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Monthly Archives: March 2014

Visit the website shown below to see my article on the ongoing substitution of capital for labor in production.

http://wallethub.com/blog/rise-of-the-machines-examining-the-future-of-capital-labor-in-production/2766/

 

 

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Couch            This is the third in a series of blogs devoted to studying the NCAA’s propensity to layer on an ever increasing number of rules.  Similar to the Code of Federal Regulations, the rules published in the NCAA Manual grow at a startling rate.  In this blog we will examine some of the specific bylaws found in the NCAA Manual in an attempt to give the reader an understanding of the kinds of nonsense our university compliance officers are now grappling with.  For a reader with a strong stomach, the entire manual can be found and downloaded from the NCAA’s web site. 

Bylaw 13 of the NCAA Manual is concerned with recruiting. It spells out in excruciating detail what sort of activities are and are not permitted when it comes to contact between a member of an institution’s staff and a prospective student-athlete. For instance, bylaw 13.1.9 says “[a]n institutional staff member may attend the funeral or memorial services of a student-athlete, a prospective student-athlete, or a member of the student-athlete’s or a prospective student-athlete’s immediate family, at which prospective student-athletes also may be in attendance, provided no recruiting contact occurs.” Now, it is hard to imagine that there are many institutional representatives who would frequent funerals for recruiting purposes, but evidently the mere possibility of such is sufficient to justify a bylaw prohibiting it. Another example of the specificity found in the manual is bylaw 13.4.1.1, which details the types of printed materials that an institution can provide to prospective student-athletes. To cite an example, if an institution sends a prospective student-athlete a postcard it “may not exceed 4 ¼ by 6 inches.” (bylaw 13.4.1.1 (j)). And, it may contain “an athletics logo on one side….and may include only handwritten information….on the opposite side when provided to the recipients.” But schools should be careful when mailing out those 4 ¼ by 6 inch postcards, as bylaw 13.4.1.1.1 indicates that “[a]n institution is not permitted to use express mail delivery services and may only use first-class mail or a lesser rate of service.” The 432 page NCAA Manual is chock full of specific directives of dos and don’ts of this sort and, of course, more are added each year. Such is how things trend when rule-makers run amok; rules always beget more rules.

In June of 2011 representatives of Boise State University (including one of the authors of this blog) appeared before the NCAA Infractions Committee as a result of an NCAA investigation that began three years earlier. A portion of the NCAA investigation focused on the Boise State football program (an episode that a Sports Illustrated writer dubbed as “CouchGate.”.)1  At issue were impermissible benefits received by prospective student-athletes who participated in NCAA-allowed voluntary summer conditioning workouts held on campus prior to the start of fall semester. The athletes participating in the workouts had graduated from high school and most had signed the NCAA’s National Letter of Intent indicating their commitment to attend Boise State University. But, even though an incoming student has signed a letter of intent, according to NCAA bylaw 13.02.11 the incoming student remains a “prospective” student-athlete up until the individual either attends classes or participates in a “regular” squad practice. Regular squad practices are confined to a strictly defined fall football season, thus giving rise to the desirability for voluntary conditioning workouts during the summer. The summer conditioning program is allowable by NCAA regulation, but is not considered a “regular” squad practice.  So the new players arriving on BSU’s campus were technically still deemed to be “football prospects.”

In the case of the newly-arriving football players enrolling at Boise State University, the NCAA referenced violations of bylaw 13.2.1.1. This rule specifically prohibits an institutional staff member or “representative of its athletics interests” from arranging for a prospective student-athlete to receive “Free or reduced cost housing.” It is likely that the original intent of the bylaw was to prevent an institution from providing a star recruit with luxurious accommodations in order to gain a recruiting advantage over rival schools. However, once a bylaw is in place it is difficult to know where the line will or should be drawn. As a result, eventually the rule is pushed to the point of absurdity. At Boise State University the housing violations occurred when some of the new incoming football players crashed on couches or in spare bedrooms that were available in the apartments of their older teammates. In most instances the incoming student-athletes did pay a portion of the rent during the time they spent in the apartment, while in some instances they did not.

The final NCAA ruling was that the sharing of apartments between the new and returning football players was improper regardless of how much rent was paid. Certainly, this seems like an odd ruling.  At issue was the assistance provided by the coaches to the prospective student-athletes. The NCAA’s Public Infractions Report2 (2011, p. 10, 11) states that “It would have been permissible for a prospect to contact a student-athlete on his own initiative and [make] arrangements to stay with the student-athlete. The concern here is that the coaches’ arrangement of housing with student-athletes enabled prospective student-athletes to save time, effort, and perhaps money.” Heaven forbid.  

 

1See Stewart Mandell’s May 4, 2011 article in Sports Illustrated.  Available online at  http://sportsillustrated.cnn.com/2011/writers/stewart_mandel/05/04/pac-12-mailbag/index.html

 

2 The entire Boise State University Public Infractions report is available online at http://news.boisestate.edu/update/files/2011/09/NCAA_Public_Report.pdf

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(image provided by 123rf)

 

Imagine you are back in the first or second grade and back on the playground again during recess. Let’s say that you and Jimmy and Suzy and Janie have created a very ephemeral unit for storing value, keeping score and trading amongst yourselves. In other words, a hypothetical money. Your imaginary, very abstract unit of account happens to be “butterfly kisses.” Laughable as they may be to others outside your game, to you they are very real. So real that the four of you jealously track and guard your inventory of butterfly kisses earned and traded—and amongst yourselves, you do indeed trade them for candy, playground rides, etc. To your group, at least, they clearly have real value.

 

One day, you come storming in to Ms. Sandusky with tears of self-righteous injury springing from your eyes. “What’s wrong?” She says with concern.

 

“Jimmy just stole 200 of my butterfly kisses from me. That’s what!”

 

Ms. Sandusky is understandably puzzled. “Stole your what?”

 

“My butterfly kisses. Janie, Suzy, Jimmy and I keep track of them, who owns them, and how they are traded on a hill of wet sand in the corner of the sandbox. It’s official. ‘Mt. Sand’ we call it. We write the amounts with a stick—or rather Janie does. She’s the only one we trust as our banker. She’s the only one allowed to use the stick. We don’t really use the butterfly kisses themselves. We just trade them among us for all kinds of things—like rides on the teeter-totter. I had 400 butterfly kisses and Jimmy stole from me by changing the 4 to a 2.”

 

“Oh you dear children!” Ms. Sandusky exclaimed. “How clever and imaginative of you. But I can make everything better. After all, butterfly kisses are just imaginary but wonderful. Everybody should have as many as they want.” She takes a moment to write something on a post-it. “Here you go. I just gave you 200 new butterfly kisses on this post-it and I made it official by signing it. Now don’t lose them!”

 

“But… You can’t just create them out of thin air. They’re valuable because they’re hard to get. If you can just make them up any time you choose, they don’t mean anything! That’s not fair!” (Your childish brain is dimly groping with the concept of scarcity being intrinsic to value)

 

“Now that’s quite enough from you young man. I’m trying to be nice. You take this post-it and go back out there and play nicely.”

 

So you and your friends apparently made two errors in your money system. First, you did not make sure that your system (Mt. Sand) for tracking ownership and exchange of your currency was secure. Secondly, your choice of an abstract, ephemeral money, while it has real recognized value to you is not widely understood or seen to have value by the appropriate controlling or regulating authority (Ms. Sandusky).

 

Sadly, the parallels to “Mt. Gox” and Bitcoins are obvious. One legitimate function of government is protecting the sanctity of voluntary trades and property rights. Nevertheless it appears that most governments appear puzzled and somewhat threatened by the rise of a private monies and, in particular, private digital currency. Why should their reluctance to recognize and enforce the real, trading value of Bitcoins be surprising? After all, the rise of a workable private currency threatens their lucrative monopoly on printing intrinsically valueless fiat money and deriving a counterfeiter’s rent from doing so.

 

 

 

One can only imagine the phone call…

 

“My account just got hacked into and fifty of my Bitcoins have been fraudulently transferred—stolen.”

 

“Your what?”

 

“My Bitcoins! They are a virtual digital currency whose supply is cryptographically controlled—ultimately there will never be more than 21 million of them created over the next 40 years. They are currently used in trading for more and more things and the exchange and record of ownership is tightly monitored and controlled by the Bitcoin exchanges.”

 

“Evidently not that tightly controlled, Mr. Wilson, or yours would not have been stolen. Twenty one million you say? Wow, that seems like a lot! Say, I’m a little a fuzzy on this digital stuff. Is your ownership of Bitcoins kind of like wins at ‘Angry Birds?’ You can bet I’d be mad if someone stole my ‘Angry Birds’ wins!’

 

“No! ‘Angry Birds’ is just an imaginary game. Bitcoins are real! They are a real digital currency with a real trading value recognized by millions!”

 

“Wait now I got you, Mr. Wilson. You’re like that caller we got an hour ago who reported the theft of 9,615 of his likes for a comment he posted on ‘Facebook.’ He was real steamed too!”

 

“It’s not at all like that! Bitcoins are real, the ownership of them is real, and they have a real value in terms of the real goods they can buy!”

 

“Well if they’re real, if property has indeed been stolen, then can you describe one for me—so that I will know it if I see it?”

 

“Well you won’t see them, since they only exist in cyberspace, but I will give you the code that identifies one of my Bitcoins. Just a moment now, I have it somewhere… Ah! Here it is—“65//+#4139AB**\\\\b16hedgehog%$@@#1312^. Does that help?”

 

“You bet it does. That helps us a lot. If you give me the rest of your allegedly stolen codes, I can then hand you over to Ed. He heads up our new Digital Property Restitution Division. As a matter of fact—I hope you don’t mind—I’ve taken the liberty of letting Ed listen in on this call. What do you think Ed, can we help Mr. Wilson get his Bitcoins back?”

 

“Sure, Tom. If Mr. Wilson will be kind enough to give us all the codes using his current e-mail address, we can certify his report of them and e-mail them back to him. We’re good at that and we have the staff to handle it—just now they smartly clicked 10,000 likes for that poor guy who had his likes hacked and stolen from his ‘Facebook’ comment. We’re just here to serve.”

 

“What? This is ridiculous! You can’t just make up my Bitcoins! They were illegally hacked from my account. You’ve got to find who stole them, where they are, and get them back for me. I insist on the return of my property and the prosecution and punishment of the thief!”

 

“Whoa there! Hold your horses! Raising your voice isn’t going to help anyone. I don’t like you attitude Mr. Wilson. Ed and I are doing our best to help. I don’t know that we would know what your property is even if we saw it—and we’re not likely to see it. After all, cyberspace is a mighty big place! If I could offer you a suggestion. Next time why not let this be a lesson learned. Store your wealth in something real, in good old-fashioned U.S. dollars—legal tender and backed by the U.S. Government. Putting your money in something as solid as a rock would have avoided this whole problem.”

 

“You idiot! Federal Reserve notes aren’t real! They’re just a fiat money printed at the whim of the Government and the Federal Reserve. They’re just as abstract as Bitcoins. But unlike Bitcoins their supply is unlimited…”

 

 

 

Farfetched? Ominously, in current court cases concerning the fraudulent transfer or use of Bitcoins, arguments are already being framed by legal defenses that no crime has actually occurred because Bitcoins are not really money. Don’t get us wrong. We are sympathetic to all private money efforts (including Bitcoins) and we believe economies and private markets are more than ready for their introduction and the eventual replacement of the disastrous, de-stabilizing combination of government fiat monies coupled with fractional-reserve banking.  The speed of exchange and record of ownership is technologically capable of supporting this evolution.

 

However, we prefer that the new, private money be backed by something of broadly recognized real value, aside from a hypothetical scarcity of cyber-money. That is why we prefer broad productive capital as the basis for exchange, valuation, and a store of value (for more detail read, Capital as Money, available from Amazon.com). While electronic records of capital ownership and exchange could conceivably be hacked and stolen (as, sadly, is also the case of anything else that has value), at least shares of productive capital and index ETFs are widely recognized by governments as property and the theft or attempted theft of them is recognized as a crime.

 

 

 

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helmetAthletics departments are devoting ever more resources to insure that the NCAA’s rules are being enforced, but judging from the number of NCAA investigations and sanctions the institutions’ efforts are largely futile. Given the impossibility of monitoring everything, most institutions walk a tenuous path hoping to avoid investigation. Moreover, in a world where everyone is guilty, competitors can attempt to prompt NCAA investigations in order to gain a competitive advantage.

The Association has so many bylaws that the thought of an investigation strikes fear into administrators.  Given that membership is entirely voluntary, how can this happen?  What is it that induces universities to voluntarily participate in an arrangement that many find to be burdensome?  The economic theory of rent seeking provides some insight into the matter.

The cash generated by intercollegiate athletics in general, and college football in particular, is enormous. An appearance in a Bowl Championship Series (BCS) game is highly coveted, since the payoff from these games result in millions of extra dollars of revenue for the universities involved. Likewise, an appearance in the NCAA’s final four in basketball generates huge sums of cash for the participating institutions.

Besides the direct cash payments to the universities, indirect benefits take the form of increased sales of season tickets, concessions, and merchandise with school logos. Given the large amount of money on the line, the competition between universities for the best student-athletes is intense.  

In a recent column on academic pretense, Thomas Sowell pointed out the “hypocrisy” of academicians and school administrators who are vehemently opposed to paying student-athletes.(See the article titled “Academic Hypocrisy” at http://townhall.com/columnists/thomassowell/2012/02/21/academic_hypocrisy/page/full/). 

Head football coaches at major colleges normally receive annual salaries well in excess of a million dollars. Assistant coaches are also handsomely rewarded, as are athletic directors. But student-athletes are not allowed to share in the windfall arising from their work on the field.  For the guys on the field, even a booster-bought snow cone is prohibited. In commenting on the various recruiting and other NCAA violations being reported, Taylor Branch (2011, p. 1) observed that, “the real scandal is the very structure of college sports, wherein student-athletes generate billions of dollars for universities and private companies while earning nothing for themselves.”1

In his article, Branch (2011) provided an excellent review of the history and development of the NCAA. Branch’s scathing portrayal of the NCAA is largely focused on the institution as a rent-seeking cartel: “The NCAA makes money, and enables universities and corporations to make money, from the unpaid labor of young athletes.” (2011, p. 5). The argument is a familiar one from the theory of rent seeking. In a competitive market, productive inputs (student-athletes) would tend to be paid a wage equal to the value of their marginal product. Prices of inputs would be bid up, thereby reducing the economic rents accruing to universities and their athletic departments. To capture more of the economic rents, universities join in a cartel (the NCAA) to enforce a list of rules and thereby prevent an all-out bidding war for student-athletes. 

As with any cartel, once the rules and guidelines are in place there is strong incentive for any particular cartel member to cheat on the agreement. In the case of the NCAA, the cheating takes place when individual schools or their boosters offer impermissible benefits in an attempt to recruit and keep a star athlete. An individual school can benefit economically by offering something to entice recruits to enroll in their institution and play for their team. For this to work, competing schools need to toe the line lest an all out bidding war occurs. Predictably, when a rival school is caught red-handed in some sort of NCAA violation, there is a high level of righteous indignation and scorn brought down on the offending institution. Any discovered violation on the part of a competitor is generally regarded as a purposeful attempt to cheat on the system and thereby gain an advantage, and offended institutions expect the guilty school to suffer the harshest of penalties for such violations. By way of contrast, a school’s own violations are almost always explained away as the result of an inadvertent slip up—the “sort of thing that could happen to anybody really.”

The NCAA actively works at defining and enforcing rules against any form of compensation or benefit directed at student-athletes.  But what constitutes illegal compensation aimed at attracting and keeping a star athlete?  In attempting to answer this question the NCAA has developed an incomprehensible rule book. The next blog in this series will provide some humor by looking at some of the specific NCAA bylaws that are particularly asinine.

 

[1] See “The Shame of College Sports” Atlantic Monthly, October 2011.  Available online athttp://www.theatlantic.com/magazine/archive/2011/10/the-shame-of-college-sports/8643/2/

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Throughout time empires, nations, communities,football player institutions, and associations have come and gone. Some last for long periods of time while others flourish for a brief period before withering away. There are perhaps many reasons for the success and failure of human organizations, but one stands out to us as being crucially relevant:  Laws, rules, and regulations tend to multiply over time resulting in top heavy organizations that eventually become detested by those living in subjection to them.  Over the next several weeks we will explore this process by looking at the NCAA as an illustration of this tendency. 

The NCAA provides an interesting case study to analyze the growth of a bureaucracy.  Membership in the Association is voluntary, and the Association’s members are responsible for proposing and voting on any new rules.  A new bylaw becomes binding only after it has been approved by the membership through its established legislative process.  However, even though member institutions are allowed to participate in the development of new bylaws, a large and ever-growing number of malcontents are finding the NCAA and its rules and regulations to be overly burdensome. 

The NCAA routinely investigates universities for violations of its rules governing the member schools’ athletic programs. Within the past several years it has investigated several high-profile football programs to see whether an “extra benefit” was received by either a student-athlete or prospective student-athlete. An NCAA investigation can result in violations and subsequent penalties placed upon the guilty institution if it is determined that extra benefits were provided to athletes. In the past few years the NCAA has investigated Auburn University, The Ohio State University, Boise State University, and the University of Miami to name a few.

On page 1 of its burgeoning manual (2013-2014), the NCAA states that its purpose for existence is the maintenance of a “clear line of demarcation between intercollegiate athletics and professional sports.” On page 4, it asserts that “student-athletes should be protected from exploitation by professional and commercial enterprises.” In its attempt to “protect” student-athletes from receiving any extra benefits, the NCAA increasingly attempts to micro-manage the lives of all athletes falling under its rule. Like the federal tax code, as time has gone by rules have expanded to the point of absurdity. For example, a particularly laughable NCAA bylaw (#16.5.2 (h)) asserts that “[a]n institution may provide fruit, nuts and bagels to a student-athlete at any time.”  Following the passing of this bylaw, the question of whether or not cream cheese can accompany the allowed bagel was hotly contested in athletics’ compliance circles.

Today’s blog is the first of a series that will examine NCAA regulation from an economics perspective. The next one will examine the NCAA’s amateurism principle through the lens of public choice theory and rent-seeking. It will be argued that despite the lofty language found in the NCAA Manual, a primary goal of its legislation is to establish a cartel arrangement to insure that economic rents accrue to the university, coaches, and athletics administrators, rather than to the student-athletes who are doing the heavy lifting on the field. We will then look at the ever-growing list of rules and regulations promulgated by the NCAA in its attempt to insure economic profits (i.e., extra benefits) are not accruing to student-athletes. To accomplish this objective the NCAA endeavors to monitor and control an ever greater part of a student-athlete’s life; a task that is ultimately impossible.  Due to the inability of any institution or athlete to fully comply with all the NCAA’s rules and regulations, every institution has violations—some discovered but many more undiscovered—on what is most assuredly a daily basis. Thus, when everyone is guilty, the decision to investigate and penalize any particular institution can appear to be arbitrary and capricious.  The parallels between this and our bigger “prohibited everything” economy are obvious.   

The growth of the NCAA into a bulky, overbearing establishment that is insufferable to many of its own members is not a new or an isolated phenomenon.  There is and always has been a disturbing deep-seated human tendency for groups to evolve from simple associations into large and oppressive establishments, a trend which will be explored in this series of blogs.  We may be our own worst enemies. 

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