Baseball and the Free Market (Some Random Thoughts)

I began thinking about the ideas for this post a few days ago when I read a piece by Andres Alvarez of the excellent Wages of Wins blog explaining why the NBA will never be profitable. (Even the headline premise of that post boggles the mind. How can a corporation that clears billions of dollars annually not be profitable?) Amidst several very valuable observations, Alvarez made some claims that seem quite dubious. For instance, he claims that bad teams should be allowed to fail—or at least relocated from sub-optimal markets (Denver, Utah) to underutilized ones (New York, Los Angeles). He also suggests that the draft is about the most unfair innovation ever in professional sports.

The observation about the draft was particularly intriguing as it pertains to baseball. MLB has been successfully promoting its draft in recent years, increasing web and television coverage and making the draft more of a capital-E Event like the NBA and the NFL. Along with this increased prominence has been a rise in criticism of the draft’s central tenet: that amateur talent should be distributed according to which teams are most in need of it. The idea that the draft can provide competitive balance is comically ironic in a league that refuses to effectively eliminate PEDs, protect pitchers from head injuries, etc. But nonetheless, the notion that all teams should have a fair shot at the best amateur talent seems essential to the league.

But there are all sorts of problems with the version of “competitive balance” that MLB uses to distribute draft picks. First and foremost is the way that draft order is pegged to teams’ short term performance at the major league level. The team that has the worst record in a season drafts first the next year; second worst drafts second; and so on. This makes zero sense in baseball, where even the most elite and advanced prospects will not have an impact on the major league team for at least a year, and likely even longer. Drafting with the “worst first” order may not make sense in football or basketball either; but at least in those sports, the top players are expected to help a team relatively quickly. But in baseball, a team that has been a mediocre performer for most of the season (say, the 2012 Red Sox) can tank the end of the year (say, by trading several players) and receive handsome compensation in the draft for doing so.

The Red Sox picked seventh in the Rule 4 draft a few weeks ago. The Red Sox are currently leading the AL East. Are these two facts related? Not in the slightest. There’s no logical reason why the Red Sox should be rewarded for playing a few bad months of baseball. Their poor record last season was the result of injuries, underperformance, and random fluctuations in outcomes—it was definitively not the result of a competitive imbalance that needed to be redressed in the draft. (I’m using the Red Sox only as a recent poster child for this problem; my general dislike of that particular organization is beside the point.)

There’s an equal and inverse side to the Red Sox draft profiteering (thank you Isaac Newton). As Dave Cameron wrote at Fangraphs, successful small market teams like the Rays and Athletics “are being penalized for successfully building winning teams despite their [financial] disadvantages.” He is absolutely correct, and this is precisely the problem with tying draft order (and now bonus pool value) to the short-term performance of players who likely will not even be around when the drafted prospects make it to the majors.

But does this mean that we want to eliminate the draft all together and enter a wild west of amateur players getting whatever they can for their services? Rany Jazayerli, writing at Grantland, says yes; I disagree.

My fundamental difference with Jazayerli (and others who propose the complete abolishment of the draft) relates to the sort of business that we think baseball is. Baseball does not have the most pristine history of labor relations (see “Flood, Curt”). But there’s no logical reason why the only alternative to the draft as currently constituted should be no draft at all. Jazayerli suggests that players should be able to get whatever money the market will bear for their services, and that this is not possible when a player is obligated to either sign with a single team or sit out a year. First of all, it’s categorically false that players have no leverage in post-draft negotiations; Mark Appel’s recent experience should make that clear. Second, there’s no reason to believe that, left to their own devices, teams will self-regulate the money that they spend on prospects. Failure is simply not a deterrent to teams with money. (Have you seen what the Dodgers have spent on major league “talent” in the last year?) Jazayerli argues that the spending cap could be retained in a system without the draft—but remarkably, he sees no problem with determining teams’ spending caps based on the previous season’s records.

This line of thinking embraces Libertarian ideals of the unregulated free market. Players own their bodies and they should be entitled to negotiate whatever compensation for those bodies that the free market will bear. But this argument ignores the fact that baseball cannot operate as an unregulated free market. The problems with the “free market” ideal in baseball are several:

First, baseball (like all professional sports) is a relatively unique situation, where companies that are nominally independent (i.e., teams) have a vested interest in the success of their competitors. (Dave Cameron nicely sums this up in the link above.) Relatedly, Alvarez’s assertion—that teams in small markets should be allowed to fail—is utterly laughable. Who’s going to watch a professional sports league where the teams are all in L.A., New York, and Texas?

Second, and more importantly, the players need to succeed as a group for the league to survive. The existence of the MLBPA and their collective bargaining with the league have been crucial to the gains made by players, both as a group and individually, in the previous four decades. In exchange for various protections for more experienced players—the “ten and five” rule, pensions, health insurance—players have surrendered some of their rights early in their careers. This means that players can’t get paid as much right from the start—they have to wait until they reach free agency or negotiate a separate deal with their team—but it also means that young players are given fair opportunities to move through the system and reach the major league. This system is clearly not driving down players’ salaries (Pujols?), although it might be encouraging both players and teams to reach more mutually acceptable agreements before players reach the “open market.” In short, without the draft (in some form) and the protection of the union, the league would end up with a highly stratified hierarchy between players; some would win big, but most would have even less chance of making a decent living. (Look into the average salary for a player at Class-A; it ain’t much.)

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