In the second of my deep-thinking articles, I try to explain famous Economic theories by using football as the model. Today, the work of George Akerlof on Market Uncertainty.
The Market for Lemons was a controversial piece of research published by Nobel Prize-winning academic and famous Leyton Orient fan, George Akerlof. Up until his work was published, most economists believed that markets would allow everyone willing to sell goods at a certain price to make deals with anyone who wanted to buy goods at that price.
Akerlof, frustrated by the fact that the O’s (back then they were just Orient) kept bringing in short-term players who were basically rubbish, explained how uncertainty caused by limited information caused markets to fail. As a football club who hold a player’s contract have more information about him than a potential buying club, it can often be a bad move to buy the player. In other words, if you do not do your research on a player, you are liable to buy a lemon.
Whilst Akerlof’s research was based on the second-hand car market in the US, he also kept a close eye on the transfer dealings of third tier English football clubs. In the same way that sellers of better-than-average cars to sell will withdraw them from the market because it is impossible for them to get a fair price from a buyer who is unable to tell whether that car is a lemon or not, football clubs needed a way to ensure that they weren’t buying an old crock.
He suggested that football clubs could “borrow” a player for a short period of time to see if he is fit, able and not a mass murderer before they made a decision to buy him. That way, a fair price could be determined between the buying and selling club. Furthermore, he concluded that if a player is passed from club to club on loan then he is a lemon, just like a used car that has had dozens of owners.
Football clubs that are desperate to sign a player for a particular position, perhaps due to injury, are often held to ransom by selling clubs, knowing that they can try and extract a few more million for a player who is completely over-valued. Rather than over paying for the player they are forced into the loan market where they may get some short-term gain but ultimately, loan deals are flawed in the same way that second hand cars are.
And that, ladies and gentlemen, is the theory of Market Certainty.