It’s open season for football’s economic analogies and the sky’s the limit

EVEN though I’m an Everton fan, I’m enjoying the start of the new Premier league season. Part of the optimism is the latest round of television money that offers a lifeline to clubs that are financially perilous.

This season, the Premier League made £3bn selling the rights to screen matches, a surprise 71 per cent increase on last year. Each club will receive an extra £14m to play with, and more than two thirds of that came from Sky. This windfall illustrates several important economic concepts.

Firstly, you may hear journalists refer to “transfer inflation”, as clubs spend some of the money on new players. However, as the economist Milton Friedman said: “Inflation is always and everywhere a monetary phenomenon”. Economists typically use the term inflation to refer either to an increase in the money supply, or its consequence, an increase in the general price level. Increasing prices in one particular sector, such as football transfers, is not inflation. In the same way, people often get confused about rising energy prices. What they are typically observing is the consequence of inflation, not the cause. Unless BSkyB gets control of the printing press, the company cannot generate inflation.

Another concept is “Cantillon effects”, named after the classical economist Richard Cantillon who was an early pioneer of monetary theory. He noted that increases in the supply of money has localised effects, with prices moving in a sequential order based on their distance from the initial injection. In a modern economy, new money tends to enter the financial system through the banking sector, hence market participants clamber to get closer to the source. You want your income to rise before the prices of the goods that you buy. Sky’s television money will increase prices beyond the football club, but it will initially be concentrated in the football sector.

Finally, we can think about the speed at which these changes occur. Tottenham Hotspur’s former chairman, Alan Sugar, famously compared the business model of football with drinking prune juice: all the money you put in immediately gets passed on to players and agents. In 2009/10, only three Premier League clubs had wage to turnover ratios of less than 50 per cent (Arsenal, Manchester United and Wolverhampton Wanderers), while eight clubs had ratios over 80 per cent). So we might expect players to capture the majority of this £3bn. But if everyone expects transfer fees and wages to go up, managers will increase the bidding now.

The bottom line is that the people who immediately benefit are those with the scarce talent. And that’s the players. But the fans of the Premier League will also benefit from seeing some of the best players in the world play in England. It is, after all, a global market.

Anthony J. Evans is associate professor of economics at ESCP Europe Business School. @anthonyjevans