Friday, March 5, 2010

Dollars and Saints

Sean Payton is the head coach of the Super Bowl-champion New Orleans Saints. The Saints are known for their high-powered offense, but few know that their best play this year was made by Sean Payton, before the season even began. Payton gave away $250,000 of his salary so that the Saints would have the funds necessary to sign defensive specialist Gregg Williams. We seldom hear of such sacrifice, but it's actually commonplace; sacrifice is necessary for success in competition.

Payton's goal was to win the Super Bowl. Forced to compete, he had to generate the best possible team with limited salary money. Instead of keeping the $250,000 for himself, Payton improved his team by using the money to acquire Gregg Williams. Williams revamped the team's defense, bringing victory to the Saints and prosperity to the city of New Orleans.

In capitalism, entrepreneurs and executives must compete to attract customers. A company attracts customers only if the price of its service is as low as possible. Low prices are possible only if production costs are low, meaning that resources are allocated efficiently. For example, say that Comcast can more efficiently provide the same Internet service that Verizon provides. If so, then Comcast will attract customers by offering prices lower than Verizon's. Comcast will turn a profit, which is great not only for Comcast, but for the entire country! People will get Internet service more cheaply, and will have extra money to be spent in other industries, which ultimately helps people who don't have Internet service at all.

Success in competition requires an efficient allocation of resources, thus competitors are compelled to sacrifice. In the end, Sean Payton profited from his sacrifice. Instead of equating profit with greed, we should commend risk takers like Payton for trying in the first place, for profits benefit not only the risk takers, but everyone who's counting on them. Just ask anyone on Bourbon Street.


  1. While I agree with the general sentiment that profit maximization is not necessarily a bad thing, there are a couple subtleties in your analysis that I'd like to point out:

    As you say, Sean Peyton wanted to win a Super Bowl, not maximize the total profits of the Saints organization. Fielding the best team might maximize chances of winning the Super Bowl, but will not guarantee maximum profits. Just ask Dan Snyder and our beloved Redskins fans. Horrible team, keeps losing. Yet, consistently in the top echelon of profitable teams in the league year after year. Just one case in many where the profit maximization model does not necessarily lead to what the customer wants (a Super Bowl).

    Although I guess the puzzle then is, "Why do those stupid fans keep paying tickets to go see a horrendous team?". I don't know, I don't. But then again, I also bought DirecTV NFL Sunday Ticket, which through revenue sharing contributes to Dan Snyder's profitability.

    The bigger point though is that while true capitalism might increase efficiency, the way our political system interacts with the economic system will never allow it to get there. Firms will fight tooth and nail to restrict competition, filling the campaign coffers of whichever politician promises to pass bills that achieve their ends. Just take Southwest Airlines and the restrictions in place for them to fly outside of Texas:
    (placed primarily because of heavy lobbying from existing interests and politicians who were beholden to them).

  2. Vineet,

    Great points - you really got me thinking hard today at work!

    There are a few things that come to mind:

    - I don't know enough about how the special nature of an NFL franchise differs from your average company to make legitimate comparisons between NFL franchise profits and average company profits. (Among the major differences are salary caps, some form of TV profit sharing, draft orders that reward failure, etc.) I just think that Sean Payton is an interesting example of individual financial profit that was achieved by financial risktaking and that ultimately benefited his entire city. And competition compelled him to take that risk, which definitely resembles the marketplace.

    - About the Redskins' situation, which is of course depressing, but definitely valid and interesting...As grim as they have been, I don't think that this case shows that "the profit maximization model does not necessarily lead to what the customer wants (a Super Bowl)." I don't doubt the point - I just don't think this case shows it. The key word is maximization. Though the Redskins may have the highest profits in the league, a Super Bowl would likely give them an even higher profit and improve the team's (& Dan Snyder's) value. From what I know about the Skins, I'd argue that Dan Snyder has been trying very hard to win that Super Bowl; his teams just haven't been successful. Surely he's motivated by profit - and that very fact keeps him trying to this day.

    - But there's something else to this you said, one of the reasons for the high profit is the high-price-ticket sellout games. So I'd say that he is pleasing customers on some level or else they'd cancel their high-priced season tickets. Maybe all of his big-ticket free-agent acquisitions appeal to the fans in that the Skins are always "in the hunt" at the start of the season...?

    And thanks for the Southwest Airlines info you sent - I'll check that out. I definitely see that firms have a vested interest in restricting competition, and I didn't even think about the whole campaign contribution angle! But even if true capitalism will never exist, I hope that public awareness about the benefits of competition will help push politicians to support policies that promote more competition, as I think it brings out the best of us.