Sports

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.

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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.