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.
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.
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