  • sticks||

    Just watched goon. You are a liar. A dirty dirty liar. I will say goon was better than the cast would suggest.

  • ||

    I sort of liked Goon, but it's not better than Slapshot. Not even close. And Jay Baruchel was borderline unwatchable... if he wants to know how to do a filthy mouth the right way, he should watch Brad Sullivan do Mo Wanchuk. "You make me sick when you speak Morris".

  • waaminn||

    Those guys clearly know what day it is for sure!

    www.AnonFosho.tk

  • Restoras||

    No alt+text? NO ALT+TEXT??? You use a picture of the Chiefs and there is no alt+text??? WTF???

  • ||

    "Owwwnzzzzzzz, owwwwnzzzzz!!!!!!"

  • LTC(ret) John||

    "As the theory goes, by eliminating the wide payroll disparity between wealthy, big-market teams and struggling small-market clubs, the cap creates a stable, more competitive league."

    So just have the teams that cannot hack form a lower league. Why should the Coyotes be in the NHL? You can have a fine second tier league with Phoenix, Indianapolis, etc.

  • Restoras||

    I like the idea of using the system in Britain for football clubs. The last place team gets demoted to the next level down, while the champion of the secondary league gets promoted. It'll never happen here, but I think its cool.

  • Rufus J. Firefly||

    It's not just Britain that has that. Germany, Italy and Spain too.

  • Raven Nation||

    Yeah, promotion/relegation works. One of the barriers in the US is that, since teams are owned by an individual (or a small group), there is a hell of lot of money invested by one person. So, relegating a team to a lower level of a sport would be a massive financial hit.

    This is already a factor in English soccer where teams being relegated from the Premier League take massive financial hits. And, there is already a move among some foreign owners (especially Americans) to end relegation.

  • Unindicted Co-conspirator||

    Promotion/relegation is already used to pretty good effect in some of the international tournaments, including the just-completed IIHF World Juniors.

    The problem, as Raven Nation points out, is that the teams getting relegated are national teams, and so you don't have private ownership facing a financial beating when a team gets relegated. A big part of why we're here is that owners are trying to socialize their losses.

  • dk12345||

    The cap is based on the myth that given the right combination of rules and regulations, even the most ineptly managed club can field a potential championship team.

    I think this is entirely false and the cap is not in place so ineptly managed clubs can be competitive. It's so teams don't spend their way to a championship.

    The cap is based on the idea that the Detroit Red Wings aren't good for hockey much like people think the New York Yankees are bad for baseball. The idea is that an owner or GM in a larger market can spend their way to dominance.

  • Lord Humungus||

    I do miss the days before the cap since there were some real powerhouse teams - the Wings and the Avalanche come to mind - that really kept the fans interest.

  • Rasilio||

    The cap is based on the myth that given the right combination of rules and regulations, even the most ineptly managed club can field a potential championship team.

    I think this is entirely false and the cap is not in place so ineptly managed clubs can be competitive. It's so teams don't spend their way to a championship.

    Both of these reasons are incorrect.

    The idea is not that poorly managed teams will eventually field a potential championship team, now is it to prevent teams from spending their ways to the championship.

    This is easily seen by the fact that all major American sports leagues have had teams which have both been bad teams for multi decade periods and other teams have have attempted to purchase championships.

    In each case however their records are mixed.

    The Pittsburgh Pirates are among the worst run organizations in all of professional sports however while they have spent the majority of the last 2 decades in the cellar and never seriously competed for even a post season birth in that time they are not losing more than 95 games every single season.

    On the flip side the New York Yankees have had the highest salary in Baseball for the last 2 decades, often to the point where their salary is higher than the next 2 highest teams combined. This has made them successful of course yet they have still only won about a quarter of the World Series titles during that period and have frequently been a merely above average team.

  • Rasilio||

    No, the real purpose of competitive balance rules like Salary Caps is to prevent the talent levels from good teams to bad teams from getting so out of whack that games are not enjoyable any more driving fans away.

  • Hollywood||

    The salary cap is meant to reduce the advantage large-market franchises have over small-market teams and increase talent parity. The owners know that fans prefer to think that every year, their club has a shot to win the championship. Compare this to, say, the Spanish soccer league, La Liga, in which there is no cap and no revenue sharing, therefore the large market teams that generate the highest revenues acquire the greatest depth of talent and are favored to win the championship every year. The problem is that the large market team has a monopoly over their market (and they are exempted from the Sherman Anti-Trust Act via the Sports Broadcasting Act of 1964).

  • Hollywood||

    Sports Broadcasting Act of 1961*

  • Rufus J. Firefly||

    It's like that in all of the Big Four soccer leagues and even in North American pro sports. Only a handful of teams represent the majority of the titles. Sorta like the 80/20 split described by Pareto.

    Go. Do the exercise. I did.

  • Drake||

    Somebody please explain to me the purpose of players' unions in major sports. Without the union, the lockout would have been illegal and a violation of each individual contract. Without the unions, salary caps would be illegal as would anything other than unrestricted free-agency (unless otherwise stipulated in an individual contract).

    What exactly do the players get for their union dues?

  • Another David||

    The CBAs are the only reason free agency exists. Whether it would be possible to put that genie back in the bottle and re-establish the reserve clause after 30-plus years is certainly an open question, but it doesn't seem like the players have any intention of testing the waters.

  • Drake||

    I understand the history, but in today's world I see absolutely no net benefit for players in the unions.

  • Another David||

    You really don't think that in the absence of a CBA, the owners would at least try to make "no free agency until we say so" a standard contract term again? There's no guarantee that they'd succeed, but the risk is there. Not to mention the elimination of things like the salary floor, signing bonuses, year-to-year variance in contract terms (both of which serve to transfer some financial risk from a career-ending injury from player to ownership), etc, which would be harder to challenge directly. There's no guarantee they'd succeed, but removing the risk is worth something.

  • Drake||

    That would be struck down in court in a second - and massive damage awards awarded.

    Why would signing bonuses be eliminated? The better players would get the best deal possible from the team offering that deal for whatever contract term they agreed to.

    Contract law is pretty well established.

  • Another David||

    One of the sticking points in the CBA negotiations was the owners' demand to eliminate signing bonuses. So it's not hard to imagine them wanting to eliminate signing bonuses.

  • ||

    Mostly due to the front-loading of huge contracts on the first or second year. This gives the club more wiggle room to sign bigger names than they otherwise would be able to afford in the last few years. I understand why the league was against it.

  • prs130||

    I think the main reason is that by banding together, players can force ownership to earmark a certain percentage of overall revenue to labor.

  • Benjy||

    Talking about cap circumventing deals with low-dollar tail years in one sentence, and then using the Ovechkn deal as an example in the very next is pretty ignorant.

  • KDN||

    Alex Ovechkin: http://capgeek.com/player/847 - 6 Years at $9m, 7 years at $10m.

    Zach Parise: $12m in year 1, $1m in year 12.

    I think you're confusing Ovechkin with Kovalchuk. It's ok, all Russians look alike.

  • KDN||

    Parise: http://capgeek.com/player/773

    Kovalchuk: http://capgeek.com/player/339

    Note that Parise's contract does everything the NHL said was wrong when they bitch slapped the Devils for Kovy's, save for going out pas age 40. Screw you, Dick Bloch and Bill Daly.

  • LibertariansRLiars||

    The Austrians are wrong for two reasons. First off, serfs are from capitalism not socialism. Yes, that is right I am talking to you Hayek. How so many people follow something so obviously wrong, I don't know. Secondly, they believe people are rational. Did "Mission Accomplished" sound rational to you? Did Dick Cheney's "Deficits Don't Matter."? Really, the dark ages are over.

  • Liberty||

    Agrarian barter-based economies where people are forced to work for one institution and can't leave are "capitalism?"

  • ||

    I don't give two shits about capitalism. All I care about is the freedom to trade and make contracts with my fellow humans. "capitalism" seems to do a little bit better on that score than socialism as far as I can tell.

    If people are not rational, then I prefer lots of individuals making lots of individual irrational decisions than TOP MEN making a few highly influential irrational decisions.

    Also, serfs are from feudalism.

  • Drake||

    Historically wrong!

    Serfs were created at the end of the Roman Empire. Middle Class taxes were so high that people were selling themselves into slavery and/or fleeing their land.

    The Emperor created a law forbidding people from selling themselves into slavery - and tied them to the land - creating the medieval serf.

    The serf was a product of big government and high taxes.

  • Bill Dalasio||

    How you arrive at the notion where the political authority has control of the means of production and the individual is held by law to his command and control is "capitalism" is beyond me.

  • Deputy Van Halen||

    This is a load of crap. (Another one of those Ayn Rand and free market economic theory explains it all).

    If you want to have a professional sports league that gives teams of both large and small markets a realistic chance to compete, there have to be labor restrictions. A salary cap is just one aspect of that. The two most important aspects, one of which gets briefly mentioned, are the amateur draft and limited roster sizes. (Pro baseball, more or less, doesn't have a salary cap, but the draft is the reason why Bryce Harper and Steven Strasburg are playing for the Nationals and not the Yankees or Red Sox). But for those, you'd probably have, in effect, a five team league. That's exactly what you have in English soccer. It doesn't matter how crafty your general manager might be. (Thus the idea that the draft "rewards bad management" is a red herring). We wouldn't be talking about Billy Beane, who gets praised here all the time, if not for labor restrictions.

  • Hollywood||


    If you want to have a professional sports league that gives teams of both large and small markets a realistic chance to compete, there have to be labor restrictions.

    Wrong. You could improve competition by allowing multiple MLB teams to exist in the same large-market city. For example, NYC could probably support five or six competing MLB teams.

  • Another David||

    That's how you have a professional sports league that focuses solely on large markets, which moves the goalposts a bit.

  • Deputy Van Halen||

    The NYC area has three hockey teams, the Devils, Rangers and Islanders. Two of those teams would not survive if there wasn't a draft.

  • Brandybuck||

    I never understood the need for sports monopolies. Each team should be wholly independent. Leagues are a great idea but they ruin the game if you give them too much power.

  • ||

    "What the salary cap fails to account for, however, is the role and importance of entrepreneurship."

    What this article fails to account for is that professional leagues are in the entertainment business. Whatever the league wants to do with regards to expanding their fan base is their business. Players saw ridiculous salary increases over the past decade, so they can cry a fucking river on this one.

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