This article was featured in Børsen:
https://finans.borsen.dk/nyheder/opinion/debat-kapitalismen-kan-laere-af-formel-1
After yet another blow to the free market ideology after a series of corporate bailouts in the wake of Covid-19, it has become painfully clear that we need to revise the foundations of our economy. Surprisingly enough we find inspiration for this by understanding the reasons behind the Formula 1 2021 budget caps and applying it as an analogy onto our search for an updated capitalist economy.
In pursuit of creating a more interesting sport for both teams and fans, Formula 1 has decided to introduce a budget cap of €145 million per team in 2021. It is believed that this will decouple team performance from team expenditure budgets, resulting in more exciting races, a renewed focus on team enginuity and driver talent. Although this cap might seem like a minor adjustment, we should see it as the first sign of a new era for our Western capitalist economy.
The quintessential change is that this budget cap will redistribute and decentralize resources within the “ecosystem” of Formula 1. As in any industry with healthy competition the Formula 1 winners are able to attract wealthier sponsors and higher paid individuals to help them win more often. In a free market it is seen as healthy competition and natural evolution to pressure companies to innovate and create better products. But within Formula 1, the individual team’s right to gather a limitless part of the market capital infringes on the overall market performance, or more specifically: the race. Although all teams should be motivated to win and do their best, when the market capital is centralized to a few teams, the unequal capital distribution causes a logical and correct, yet unwanted side-effect: boring races with predictable winners.
The visionary leaders of Formula 1 have taken a bold step in the creation of this new artificial and utilitarian (choosing an outcome for the benefit of the group rather than the individuals) economic law. The existing “winners” might initially feel that this law gives an unfair pressure on their operations, but as one of the winners has already announced, it is actually an economically beneficial cleaning of the house: Overpaid ego’s that merely bring their name to the table will have to make room for those who are more valuable for success. Driver talent and team cooperation will need to become the central point of focus and connections to sponsors reevaluated based on the strategic value they bring, rather than the monetary value.
The Formula 1 budget cap is a near perfect analogy to be used in imagining the future of our current Western economic system. The rapid increase of efficiency through digitalization and automation in all industries have made it natural for a “few winners market.” Essentially creating a market of monopolised industries, no different than a socialist state which is ironically what capitalists and free market ideology was meant to prevent. There is only one Amazon, one Facebook, one Uber and this leads to a “boring race" that needs to be democratized and decentralized with modern utilitarian economic laws, just like in Formula 1. Not to punish the winners, but so that we, the “fans” of capitalist consumerism, can enjoy the race of career, social inclusion and entrepreneurship.
Although a budget cap approach to this challenge would be interesting to consider for individuals (imagine a world where people who achieve a net worth of say €100 million get a trophy and a formal title “winner of capitalism” and then have to reinvest and redistribute anything they gain above this mark) this approach won’t work for organizations in a free market. Where the “higher purpose” of the ecosystem of Formula 1 is clear, the ecosystems in our current society are a lot more ambiguous and thus hard to force into a collective mission.
In our efforts to find and create a sustainable modern economy that benefits people, planet and profits, we need to rethink the foundation of our current economic model: What is healthy growth? How free should our markets be? And how protectionist should our governments be?
In finding the answer to these questions we need to preserve the free market drivers for progress and balance them with modern utilitarian or “ecosystem driven” constraints. This would better balance the short term needs we have as humans in our careers with the long term needs of our planet and society.
The focus of the Formula 1’s leadership on the fan’s experience will perhaps show us all the way to a more utilitarian and democratic economy with more exciting races and diversity of winners. Something that we as a society would love to become a fan of.
