College athletes create the value so they should get the money, shouldn’t they?

As a Brit, I confess to finding American college sports baffling. We have noting like it in Britain, for better or worse, and I don’t know that any other country does. So I say the following with a degree of hesitancy.

State Senator Roger Chamberlain, who chairs the Taxes Committee, plans to introduce a bill in the 2020 session that would let student athletes profit from their name and image, including by signing endorsement deals. California passed a similar measure in September, and lawmakers in more than a dozen states have introduced similar bills or said they expect to next year.

There appears to be some controversy about this but I am not sure why. Maybe it is just my unfamiliarity with US college sports and there is, in fact, some convincing argument against Sen. Chamberlain’s measure which I am missing. If so, please let me know. But it seems to me that if the athletes are creating the value, they should be getting the rewards.

Sergio Ramos’ shirt – How value is created

Old Navy will sell you a plain white T-shirt for $10.00. You can buy a plain white Adidas T-shirt on Amazon for $21.21. The main difference between the two is the Adidas emblem (materials will differ also). In other words, simply sticking that emblem on a plain white T shirt more than doubles the price. Spanish soccer side Real Madrid famously play in a plain white kit which is currently manufactured by Adidas. You can buy a Real jersey for $159.99. The only real difference here between the plain white Adidas T shirt and the Real Madrid jersey is the Real Madrid badge but that increases the price by $138.78. And if you buy the shirt of team captain Sergio Ramos – one of the most decorated players in soccer history – it will cost you $164.99. Again, simply adding his name to a regular Real Madrid shirt raises the price by $5. 

Does it cost $5 to put his name on that shirt? Probably not. But then it didn’t cost $138.78 to put a Real Madrid badge on a plain white Adidas shirt. This is one of the little learned lessons of economics – costs do not determine price. If something costs you $50 to make, if all anyone will pay you for it is $30, that is the price. The production costs, once incurred, are history.

So what determines the price someone will pay for it? This is another little learned lesson – so little learned that Karl Marx erected a whole, wholly false, economic philosophy on not learning it – value is subjective.

It would cost as much to put my name on the back of a Real shirt than it would to put Sergio Ramos’ name on it. But I doubt that Real Madrid would sell many such shirts at a premium, if at all. People value the letters S E R G I O R A M O S on a Real shirt more than they value the words J O H N P H E L A N on one and are willing to pay more for that value.

That, right there, is how Sergio Ramos creates value. That is why he is ‘worth’ what he gets paid. 

From Madrid to Minnesota

The same will be true on a smaller scale for college athletes. The Minnesota Gophers football team sold out against Penn State last weekend for the first time since 2015. Is this down to the U of M? Or is it down to the players?

Again, I know little of college sports, but I suspect the latter is much more a factor than the former. That being the case, if the players are generating the value, they should get the rewards.

John Phelan is an economist at the Center of the American Experiment.