From 1989 to 1991, communism foundered throughout the former Soviet bloc in Europe and Asia. From Prague to Vladivostok, twenty-eight countries in the former Soviet Union and Eastern Europe abandoned similar political and economic systems.1 The Collapse of the Socialist System At the end of communism, all these countries were experiencing great economic problems. The old, highly centralized socialist economic system had become ossified. Although it had mobilized labor and capital for industrialization, it failed to keep up with modern economies. Its chronic shortcoming was shortages, as the centralized allocation system failed to balance supply and demand for the millions of goods and services characteristic of a modern economy. It was incapable of promoting efficiency or quality improvement because it focused on gross production, encouraging excessive use of all inputs. Its ability to innovate was very limited, too. The socialist economy suffered from a dearth of small enterprises and creative destruction (the destroying of the outdated by new and better products and services; see creative destruction). As free resources dried up, growth rates started stagnating. In addition, an ever-larger share of the Soviet economy, about one-quarter of GDP in the 1980s, was devoted to military spending in the arms race with the United States. The stagnation of the standard of living bred public dissatisfaction, which in turn prompted excessive wage increases and held back necessary price rises. In Poland and the Soviet Union, budget deficits and the money supply grew rapidly toward the end of communism, causing hyperinflation—more than 50 percent inflation during one month—drastic falls in output, and economic collapse (Kornai 1992). Market economic transformation was initiated mainly by peaceful political revolutions heralded by a cry for “a normal society,” meaning a democracy and a market economy based on private property and the rule of law. The causes of the collapse of communism were multiple, and their relative importance will remain in dispute. The economic failure was manifold and evident. Political repression and aspirations for national independence also helped cause the collapse. The multinational states—the Soviet Union, Czechoslovakia, and Yugoslavia—fell apart. The Soviet Union’s inability to keep up with the United States in the arms race and in high technology was also a factor. The European Union attracted the East-Central European nations, which demanded a “return to Europe.” Differing Programs of Economic Transformation At the beginning, the transition’s direction was clear, but its final aims were not. Overtly, everybody advocated democracy, a normal market economy with predominant private ownership, a rule of law, and a social safety net, but their eventual goals ranged from the American-style mixed economy to a West European–style welfare state to market socialism. Instead of arguing about aims, people argued over whether the transformation to a market should be radical or gradual. A radical program, “shock therapy” or “the Washington consensus,” became the main proposal for how to undertake

In recent years, taxation has been one of the most prominent and controversial topics in economic policy. Taxation has been a principal issue in every presidential election since 1980—with a large tax cut as a winning issue in 1980, a pledge of “Read my lips: no new taxes” in the 1988 campaign, and a statement that “It’s your money” providing an enduring image of the 2000 campaign. Taxation was also the subject of major, and largely inconsistent, policy changes. It remains a source of ongoing debate. Objectives Economists specializing in public finance have long enumerated four objectives of tax policy: simplicity, efficiency, fairness, and revenue sufficiency. While these objectives are widely accepted, they often conflict, and different economists have different views of the appropriate balance among them. Simplicity means that compliance by the taxpayer and enforcement by the revenue authorities should be as easy as possible. Further, the ultimate tax liability should be certain. A tax whose amount is easily manipulated through decisions in the private marketplace (by investing in “tax shelters,” for example) can cause tremendous complexity for taxpayers, who attempt to reduce what they owe, and for revenue authorities, who attempt to maintain government receipts. Efficiency means that taxation interferes as little as possible in the choices people make in the private marketplace. The tax law should not induce a businessman to invest in real estate instead of research and development—or vice versa. Further, tax policy should, as little as possible, discourage work or investment, as opposed to leisure or consumption. Issues of efficiency arise from the fact that taxes always affect behavior. Taxing an activity (such as earning a living) is similar to a price increase. With the tax in place, people will typically buy less of a good—or partake in less of an activity—than they would in the absence of the tax. The most efficient tax system possible is one that few low-income people would want. That superefficient tax is a head tax, by which all individuals are taxed the same amount, regardless of income or any other individual characteristics. A head tax would not reduce the incentive to work, save, or invest. The problem with such a tax, however, is that it would take the same amount from a high-income person as from a low-income person. It could even take the entire income of low-income people. And even a head tax would distort people’s choices somewhat, by giving them an incentive to have fewer children, to live and work in the underground economy, or even to emigrate. Within the realm of what is practical, the goal of efficiency is to minimize the ways in which taxes affect people’s choices. A major philosophical issue among economists is whether tax policy should purposefully deviate from efficiency in order to encourage taxpayers to pursue positive economic objectives (such as saving) or to avoid harmful economic activities (such as smoking). Most economists would accept some role for taxation in so steering economic choices, but economists disagree on two important points: how well policymakers can presume to know which objectives we should pursue (e.g., is discouraging smoking an infringement on personal freedom?), and the extent of our ability to influence taxpayer choices without unwanted side effects (e.g., will tax breaks for saving merely reward those with the most discretionary income for actually saving little more than they would without a tax break?). Fairness, to most people, requires that equally situated taxpayers pay equal taxes (“horizontal equity”) and that better-off taxpayers pay more tax (“vertical equity”). Although these objectives seem clear enough, fairness is very much in the eye of the beholder. There is little agreement over how to judge whether two taxpayers are equally situated. For example, one taxpayer might receive income from working while another receives the same income from inherited wealth. And even if one taxpayer is clearly better off than another, there is little agreement about how much more the better-off person should pay. Most people believe that fairness dictates that taxes be “progressive,” meaning that higher-income taxpayers pay not only more, but also proportionately more. However, a significant minority takes the position that tax rates should be flat, with everyone paying the same proportion of their taxable income. Moreover, the idea of vertical equity (i.e., the “proper” amount of progressivity) often directly contradicts another notion of fairness, the “benefit principle.” According to this principle, those who benefit more from the operations of government should pay more tax. Revenue sufficiency might seem a fairly obvious criterion of tax policy. Yet the federal government’s budget has

The term “supply-side economics” is used in two different but related ways. Some use the term to refer to the fact that production (supply) underlies consumption and living standards. In the long run, our income levels reflect our ability to produce goods and services that people value. Higher income levels and living standards cannot be achieved without expansion in output. Virtually all economists accept this proposition and therefore are “supply siders.” “Supply-side economics” is also used to describe how changes in marginal tax rates influence economic activity. Supply-side economists believe that high marginal tax rates strongly discourage income, output, and the efficiency of resource use. In recent years, this latter use of the term has become the more common of the two and is thus the focus of this article. The marginal tax rate is crucial because it affects the incentive to earn. The marginal tax rate reveals how much of one’s additional income must be turned over to the tax collector as well as how much is retained by the individual. For example, when the marginal rate is 40 percent, forty of every one hundred dollars of additional earnings must be paid in taxes, and the individual is permitted to keep only sixty dollars of his or her additional income. As marginal tax rates increase, people get to keep less of what they earn. An increase in marginal tax rates adversely affects the output of an economy in two ways. First, the higher marginal rates reduce the payoff people derive from work and from other taxable productive activities. When people are prohibited from reaping much of what they sow, they will sow more sparingly. Thus, when marginal tax rates rise, some people—those with working spouses, for example—will opt out of the labor force. Others will decide to take more vacation time, retire earlier, or forgo overtime opportunities. Still others will decide to forgo promising but risky business opportunities. In some cases, high tax rates will even drive highly productive citizens to other countries where taxes are lower. These adjustments and others like them will shrink the effective supply of resources, and therefore will shrink output. Second, high marginal tax rates encourage tax-shelter investments and other forms of tax avoidance. This is inefficient. If, for example, a one-dollar item is tax deductible and the individual has a marginal tax of 40 percent, he will buy the item if it is worth more than sixty cents to him because the true cost to him is only sixty cents. Yet the one-dollar price reflects the value of resources given up to produce the item. High marginal tax rates, therefore, cause an item with a cost of one dollar to be used by someone who values it less than one dollar. Taxpayers facing high marginal tax rates will spend on pleasurable, tax-deductible items such as plush offices, professional conferences held in favorite vacation spots, and various fringe benefits (e.g., a company luxury automobile, business entertainment, and a company retirement plan). Real output is less than its potential because resources are wasted producing goods that are valued less than their cost of production. Critics of supply-side economics point out that most estimates of the elasticity of labor supply indicate that a 10 percent change in after-tax wages increases the quantity of labor supplied by only 1 or 2 percent. This suggests that changes in tax rates would exert only a small effect on labor inputs. However, these estimates are of short-run adjustments. One way to check the long-run elasticity of labor supply is to compare countries, such as France, that have had high marginal tax rates on even middle-income people for a long time with countries, such as the United States, where the marginal rates have been persistently lower. Recent work by edward prescott, corecipient of the 2004 Nobel Prize in economics, used differences in marginal tax rates between France and the United States to make such a comparison. Prescott found that the elasticity of the long-run labor supply was substantially greater than in the short-run supply and that differences in tax rates between France and the United States explained nearly all of the 30 percent shortfall of labor inputs in France compared with the United States. He concluded: I find it remarkable that virtually all of the large difference in labor supply between France and the United States is due to differences in tax systems. I expected institutional constraints on the operation of labor markets and the nature of the unemployment benefit system to be

History of Regulation With the establishment of the Interstate Commerce Commission (ICC) to oversee the railroad industry in 1887, the federal government began more than a century of regulating surface freight transportation. Railroad Regulation was strengthened several times in the early part of the twentieth century. Those changes stifled price competition between railroads by prohibiting rebating, discounting, and secret price cutting. The federal government nationalized the railroads during World War I, and by the end of the war had provided about $1.5 billion (1919 dollars) in subsidies to the ailing railroads. The major concern after the war was to make the railroads profitable. The Transportation Act of 1920 essentially cartelized the railroad industry and mandated that the Interstate Commerce Commission establish rates to provide a “fair rate of return.” The ICC was given complete authority over entry, abandonment, mergers, minimum rates, intrastate rates, and the issuing of new securities. Even during the prosperous 1920s, railroad earnings never reached what the act indicated might be a fair rate of return. New competition from the growing trucking industry presented a major problem for the railroads. With the advent of the Great Depression, earnings plummeted and, for the first time, became negative for the whole railroad industry. In an attempt to improve their profitability, leaders of the railroad industry, together with the ICC, urged Congress to regulate these competitors. The trucking industry also suffered during the Depression and began to favor allowing the ICC to restrict competition. With the major spokesmen for a number of large truckers arguing for controls to prevent “cutthroat competition,” Congress moved to control motor carriers and inland water carriers. The Motor Carrier Act of 1935 required new truckers to seek a “certificate of public convenience and necessity” from the ICC. Truckers already operating in 1935 could automatically get certificates, but only if they documented their prior service—and the ICC was extraordinarily restrictive in interpreting proof of service. New trucking companies found it extremely difficult to get certificates. In 1940, Congress extended ICC regulation to include inland water carriers, another competitor of the railroads. Thus, with pipeline regulation, which originated with the Hepburn Act of 1906, the ICC controlled all forms of surface freight transportation (air freight was controlled separately). From 1940 to 1980, new or expanded authority to transport goods was almost impossible to secure unless an application was completely unopposed. Even if no existing carriers were offering the proposed service, the ICC held that any already certified trucker who expressed a desire to carry the goods should be allowed to do so; new applicants were denied. The effect was to stifle competition from new carriers. By reducing competition the ICC created a hugely wasteful and inefficient industry. Routes and the products that could be carried over them were narrowly specified. Truckers with authority to carry a product, such as tiles, from one city to another often lacked authority to haul anything on the return trip. Regulation frequently required truckers to go miles out of their way. During the first three-quarters of the twentieth century, the ICC kept a stranglehold on railroads, preventing them from abandoning unprofitable lines and business. Regulations restricted rates and encouraged price collusion. As

Telecommunications matters economically for two reasons. First, it plays a role perhaps second only to brain power in the operation and rapidly expanding productivity of the modern “information-based” economy; indeed, it supplies a primary technical means for productively harnessing the information and knowledge spread among individual economic actors throughout the global economic order. Second, the evolution of telecommunications from a “natural monopoly” to a more competitively structured industry has raised many challenging economic issues, the analysis and resolution of which are important in their own right and relevant to other sectors of the economy as well. There’s No “There” Anymore … Only “Here” Information and communications technology plays an increasingly important role in the wealth of nations. Adam Smith’s theory of economic growth emphasized the “division of labor” (i.e., productive specialization), and he argued that growth through the division of labor was limited by “the extent of the market.” Thus, he favored extension of markets overseas and expansion of trade as practical methods of extending market boundaries, and thereby the scope available for further division of labor. Improvements in maritime navigation and the development of the steam engine and rail transport were important because they increased the size of economically relevant markets, thereby fostering greater productive specialization. Increases in market size also encourage economies of scale and scope and more intense competition among buyers and sellers. Just as improvements in transportation during the Industrial Revolution expanded the breadth of markets, so also recent improvements in the availability of information and the ability to communicate are expanding markets by making buyers and sellers aware of each other. High-quality transportation and communications sometimes make physical distance irrelevant: a buyer and seller may be thousands of miles apart but still figuratively “next door” (see spatial economics). At the turn of the twenty-first century, the U.S. economy experienced a jump in productivity growth, with productivity increases about 0.2 to 0.4 percentage points above the long-term trend. While the causes of this productivity surge are still debated, many economists believe it is due to the spread of increasingly economical and powerful information movement and management technologies throughout the economy. A Network of Networks The fundamental economic reform that has altered telecommunications is the introduction of competition into what had previously been a closed monopoly. In the United States, governments monopolized and regulated private telephone companies; in most other countries, governments owned and operated a monopoly telephone network. Privatization and deregulation (see Regulation) have produced substantial productivity increases, a proliferation of service offerings, and many service innovations. In the United Kingdom, for example, the British Post Office–run telephone company, prior to privatization, employed two to three times as many workers as were employed in the United States to maintain ten thousand access lines (a standard industry measure of productivity)—so there were huge gains to be reaped from privatization and deregulation simply by attaining productivity standards previously realized only by privately owned companies in the United States. Efficiency gains by U.S. telephone companies have also been quite substantial in the competitive era, although not as great as those experienced in many initially privatizing countries. Before this revolution away from monopoly, governments typically sought to promote widespread (“universal”) telephone service by keeping long-distance rates high—sometimes as much as 100 percent above cost in the United States and even more in some foreign countries—and using, or, in the case of private phone companies, requiring the phone companies to use, the revenues from long distance to subsidize line rentals. To put this into perspective, imagine that the government decided that everyone should have a fine automobile and subsidized a BMW purchase for every household—and then paid for this largesse by imposing an additional two-dollars-per-gallon gasoline tax. Everyone has a nice car under this program, but most cannot afford to drive it long distances; likewise, virtually everyone had a phone, but long-distance calls were a luxury item for most consumers. The artificially high-priced service, long distance, supplied an attractive target for competition, which is where the initial competitive forays in telecommunications occurred virtually everywhere. The subsidized service—local line rentals—offered a less attractive target, although wireless services provided a means to offer a competitive service without the need to duplicate the existing wireline carrier’s network of dedicated subscriber lines. U.S. regulators tried to have their cake and eat it too by attempting to promote competition for line rentals and related services at the same time they prevented the relevant service prices from rising to efficient levels. The result has been the proverbial

The price of a share of stock, like that of any other financial asset, equals the present value of the sum of the expected dividends or other cash payments to the shareholders, where future payments are discounted by the interest rate and risks involved. Most of the cash payments to stockholders arise from dividends, which are paid out of earnings and other distributions resulting from the sale or liquidation of assets. The cash payments available to a shareholder are uncertain and subject to the earnings of the firm. This uncertainty contrasts sharply with cash payments to bondholders, the value of which is fixed by contractual obligation and is paid in a timely manner unless the firm encounters severe financial stress, such as bankruptcy. As a result, the price of stocks normally fluctuates more than the price of bonds. Over time, most firms pay rising dividends. Dividends increase for two reasons. First, because firms rarely pay out all their earnings as dividends, the difference, called retained earnings, is available to the firm to invest or buy back its shares. This, in turn, often produces greater future earnings and, hence, higher prospective dividends. Second, a firm’s earnings will rise as the price of its output rises with inflation, as demand for its products grows, and as the firm operates more efficiently. Firms with steadily rising dividends are sought after by investors, who often pay premium prices to own such firms. Cash payments to shareholders also result from the sale of some of the firm’s assets, outright liquidation, or a buyout. A firm may sell some of its operations, using the revenues from the sale to provide a lump-sum distribution to stockholders. When a firm sells all its operations and assets, this total liquidation results in a cash distribution after obligations to creditors are satisfied. Finally, if another firm or individual purchases the firm, existing shareholders are often eligible to receive cash distributions. Stock Markets In the United States, most stocks are traded either on the New York Stock Exchange (NYSE, or “Big Board”) or on NASDAQ, an electronic market that grew out of the “over-the-counter” market in 1970. The NYSE, founded in 1792, trades most of the large U.S. stocks through a series of

Major league sports, as every reader of the sports pages knows, is a major league business. As a result, economics has a lot to say about how players, teams, and leagues will act under different circumstances. But would you believe that economics can be used to predict which teams will win and which will lose? It can. How good a professional sports team is depends, of course, on the quality of its players. Because teams compete for better players by offering higher salaries, the quality of a team depends largely on how strong it is financially. The financially stronger teams will, on average, be the better teams. And they will also, on average, be the ones in bigger cities, because more revenues can be made in bigger cities. In baseball, equivalent win records in New York, Los Angeles, or Chicago yield three times the revenue as in Kansas City, Milwaukee, or Pittsburgh. That is why professional sports teams in cities with large populations tend to have records above .500, while teams in cities with small populations tend to have records below .500. Exceptions to the rule that financially stronger teams are better are some small-market teams, such as Oakland and Montreal, that, for certain periods of time, develop high-quality players in their farm-team system. These “diamonds in the rough” are better than the market. Such a strategy can produce relatively competitive teams in a small market while keeping player salaries relatively low. Of course, the exception proves the rule. Once these players win substantial salary increases through arbitration or become free agents, big-market teams often hire them away. It is easy to see why large-market teams do better in the era of free agents, when a star player can move to whichever team will pay him the most. But, as I will explain below, this differential between large- and small-city teams also existed when teams “owned” player contracts and players were not free to accept a higher offer. One factor that matters for team revenues and for competitive balance is the league’s rule for dividing the gate receipts. In basketball and hockey, the home team gets all of the gate receipts and the visitor gets nothing. The gate division is 85:15 in baseball and 60:40 in football. When the home team gets to keep more of the gate receipts, the teams in bigger cities get more of the benefit from their inherent financial advantage. When the split is more equal, the financial advantage of being in a bigger market is less. Partly for this reason, financial disparity is least in the National Football Leaque (NFL). But in all sports, revenues from national television contracts have grown as a percentage of total revenues, and TV revenues are divided equally among the clubs. As a result, the differences in the financial strength of teams have narrowed. Big-city domination, though not completely eliminated, has diminished. By their very nature, sports leagues are cartels that exclude competition from other companies. You cannot start a baseball team and hope to play the Yankees unless you can get Major League Baseball (the cartel) to grant you a franchise. The antitrust laws prohibit cartels, but professional sports is the only private business in the United States that is largely exempt from those laws. Ever since a 1922 court decision (Federal Baseball Club of Baltimore v. National League et al.), baseball has been totally exempt. No other sport enjoys such a blanket exemption from antitrust, but all professional team sports have a labor exemption and, since the Sports Television Act of 1961, a broadcast exemption. All of the leagues have collusive agreements that govern the selection, contractual arrangements, and distribution of players among the teams. Collectively, these agreements grant a degree of monopsony power (monopoly power over the right to buy something—in this case, player services) to owners. The owners exploit this power by paying the players less than their incremental contribution to revenue. Athletes enter most professional team sports through a drafting procedure. The common feature of the drafts is that they grant one team exclusive bargaining rights with each prospective player. Once drafted, the athlete negotiates with that team alone, and others cannot offer higher salaries to get him. In some instances, signing bonuses for draft choices are very high. Such instances are relatively rare and depend on the quality of the player and the labor-market structure of the sport. In baseball, where drafted players usually are assigned to the minor leagues, face relatively long careers on average, are not constrained by a salary cap, and are paid their salaries for the length of their contracts—which can be for several years—large signing bonuses for amateurs are rare. In football, where players face a salary cap, careers are short—less than three years, on average—and salary is not guaranteed if the player fails to make the team or is injured during the season, signing bonuses can be high for impact players. The rules affecting the amateur draft have been weakened somewhat over the years, but competitive bidding for beginning players remains impeded. Once the player has come to terms with the drafting team, he must sign a uniform player’s contract that allows him to sell his services only to the team holding the contract. Although player contracts vary from sport to sport, all contain some basic prohibitions against player-initiated moves to other teams. That is, owners are free to “trade” (sell) players to other teams, but players are not totally free to offer their services to competing teams. Owners claim that restrictions on player movement are necessary to maintain competitive balance and prevent financial powerhouses such as the old Yankees from buying up all the best talent and completely dominating the sport. That, owners say, would make the sport duller for fans and hurt everyone. Economists have always been skeptical about the owners’ motives—and about the evidence. There never was any disagreement over the fact that star players would wind up on big-city teams. But economists believe that this would happen regardless of whether or not leagues restrict moves initiated by players. If players were free to move between teams, then, assuming they were indifferent about location, they would play for the team that pays the most. The team that pays the most is the one that expects the largest increment in revenue from that player’s performance. Since an increment in the win-loss record yields more revenue in, say, New York than in Kansas City, the best players go to New York rather than to Kansas City. That point, which is made by those who justify restrictions on mobility, is correct. But limiting the ability of players to initiate moves should not have any effect on where players end up playing. When players are not free to move, does a small-city team that acquired a star player in the draft keep him? For a small-city franchise, the team holding the player’s contract expects him to contribute, say, one million dollars in incremental revenue to the club. In a large city, that same player’s talents might contribute three million dollars. Because the player is worth more to the big-city team in either case (and the big-city team will pay more for him), the small-city franchise has an incentive to sell the player’s contract to the big-city team, and thereby make more money than it could by keeping him. Thus, players should wind up allocated by highest incremental revenue, with or without restrictions on player-initiated movement. The evidence supports that conclusion. Since the advent of free agency, which made it easier for players to jump from one team to another, the total movement of players (trades, sales, minor league transfers) has been about the same as it was before. So, although restrictions on player-initiated movement should not affect the allocation of player talent within a league, they substantially affect the division of income between owners and players. Under free agency, the players earn what they contribute to incremental revenue; under league restrictions on player-initiated transfers, the owners keep more of the revenues. The dramatic rise in player salaries since the mid-1970s, notably in baseball and basketball, is largely the result of the relaxation of restrictions on player-initiated transfers. The most important antitrust issue in sports today relates to the formation of new leagues. The collusive arrangement in the allocation of broadcast rights between the television networks and the existing leagues constitutes a formidable barrier to entry for a new league. In particular, football programming is very valuable because football games attract large audiences. Large audiences mean high advertising revenues and, therefore, large network television revenues to the NFL. By allocating games to several networks instead of just one, the NFL has become a partner with the networks in the broadcast enterprise. Further, the contract stipulates that the networks cannot broadcast another professional football league’s games within forty-eight hours of an NFL game. This relegates any competing league’s games to midweek, which is hardly attractive to the networks. Television, by building fan recognition and loyalty, builds attendance and gate receipts. Thus, a competing league may not be able to exist without access to television. The NFL has an exclusive, multiyear contract with the networks that is a barrier to entry for a competing league. Only when the network-NFL contract expires is there the possibility of a point of entry. But for that to happen, the networks would have to consider a new league’s games suitable substitutes for NFL games. Because teams in new leagues are inferior to established teams (the established teams already have the best stars), the networks have little incentive to make such a substitution. Partly because of the broadcast exemption to antitrust law, and partly because of the judicious expansion of the leagues in all of the professional team sports, fans are unlikely to see competing sports leagues arise. Some seventy-three million fans attended major league baseball games in 2004, and fan interest remains high in other professional team sports. The explosion of new sport facilities since 1990 has contributed to increased attendance. These expensive facilities, usually financed by taxpayers, are leased to the teams at relatively low prices. These implicit annual subsidies to teams are about ten million dollars or so per team, and a new facility adds twenty million or more to a team’s revenue. These added revenues and subsidies add to a franchise’s value. Economists have found that the benefits from the government subsidies, such as increased employment, expanded consumer leisure spending, economic development, or other economic effects, are a fraction of the subsidies. Proponents of public spending on sports facilities claim that income generated in the community is ten dollars for every one dollar spent by the team’s fans. Economists are skeptical that the impact is more than twice that of club revenues. Many other public projects rank well above sport facilities in generating benefits for a given subsidy. But politicians and bureaucrats are in a poor bargaining position relative to the monopoly leagues. These leagues keep one or more sites open and threaten to relocate or deny expansion to the locality that will not build a new facility. Politicians want to provide popular projects that their constituents favor, and a sports team is considered part of the local culture and quality of life. Often, special bond elections are held to approve public spending for sport facilities. Such elections seldom draw voter turnouts of more than 10 percent. Relatively more fans turn out to vote than the general public. Moreover, these facilities often are financed by increased taxes on tourists. But one must also turn to psychological and sociological explanations for the popular support of sports monopolies. One important area of economic activity that this article leaves out is that of amateur sports. The economic importance of amateur sports, measured by the value of time and other resources spent by participants and fans, is comparable in order of magnitude to the importance of professional sports. About the Author Gerald W. Scully is emeritus professor of economics at the University of Texas at Dallas. Further Reading   Lewis, Michael. Moneyball: The Art of Winning an Unfair Game. New York: Norton, 2003. Noll, Roger G., and Andrew Zimbalist, eds. Sports, Jobs and Taxes: The Economic Impact of Sports Teams and Stadiums. Washington, D.C.: Brookings Institution Press, 1997. Quirk, James, and Rodney D. Fort. Pay Dirt: The Business of Professional Team Sports. Princeton: Princeton University Press, 1992. Scully, Gerald W. The Market Structure of Sports. Chicago: University of Chicago Press, 1995.   (0 COMMENTS)

Judged by the huge strides that people all over the world have made in overcoming poverty and want, it is only a slight exaggeration to say that little of economic consequence happened before the last three centuries. Before that, most of the world not only took poverty for granted,

Until recently, economists who analyzed sports focused on such things as the antitrust exemption, the alleged cartel behavior of sports leagues, and the player draft (see sports). Sportometrics is different. It is the application of economic theories to the behavior of athletes to explain what they do and to see if what they do can help to explain the behavior of people in other professions and settings. Instead of being about the “economics of sports,” sportometrics introduces the idea of “sports as economics.” In other words, sportometricians view sports as an economic environment in which athletes behave according to incentives and constraints. Economists have, for example, shown how incentives and costs can explain how much effort runners exert in a footrace (see Higgins and Tollison 1990; Maloney and McCormick 2000). Using data from sprint events of the modern Olympics from 1896 to 1980, Richard Higgins and Robert Tollison (1990) found that running times were faster when there were fewer contestants in a race. This makes sense. With fewer runners, each runner’s chance of winning is greater, and, therefore, each runner’s expected gain from putting out additional effort is greater. This cannot be attributed to decreased congestion: because each runner is given a lane, congestion does not diminish when the number of contestants falls. Higgins and Tollison also found that the harder an Olympic record is to break, the less effort contestants will expend to break it. Can any fan ever forget Carl Lewis’s

Producers and buyers are dispersed in space, and overcoming the distances between them can be costly. Much commercial activity is concerned with “space bridging,” and much entrepreneurship is aimed at making good use of locational opportunities and cutting the costs of transport and communication. Spatial economics is the study of how space (distance) affects economic behavior. The Costs of “Space Bridging” Have Fallen Throughout history, transport costs have hampered specialization, and improvements in transport and communications have been among the main driving forces of economic progress. In medieval Europe and China, most ordinary people never moved farther than twenty miles from their birthplaces, and before the advent of book printing, most people knew very little about what happened beyond those narrow horizons. Firms that depended on heavy inputs, such as steel makers, used to locate near the source of major inputs—coal mines, in particular. By contrast, firms that interacted intensively and frequently with customers tended to locate near the demand. Thus, gasoline stations are still found near busy intersections. In recent decades, technical and organizational progress has caused the costs of transport to fall steadily and communication costs to plummet. Between 1950 and 2000, the price of bulk sea freight and port handling dropped, on average, by 0.9 percent annually, of long-distance passenger air transport by 2.6 percent annually, and of trans-Atlantic phone calls by an astounding 8 percent annually. The inflation-adjusted price of a long-distance phone call from New York to London is now less than 1 percent of what it was in 1950. Fax machines, portable video cameras, satellite TV, computers, and cell phones have all cut communication costs greatly. More recently, the Internet has made global communication so cheap and user friendly that words and images can be distributed by almost anyone globally, without delay and at near-zero cost. These technologies have opened new, easily accessible channels of communicating, so that entirely new forms of the division of labor between different locations have become feasible. This reduction in transport costs has revolutionized decisions about where goods and services are produced. The relative costs of employing immobile production factors, such as land and labor, have become relatively more important in influencing the spatial arrangement of industries, irrespective of national borders. Yet, most businesses still take account of transport and communication costs (and the risks of disruptions) between the locations from which their inputs are supplied and the locations where they find their market demand. Globalization In the wake of these changes, globalization has become a tough political issue. Lower transport and communication costs have thrown many firms and their workers into global competition. Now, with concerns about competitors in faraway places entering the local market, locals must control costs more tightly, remain innovative, and sell at lower prices than before. Manufacturers have long known that foreign producers can make inroads into local markets and that their own market is increasingly the world, rather than simply the national market. Thus, there are now steel plants in China, Japan, and South Korea, far from iron and coal mines but near ports; the falling cost of shipping has made it possible to transport coal and iron ore to seaside locations, from where steel is sold around the world. What matters more for capital-intensive industries is whether the capital owners enjoy secure property rights where they invest. Consequently, locations now have to compete by providing good property-rights protection and other such trust-inspiring institutions. Because the Internet now makes it possible to provide many services over long distances and even globally, service providers—in accounting, finance, and managerial supervision, for example—have also become more mobile. Thus numerous low-skill service jobs have begun to migrate from high-wage locations to low-cost locations overseas. Established service providers are now often coming under competitive pressure from new, low-cost competitors in distant places, such as call centers and software developers in Ireland or India. By the same token, engineers in New York offices are now supervising construction work in Brazil in real time, and academics in California are delivering lectures and tutorials via computer terminals throughout East Asia, adding high-skill job opportunities in America. The Thünen Model The work of nineteenth-century German economist Johann Heinrich von Thünen explains the economic effects of falling space-bridging costs. Thünen became the father of spatial economics when he laid out the basic logic of how producers distribute themselves in space. He explained that the owners of mobile production factors, such as capital and technical knowledge, have to be paid the same return whether their assets are employed in the center of activity or on the periphery, at a distance from the central marketplaces. Otherwise they engage in “locational arbitrage”—that is, move from places where they are paid less to places where they are paid more. The story for owners of immobile production factors such as land and labor is different. If they are in remote locations, then, to stay in business, they must absorb the entire transport-cost disadvantage. Landowners and workers in the center of markets, on the other hand, can earn a premium. In short, the prices of immobile land and labor vary inversely with the distance from the central marketplaces. This “Thünen principle” can be demonstrated at various levels of locational analysis: A. In a city or region, real estate rents drop as one moves