Another argument for Open Borders: It is good for the quality for football!

There is no doubt that I strongly favour a policy of removing restrictions on immigrations. Nathan Smith in his recent guest post on my blog showed that a policy of global Open Borders would significantly boost global GDP. However, there might be even better arguments for Open Borders.

My friend Ben Southwood, Head of Policy at the Adam Smith Institute, in a new paper argues that the “crackdown on foreign players hurts English football”. You might not buy Nathan’s arguments, but you should certainly buy Ben’s arguments for Open Borders in international football (to my American readers: Soccer).

This is the abstract from Ben’s paper:

It is a very common view that “importing” foreign football players into the UK to play in the Premier League leads to less opportunity for English players to play for these teams. This means that English players get less high-level experience, and consequently aren’t as good as the players of Spain, France, Italy or Ger- man, who make up a larger fraction of the players playing in their home leagues. This, the argument runs, is an important factor in explaining the English national team’s perceived underperformance in international competitions. I review the literature and present novel data establishing a negative relationship between current performance (as measured by FIFA ranking) and the current amount of football played in a league by native players (across Spain, England, Germany and Italy). Further, I find no relationship between minutes played by English players in the Premier League five or ten years ago and current performance. Finally, I find strong evidence that a league’s overall strength (as measured by its UEFA coefficient) is predicted by the current amount of foreigners playing in it. To restrict foreign players would not directly benefit the English national team, but it would risk substantially curtailing the overall quality of the world’s most popular football league.

PS in my favourite team FC Copenhagen there are very few Danish players and the best “Danish” players have immigrant background. Thank god for immigration and free trade in footballers!

PPS this is my son’s favourite (now former) FC Copenhagen player Igor Vetokele.

Igor

Gary Becker has died. Long live economic imperialism!

As geopolitical tensions in Ukraine have been rising I have found myself thinking about the impact of such events on markets and economies. One thing is to understand what is actually going on and another thing is to understand the economics of such events. How are geopolitical tension or terror impacting investment and consumption decision?

Most people would tend to give ad hoc explanations for the economic and financial impact of such events. However, that would not be the way I would look at it. I would always start out by trying to understand such events and the impact of such events from a rational choice perspective. The tools economists use to understand the pricing of beer or the demand for football tickets can also – and should – be used to understand for example suicide bombings or how markets react to geopolitical tensions.

This was the key message from Nobel laureate Gary Becker who passed away on Sunday at an age of 83.

Becker was awarded the Nobel Prize in economics in 1992 “for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour”.

Airport security and the Economics of discrimination

Gary Becker is one of the economists who has had the biggest influence on my thinking about the world in general – also the “nonmarket world” – so his ideas often come up when I encounter different decision making problems.

Recently I was going through security control in Copenhagen airport. In Copenhagen airport there is a special security control called something like the “Express” track. It is basically a quasi-fast track. I fundamentally think it is used to get people who are late for the their flight fast through security and for example for people in wheelchair. However, I have noticed that I often will be called over to this Express track. Last time that happened a couple of weeks ago I came to think about the concept of “statistical discrimination”.

The idea with statistical discrimination is that it can be rational for example for employers to discriminate against certain ethic groups if there is a cost of gathering information of about individuals’ skills. While Gary Becker did not come up with the theory of statistical discrimination he nonetheless was the economist to pioneer the economics of discrimination. His work on discrimination was published in his great book The Economics of Discrimination from 1971.

Becker books

So why am I so often called to the “Express” security control in Copenhagen airport? The answer is statistical discrimination. When I travel I am mostly wearing a suit and look like a seasoned business traveler. The security staff will based on my looks fast conclude that I am a seasoned traveler and know the security routine well and I therefore would not slowdown the process if they got me through there. This obviously was completely rational because I am in fact well accustomed with the security process.

As I was going through the express security control I was thinking about Gary Becker and what he taught us about using standard economic thinking (rational choice theory) to understand non-market phenomena.

Fear and the Response to Terrorism   

I consume a fair amount of working papers every month. As it happens the last working paper I read (or actually re-read) was a paper by Gary Becker (and Yona Rubinstein). The paper – “Fear and the Response to Terrorism: An Economic Analysis” (2011) – “offers a rational approach to the economics and psychology of fear”.

The reason I re-read the paper was that wanted to better understand how the increased geopolitical tensions in Ukraine might impact particularly the Central and Eastern European markets and economies.

Try to think about the geopolitical tensions while reading this part from the abstract from the paper:

“We explicitly consider both the impact of danger on emotions and the distortive effect of fear on subjective beliefs and individual choices. Yet, we also acknowledge individuals’ capacity to manage their emotions. Though costly, people can learn to control their fear and economic incentives affect the degree to which they do so. Since it does not pay back the same returns to everyone, people will differ in their reaction to impending danger … Education and the exposure to media coverage also matters. We find a large impact of suicide attacks during regular media coverage days, and almost no impact of suicide attacks when they are followed by either a holiday or a weekend, especially among the less educated families and among occasional users.”

This might help us understand why the increase in geopolitical tensions in Ukraine and Russia has had so relatively limited impact on global financial markets. Obviously there has been a marked impact on the Russian and Ukrainian markets, but while we initially saw a “fear factor” in the global stock markets this “shock” fast ebbed.

In reality there is a similarly to Becker’s original theory of discrimination, where economic agents could have a “taste” for discrimination. Hence, an employer might have a dislike for jews or blacks, but this “fear” is not for free. If the employer refuses to hire a certain individual because of his or her race or religion despite that individual is as productive as a more open-minded competitor might hire other candidates for the job then that individual. Therefore racist employers will have to pay for their racism by having to accept a lower profit.

Similar it is costly to maintain an irrational fear of geopolitical risks. This I think is pretty important in terms of understanding the impact of the Ukrainian crisis on the global markets.

Long live economic imperialism!

This is just a few examples of how Beckerian thinking is influencing my own thinking at the moment. Gary Becker made a huge impact of me when I really got into studying his research in the second half of the 1990s when I was doing research on the economics of immigration at the Danish Ministry of Economic Affairs and at the same time was teaching a course in the Economics of Immigration at the University of Copenhagen.

I will gladly admit that I am a strong proponent of economic imperialism. I strongly believe – and learned that from studying Gary Becker – that economic method (rational choice theory) can be used to understand most societal issues whether it is stock market pricing, suicide bombings, why politicians are asshats or sports. In fact the latest book to arrive in my mail from Amazon I got to today is a book – “The Numbers Game” – on how to apply economic methods to understanding football (for my American readers – that is what we call soccer in Europe).

I am sure Gary Becker would have agreed that if you want to understand for example the impact on team success by firing a coach you need to apply rational choice theory. It is not about “psychology” – it is all about rational choices.

Thank you Gary Becker for making me understand this.

Numbers game

Update – See also these links on Gary Becker:

Greg Mankiw: Very Sad News

Peter Lewin: Gary Becker: A Personal Appreciation

David Henderson: Gary Becker, RIP

Bloomberg: Gary Becker, Who Applied Economics to Social Study, Dies at 83

Reuters: Nobel-Winning Economist Gary Becker Dies at 83

Chicago Tribune: Nobel-prize winning economist Gary Becker dead at 83

Fox News: Gary Becker, University of Chicago Economics Nobel Laurete, Dies at Age 83

Peter Boettke: Gary Becker (1930-2014) — An Economist for the Ages

Mario Rizzo: Gary Becker (1930 – 2014): Through My Austrian Window

Russ Robert/Café Hayek: Gary Becker, RIP

 

 

 

What are Crashes in Cycling’s Grand Tours telling us about banking crisis?

The concept of moral hazard can often be hard to explain to non-economists – or at least non-economists are often skeptical when economists try to explain excessive risk taking in banking with moral hazard problems. Non-economists often prefer a simpler explanation to banking crisis – bankers are simply evil and greedy bastards.

But maybe if we – as economists – use something that most people would understand – sports – to explain moral hazard we might be more successful when we want to explain moral hazard in banking.

Just take a look at the abstract from a recent paper – Does the Red Flag Rule Induce Risk Taking in Sprint Finishes? Moral Hazard Crashes in Cycling’s Grand Tours – from the Journal of Sports Economics:

Sprint finishes in professional cycling are fast, furious, and dangerous. A ‘‘red flag rule’’ (RFR) seeks to moderate the chaos of these finishes, but may induce moral hazard by removing the time penalty associated with crashing. To test for moral hazard, the authors use a 2005 rule change that moved the red flag from 1 km to 3 km from the finish. Data from Europe’s Grand Tours indicate that, after the rule change, both the incidence and the size of crashes nearly doubled in the 1–3 km from the finish zone. There was no such increase in crashing rates in the 3–5 km zone.

I love Sportometrics or the Economics of Sports not only because it tells us about sports, but also because sports is a good way of testing economic theories such as moral hazard. It is real-life experimental economics.

Therefore, I think that if we can show that if you reduce the “cost” of crashing in a bike race with a rule like the “red flag rule” then you will increase “risk taking” then it is only natural also to expect bankers to take excessive risks if there is a similar “red flag rule” in banking – such as deposit insurance.

This also shows that if we try to make the “game” more safe then the end result might very well be the opposite.  Regulators and bankers alike should realise this.

%d bloggers like this: