NBA SALARY CAP AND THE MALTHUSIAN TRAP

Thomas Robert Malthus was an English influential economist in the fields of political economy and demography. In his book from 1798 “An Essay on the Principle of Population” he explained a view about the correlation of economics and demography. Later on, that view has become known as “Malthusian trap”. We can basically explain that view like this. In a country where there is an increase in food production by technological advances or etc., there will eventually be an improvement in standard of living. This led to us an increase in population however, because of that there might occur a starvation situation due to increase in population way more that production. That’s why population starts to decline where per capita supply of resources back to its original level. After the Industrial Revolution some economists think that humanity get out of this trap, or according to some others’ it continues due to extreme poverty.

Thomas Malthus, famouseconomists.net

In my opinion, the important thing about this view is not the details of it. I think the mentality of it is important. What do I mean? I mean food and population are just variables in “Malthusian trap”. For an example, we can put some other variables in order to understand what I said. Let’s think about the NBA. As you know, there is financial system in NBA called “salary cap” in order to keep fair competition between teams. Simply, NBA limits the teams’ amount of total salary of all players in roster. On the other hand, contracts of players are restricted in the length of it. Thus, whether they’re traded or released to free agency, they continue to get paid and make a place in salary cap of their last team. Now, imagine that you are a general manager of an NBA team. You are financially and sportively head of the team. By trades or free agents, you create a team which is not over the salary cap. By the time goes, your team makes great accomplishments. Fans from all over the world love your team and players so teams’ profit increases more and more. Everything is going really well for you and your team. In the end, your teams become NBA champion. After that success what can be gone wrong? Actually, these accomplishments bring huge problems. Your wonderful players’ contracts are going to be ended. If you want to sign extensions probably you are going to take same response from each one of them. “I am one of the best in the league in my position and I think I deserve bigger paycheck. If you are going to offer me a maximum contract I can happily sign, if you don’t, I will be testing free agency.” Because of the salary cap you cannot give maximum contract to every one of them. So, what are you going to do? The answer is simple, you will sign with the important ones and replace the others with considerably less successful players with less salary or take a risk and sign with none of them and go to place where you start your job.

In the first look, this example seems a little bit off-topic but let’s look at the variables. Salary cap is like food, it is limited and when we want to increase them both are increase in smaller amounts. Also, contracts of the players are like population, it is unlimited and when there is a grow -or as in NBA example success- both are increase in greater amounts. I think we can say this example actually makes sense, right?

So, “Malthusian trap” is still on the table even in the different areas of life. However, can we say is it possible to get out from this trap? I think the answer is, it is possible to break chains of orders of “Malthusian trap”. Again, in our NBA examples we can offer longer and affordable contracts before getting accomplishments so we will have some controls over contracts before players want huge increase in their wages. In the same way, economists say control over population will prevent us getting in the trap. Countries can have this control by fertility policies and sustain them with preventative checks -such as what China is doing-. On the other hand, there are some situations that no one can control. Such as diseases -Corona Virus-, earthquakes or etc. According to Malthus, these are positive checks. These are uncontrollable and dangerous but, because they are reducing population it is beneficial to get out of this trap. Also, another approach is increasing the growth of economy and thanks to technological advances it gets easier day by day. So mainly what we must do is sustain unified growth between population and economy in order to escape from the trap. In summary, “Malthusian trap” was founded by famous economist Thomas Robert Malthus and it explains the correlation between economics and demography. Even it was founded in 1798, this trap continues its existence and due to its consistent mentality, we can see it on other areas in life. However, “Malthusian trap” is not inevitable, with some preventions or policies it is possible to get out of this trap.

References

The Malthusian Trap [Graph] https://effortlesseconomics2020.wordpress.com/2020/06/ 07/are-we-heading-towards-the-malthusian-trap/amp

Fırat GÖK

Middle East Technical University

Economics

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