In 1975, Kareem Abdul Jabbar made $450,000 as the highest-paid player in the NBA. In that year, the average player salary was $90,000.
The way the game of basketball was played then determined which competencies (i.e. skills) were of most value. At that time, it was the center position. In terms of income inequality, a popular measurement of labor statistics favored by French economists and a former candidate for president of the United States, the difference of player income was a multiple of 5x. In that same year, the US median household income was $13,779 and an unarmed security guard working NBA arenas was making $3.50 per hour on average, $7,280 annually. The income inequality measure between Jabbar and the average family was 33x.
Fast forward to 2020, and the highest-paid player in the NBA is Steph Curry, making $40 million. The game has changed; 3-point shooting is now perhaps the most valued competency. In 2020, the average player in the NBA makes $7.7 million, roughly the same multiple of income inequality at 5x. Stated another way, both NBA figures, the top, and average contracts, represent a 10.5 percent CAGR (Compounded Annual Growth Rate), demonstrating how much American and global consumers value the NBA.
In 2020, the US median household income is $63,688 and the average pay of the NBA security guard is $13.91 per hour, $32,429 per year. While the income inequality measure between the guard and the family remained constant at 2x over 45 years, as did the inequality between the top salary and the average salary in the NBA, the income inequality between Curry and the average family increased to 628x.
What can explain such an increase?
If we were demonstrating this sort of income inequality in a profession outside of the NBA or using an entrepreneur as the example rather than Steph Curry, you can imagine the exasperated cries from many who are convinced capitalism is an unfair economic system, perhaps even evil. Many make the unreasoned leap that the existence of an economic disparity between the top and bottom proves the existence of exploitation or structural unfairness.
In reality, it turns out that such unequal distributions are quite common. It’s as if they are governed by a natural law. Well, they are. There is a recurring pattern in all facets of our life that demonstrates the extremely unequal distribution of creative production. It’s called Price’s Law.
Derek Price, a British physicist, made the discovery that governs organizational output. Essentially, a small handful of people are always responsible for a large majority of the value creation. Price’s Law explains how this inequality exists in everything. Whether musicians, artists, writers or athletes, a small minority of people produce a majority of the most valuable things. It’s why only five composers have produced roughly 50 percent of all of the classical music we listen to. There is a hierarchy of competence that exists in everything.
The Pareto Principle is another helpful way to understand that inputs and outputs are not equally distributed. The Italian economist, Vilfredo Paretoobserved that 80 percent of the wealth in his country was controlled by 20 percent of the population. As he discovered, the same was true in other countries. Nearly everywhere we look, a minority outscores the majority in wealth because a few people have mastered the competency of their realms. We can look again to sports to see this play out in teams and leagues.
Of the 25 million people who play golf in America, only a few hundred of them are able to have a competency level high enough to play on the PGA Tour each year. And within that elite group, the Pareto Principle and Price’s Law hold true. Brooks Koepka started 21 tournaments in 2019 and earned $9,684,006 in prize money. Rod Pampling also started 21 tournaments in 2019. He earned $102,127.
Does this suggest the rules of the game were unfair? Did Koepka cheat? No, the results were simply unequal.
Let’s look at the NHL, where Connor McDavid is the highest-paid player at $12,500,000. Anthony Richard is also a center in the NHL. He makes $688,333. McDavid scored 116 points (41 goals, 75 assists) in 2019; Richard did not score. Are Canadians up in arms over this?
What about the NFL? The Pittsburgh Steelers have Ben Roethlisberger and Paxton Lynch under contract as quarterbacks. Roethlisberger makes $36,042,682; Lynch makes $735,000. In 2018, Roethlisberger threw 34 TDs; Lynch threw two in 2017. In Seattle, Russell Wilson earns $31 million per year as the starting quarterback of the Seattle Seahawks. He threw 31 TDs last year. Cody Thompson is also a QB on the Seahawks roster. He makes $510,000 annually.
If we go across the pond to the English Premier League, will we find a more egalitarian system based on an equal distribution of compensation? The top goalkeeper in the EPL is David De Gea. The Spanish wizard has a record of 167 wins and 65 losses, including an astonishing 107 clean sheets. De Gea is paid £19,500,000 per year. The lowest-paid goalkeeper in the EPL is Pontus Dahlberg at £156,000. Dahlberg is yet to make an appearance in an EPL match.
Returning to the NBA, what about a favorite of social justice advocates, LeBron James? In the 2019 season, James averaged 25.5 points and 10.5 assists and earned $31 million in salary, which was roughly 30 percent of the Lakers’ cap space. Talen Horton-Tucker is also a player on the Lakers. He earned $898,310, despite averaging zero points and one assist per game.
In other words, the NBA has become such a valuable form of entertainment around the globe that a benchwarmer today is making what Kareem Abdul Jabbar made in 1975 (in inflation adjusted dollars). And that’s a good thing. While we focus on how much Steph Curry makes at the compensation ceiling, what we need to recognize is how much players are making on the compensation floor. The difference in compensation is not a result of bias; it’s a result of a meritocracy that rewards value creation. No NBA players are being exploited.
What these salaries reveal is the liberating nature of free enterprise. It works beyond sports, too.
Free enterprise gives opportunity to the creative and encourages productive actions. There is no other way to explain the substantial decline in extreme poverty in the world over the past 40 years. In the 1980s, 40 percent of the world lived in extreme poverty. Today, 8.6 percent do. Instead of focusing on the income gap, we should keep raising the floor.
Yes, the rich are getting richer. But who says they are doing so at the expense of the poor? Well, lots of people. The list includes French socialists, economics professors at Harvard, Project 1619 contributors at The New York Times, Bernie Sanders, CNN commentators, even some professional athletes.
We don’t know if these people believe attacks on the rich will lead to a more prosperous society, but when citizens start to believe this popular fiction, it leads to a strong resentment against the most creative producers in our society. It feeds the belief that these producers obtained their wealth by stealing it from others.
This can lead to destructive public policies, such as Sen. Elizabeth Warren’s wealth tax. Rather than focusing on attempting to narrow the gap between rich and poor, we should focus on expanding economic growth.
That’s what the professional sports leagues have done over the past four decades, and there are many more millionaires as a result.
This appeared in FEE on March 27, 2020.