In the early 1940s, economist Joseph Schumpeter wrote the book, “Capitalism, Socialism, and Democracy,” where he introduced the notion of “creative destruction,” as a requirement of capitalism’s success. This “perennial gale” of Creative Destruction is described below:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.
Essentially, the notion is that the innovation, creativity, and growth of a healthy capitalist economic system is built on the corpses of those businesses that grew complacent, failed to adapt, and change to meet the market’s needs.
Buggy whip manufacturers, photographic film producers, and coal magnates have all gradually been consigned to the dustbin of economic history as a result of failing to change with the times, often resulting in the layoffs of thousands of employees and the literal and figurative “destruction” of once towering fortunes. And, the economy and consumers are ultimately better off for it. The continual churn of businesses ultimately prevents stagnation, rewards those best able to serve the needs of the market, and punishes those businesses that put out a crappy product or fail to change as the tastes of buyers do.
What Would Happen Without Creative Destruction?
Often times as once great businesses begin to struggle, they appeal to the government to bail them out, or to subsidize their industry in the hopes of making it more competitive. Generally, this is cloaked in discussions about saving jobs and other supposed public goods, but frequently even these actions only act to slow the rigor mortis, rather than breathe new life into the faltering businesses. At best, these delays can provide a short respite for businesses to re-structure and change their business model to better serve the evolving market. At worst, they represent a squandering of public resources on a private endeavor that has made its own economic bed by failing to adapt to market demands.
In a real sense, the NFL is a powerful example of the ways in which the absence of creative destruction ultimately corrupts the market and corrodes the quality of the products that it produces.
An Economic Ball Pit
How can the NFL, an organization that made over $16 billion in its most recent revenue estimates, be an economic cautionary tale? It turns out that it has a lot to do with how that league-wide revenue is distributed among the constituent teams. About $9 billion of the league’s income is derived from very lucrative television contracts and other agreements that are shared communally by teams in the league, to the tune of about $255 million per team (as of 2019).
With a salary cap of ~$188m per team in 2019, each owner clears around $67m per year before taking into account any of the revenues from stadium seats, concessions, and other streams unique to each team. This outside income can be very significant, ranging from around $100m extra per year for the Raiders to $700m extra per year for the Cowboys.
Nevertheless, at the end of the day, because of the communal revenue sharing agreement, it is essentially impossible for an NFL team to lose money in the absence of outright fraud or extracurricular expenditures. The perennial gale has been “nerfed.” As a result, all 32 franchises are insulated from the creative destruction outlined above. The conventional market forces, profit making and a fear of bankruptcy have been short-circuited, and instead laziness, mismanagement, and a tin ear to the will of consumers are often rewarded (or at least insufficiently punished).
Interestingly, our European brethren in the soccer world seem to have developed a partial solution to this problem through the promotion and relegation process, which rewards well performing teams by moving them up into more prestigious (and lucrative) leagues and punishes poorly performing teams by moving them down.
The Redskins, with around a 40% winning percentage over the past two decades of Dan Snyder’s ownership, are the sort of “business” that could only survive in a protectionist system that - while an economic powerhouse in the aggregate - has also produced an abundance of “welfare queens” (think the Redskins, Bengals, and Dolphins) - free riders - sucking at the teat of the NFL’s swollen mammaries.
Surely some owners, notably those in the same divisions as the free riders, don’t mind perpetual losers in their midst. After all, NFL schedules are brutal, and easy wins are hard to come by. However, at the end of the day, it’s bad for the NFL brand to have perennially mismanaged franchises like the Redskins soiling the experience for an ever dwindling group of fans. It would serve the League well to find a way insert creative destruction, or at least a reasonable fear of it, into their business model moving forward.