A lesson from football: Labour needs to temper its regulatory reflex

by David Butler

A few weeks ago, the first set of Financial Fair Play (FFP) fines landed upon the desks of the owners of Manchester City, Paris Saint-Germain and a host of other football clubs. UEFA’s new system is meant to make European football fairer, limiting the ability of clubs to generate losses in search of better league places in search of European glory/a group stage exit in the Champions League. Critics have accused the reform of strengthening the power of the big clubs. These critiques of FFP offer important insights for politicians looking to intervene in markets.

There is a convincing claim that FFP embeds oligopoly. Its structure strengthens clubs like Manchester United, Barcelona and Bayern Munich whose historic hegemonic position in their respective leagues means they are major profit-making bodies. Clubs who wish to compete with them need to make significant investments to be able to match the transfer kitty, wage offers, and footballing status offer by the big teams.  Relative insurgents like Manchester City or AS Monaco rely on owners who are able to invest a sum close to the GDP of a small African nation. These investments are overwhelming loss-making, at least initially, due to the huge cost of building a squad capable of challenging consistently for Champions League places. FFP means that fewer clubs will be able to pay the sunk costs often needed to enter the market for Champions League places within their respective nation. Bad regulation may well sustain the wealthy clubs and stymie greater competition.

Labour possesses a strong regulatory reflex, beaten only by the Greens. Be it a public health issue, an employment issue, or a business issue, the Party too often has a solution based in tweaking existing rules or creating new ones. There is nothing wrong with this in some cases, especially as part of a pragmatic learning process.  Where a sector is tending towards oligopoly or monopoly, regulation is needed to counter the negative aspects of such configurations. Even when a market is relatively competitive, the existence of externalities necessitates some form of regulation or oversight. In most cases, with regulation we are trading off between the creative destruction of the market and economic stability; understanding this better can help us control our reflex and prevent often noble instincts from making us poorer, socially and economically.

Capitalism’s forces are unstable, as economists from Keynes to Schumpeter understood and sought to explain. The introduction of regulation brings greater stability to a system, partially through protecting firms from new entrants to a marketplace and internal competition within said marketplace. Regulations raise the cost of entry to a market and rewards economies of scale (as bigger firms are better able to deal with the cost of complying with the law).

The trade off between competition and stability is well illustrated in the case of financial services. TransferWire (and other peer-to-peer services) are attempting to break up the dominance of PayPal, Western Union and mainstream banks over money transfer. Greater competition should reduce the price (expressed as the commission rate) that one pay to transfer money, but there will be greater downside risk of consumers getting ripped off if there is insufficient or poorly formulated regulation.

There is a balance to be struck.  We need to be vigilant to cases where stability becomes stagnation and where competition is too destructive and insufficiently creative (or just not happening at all). Labour’s approach needs to be modest, pragmatic, nuanced and sectoral. It also requires Labour politicians to resist their regulatory reflex.

David Butler is a Labour party activist

Tags: , , , , ,

Leave a Reply