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NHL Free Agency: Market dysfunction

July 24, 2013

2-minute read

Free agency opened on July 5 in the National Hockey League (NHL) and a myriad of contracts were signed. Between July 2 and 16, which includes the few days before the free agency officially began, free agents (or players on the verge of becoming free agents) were offered a total of $618 million, including $399 million on July 5 alone.

Hundreds of million dollars must be added to this astronomical sum to account for what will be spent in the next years for expensive contract buyouts which take place when players have been overvalued (here’s a notorious example). The magnitude of the commitments made these past weeks may certainly make your head spin, but they also reveal a few free market malfunctions which deserve to be pointed out.

Resource distribution

In theory, the free market is the most efficient system to distribute resources. No need for a global representation of the world, for a general evaluation of needs and resources, or for a complex plan attributing their fair share to one and all.

The market allows for economic agents supposedly free and rational to meet one another, and then for each and everyone of them to buy and sell according to their own needs, desires, and means. This system has the reputation of being the most effective because, still in theory, agents directly involved in a transaction would be in a better position than a third party (say the State) to evaluate the merits of a certain economic choice.

Laissez-faire and instability

The examples offered by professional sports in general and the NHL in particular suggests that this theory might actually not be valid empirically. Just a little reminder: the League has been thrown into labour disputes in the last three collective agreement negotiations with the players (1994-1995, 2004-2005, and 2012-2013) because owners were incapable of keeping their payrolls under control.

Spontaneous order or equilibrium in the market in an economic microsystem like the NHL (30 teams, a few hundred players) is whimsical, and that’s nothing new. The fact that each agent (owner or player) seeks his own private interest (there are currently no female owners) does not lead to general and efficient equilibrium. It leads instead to complete chaos and the interest of the strongest taking over all other interests.

On the one hand, rich teams offer big contracts to average players, pushing not so well endowed teams to go down the same route and to jeopardize their solvency (David Clarkson and Ryane Clowe are good examples).

On the other hand, players year after year take advantage of the relative scarcity of free agents to bust the bank and get lucrative contracts often way above their market value (not to mention whatever the real value of their work could be).

Laissez-faire in the NHL is thus synonymous with dysfunction. The League’s economic system is not founded upon reasoned agreement between rational agents, but rather on never-ending overbidding. This is a game at which only recurring labour disputes can allow the League to survive.

Necessary planning

In contrast to what the dominant economic theory professes, only in periods of collective bargaining —i.e. the moment during which all economic agents involved are forced to coordinate their interests— is it possible to reach a business model which might not be efficient, but at least viable.

The NHL is interesting in so many ways when comes the time to try and validate the dominant economic theory. It shows that, no matter what we say, economic agents are not rational agents (as you can see in these two instances), that the sum of their actions does not lead up to a great level of efficiency, and that laissez-faire remains incapable of optimally distributing resources.

That’s what the dominant economic theory loses sight of: that individuals involved in market relations cheat, disguise facts, make mistakes, or are willfully blind. All of this results in a general instability that only the too rare opportunities of collective management and planning can counterbalance.

Photo credit: Bloumeister This article was written by Philippe Hurteau, a researcher with IRIS—a Montreal-based progressive think tank. 

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