Wednesday, 20 August 2008

The economic efficiency of sport

Should we spend so much money on sport?

Hilariously, now that the Olympics have started and nobody can have the conversation about how badly Britain will do, a new topic arises: are we too good at cycling?

This question is sometimes framed like this: are we spending too much money on something as trivial as sport? And sometimes it is more like: should we be doing better in 'real' sports such as athletics instead of in sports that "young African men can't afford to play"? Either way, those who choose to spend money on training elite sportspeople are rightly asked to justify it.

Perhaps the standard answers are valid:
  • Olympic success encourages other people to take up sports - improving quality of life and reducing healthcare expenditure long-term.
  • The Olympics in London will encourage tourism and that will generate more money for the economy than they will cost.


But whether consciously acknowledged by the funders or not, there's another reason why this success will bring economic benefits. I examine here what conditions must be satisfied to result in a positive return on the £265 million spent since 2004.

Coordination is important in economics. Adam Smith's pin factory, Coase's theory of the firm, Schelling's study of micromotives and macrobehaviour - all of these are powerful demonstrations of why people acting alone are usually beaten by those working together. Well-coordinated teams simply produce more output and more value than the same number of individuals working apart (accepting the Mythical Man-Month's caveat for certain types of work).

The prisoner's dilemma shows very convincingly that allowing coordination to supersede your natural instinct for individualism can bring you better returns as an individual.

Now, let me make two assertions:
  1. That there is a specific economic gain from coordination, whose value can be estimated
  2. That success in the Olympics encourages people to identify with the UK as a community, and improves their commitment to coordination over selfishness


Why is the second statement true? Because we seek to flatter ourselves. Seeing Chris Hoy wearing three gold medals, we subconsciously think "Part of that success is not just because he was born with big thighs and trained hard - it comes from his stoic grit, his stiff upper lip...his politeness in a queue. In other words, his underlying British character. I too have an underlying British character, therefore his medals prove that I'm great too."

In fact Chris Hoy is Scottish, so I'm even more great - as of course everyone knows our underlying Scottish character is more dominant than the British one.

Rationally, this may not bear much resemblance to reality - but when you compare the results of the UK team to the US, France or (especially) Russia - don't you want to feel that there's some basic, human reason that the UK has done well?

My postulate is that we translate this subconscious inference about British character into a greater sense of similarity and thus community with the people around us. That, I suggest, provides a small boost to cooperation and a small suppression of the individual instinct which can be so counterproductive to economic success.

(Bear with me here - I'm still a capitalist, this is about coordination not corporatism)

So if you accept that argument, how do we quantify it? The gains to coordination are truly vast - primarily from permitting specialisation which increases the leverage on our mental and physical resources; and from the sharing of knowledge which increases our capacity to produce. Specialisation on its own provided a hundredfold gain in productivity even in Adam Smith's time. Now, across an integrated economy and with modern communication technology, we probably get ten times more benefit again.

The gains from knowledge are hard to measure but what David Warsh calls new growth theory has tried. It would be fair to say that the larger share of economic growth in the last sixty years has been due to the dissemination of knowledge.

Putting these together, one could plausibly argue that over 95% of our current prosperity is due to coordination in one form or another. Of course, much of this coordination happens anyway - it is governed by firm existing structures such as contracts and the physical arrangement of the economy across the country. But a good quarter or more of it can be ascribed to soft structures - personal relationships, psychological commitment to a well-running society, people's subconscious models of their identity and that of the entities around them. Imagine these soft links become just 2% stronger, for the 50% of the population who is following the Olympics, or at least the headlines; let the effect last just a month; and make the reasonable assumption for simplicity that the economic results are a linear function at this level of change. What are the results?

Under these simple assumptions this works out to just under a 0.24% boost to the economy for a month. The size of the UK economy is about £1.4 trillion and so this boost is worth £280 million. The spend on elite sport these four years is £265 million. So, in pure, numerical terms of plain economic growth - ignoring any multiplier effect of the actual spend, the entertainment value of the results, and any improvement in national health stimulated by the spectacle - the investment has made a positive return in 2008 alone! And the nature of GDP growth is a ratchet - so these boosts are likely to be retained to some extent in future years, providing an ongoing return.

The £280 and £265 million look very close. Coincidence? No, of course not. Who made up the figures of 2%, 50% and one month, after all? How did I choose them? According to what I felt might be "about right". Actually I originally estimated just a 1% boost to coordination. But that way the return was only 50% in 2008 and I thought a 100% return would look better.

More seriously, this direction could offer a framework for how to measure the return. It shows one possible set of conditions which can be satisfied for the investment to be economically worthwhile - a 2% coordination boost among 50% of the population, lasting a month. If we believe - or experiment shows - these conditions to be met, there's a good argument to spend the money again for the 2012 Olympics - or for the 2010 World Cup - or on (ahem) the Millennium Dome.

Next time I had better show that Lottery spending on the arts provides an even bigger return - otherwise my friends who campaigned against the diversion of arts funding to the Olympics will probably excommunicate me.

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