The Coase Theorem Meets Moneyball
Milton Friedman Essay Contest Winner
Adam Jeff Yu
Issue date: 4/14/05 Section: Perspectives
The reserve clause also applies to the annual amateur draft. New incoming talent is drafted by teams in reverse order of finish, offering first choice to the weaker clubs. But now the best amateur players demand top dollar and thus become only affordable to the larger-market franchises. Small-market clubs have to draft players based not on ability, but signability. Unsigned drafted amateur players return to the draft the next year, leaving the team empty-handed. Therefore the limited reserve clause, the one condition that levels the playing field somewhat, is usurped from the small-market teams.
Small-market clubs operate with smaller margin for error; their distinct window to succeed is before their reserve clause talent becomes unaffordable. In the four years before free agency, players from the Oakland A's made 25 all-star appearances; four years later, the A's produced just 6 all-stars. In the same period, the Yankees went from 10 all-stars to 20. This was not a coincidence, as the Yankees signed the former Athletics, Reggie Jackson and Catfish Hunter, two future Hall of Famers. The early 1970s A's, coming off three straight World Series championships and five division titles, were reduced to an advanced talent pipeline. Fast forward to the modern era.
Since 2000, only one baseball team has accumulated more wins than the Oakland Athletics' 483 wins: the New York Yankees, with 487. Yet the Yankees have spent over three times more in team payroll as the A's -- $450 million for those additional four victories. Though various factors account for the success of the A's on a shoestring budget -- management, player development, luck -- the underlying impetus is the reserve clause. But it only helps for a limited time.
In this timeframe, Oakland has developed two Most Valuable Players, only to lose them both to free agency; nine all-stars, eight of which are no longer with the team; two Relief Pitchers of the Year, also both departed. In the 2004 free agent market, the Yankees shelled out $60 million over seven years for two pitchers who combined for a career win-loss record of 109-103. The A's exodus of premier talent continued in the loss of two pitchers boasting a combined record of 173-81, and earning just $13 million collectively for the upcoming season. Those two talents, even in their final reserve clause seasons, were no longer affordable for the A's. As late as 1990, there was still an element of cost certainty, as team payrolls exhibited less deviation. In 2000, the Yankee payroll was just a little over $90 million; Los Angeles was second at $90 million. Four years later, New York has more than doubled their team payroll, besting the runner-up by over $60 million. Money is no guarantee; the Yankees have not won a World Series since 2000; the best players under the limited reserve clause far exceed the contribution of the lower-performing free agents. However, the best underpaid talent will not be underpaid for long, nor will they be with their original team. In the end, Coase was right again in theory; but free agency created a transaction cost in the form of rising salaries that altered the distribution of major league baseball talent. Baseball then and now, is in many ways, a monetary phenomenon.
Small-market clubs operate with smaller margin for error; their distinct window to succeed is before their reserve clause talent becomes unaffordable. In the four years before free agency, players from the Oakland A's made 25 all-star appearances; four years later, the A's produced just 6 all-stars. In the same period, the Yankees went from 10 all-stars to 20. This was not a coincidence, as the Yankees signed the former Athletics, Reggie Jackson and Catfish Hunter, two future Hall of Famers. The early 1970s A's, coming off three straight World Series championships and five division titles, were reduced to an advanced talent pipeline. Fast forward to the modern era.
Since 2000, only one baseball team has accumulated more wins than the Oakland Athletics' 483 wins: the New York Yankees, with 487. Yet the Yankees have spent over three times more in team payroll as the A's -- $450 million for those additional four victories. Though various factors account for the success of the A's on a shoestring budget -- management, player development, luck -- the underlying impetus is the reserve clause. But it only helps for a limited time.
In this timeframe, Oakland has developed two Most Valuable Players, only to lose them both to free agency; nine all-stars, eight of which are no longer with the team; two Relief Pitchers of the Year, also both departed. In the 2004 free agent market, the Yankees shelled out $60 million over seven years for two pitchers who combined for a career win-loss record of 109-103. The A's exodus of premier talent continued in the loss of two pitchers boasting a combined record of 173-81, and earning just $13 million collectively for the upcoming season. Those two talents, even in their final reserve clause seasons, were no longer affordable for the A's. As late as 1990, there was still an element of cost certainty, as team payrolls exhibited less deviation. In 2000, the Yankee payroll was just a little over $90 million; Los Angeles was second at $90 million. Four years later, New York has more than doubled their team payroll, besting the runner-up by over $60 million. Money is no guarantee; the Yankees have not won a World Series since 2000; the best players under the limited reserve clause far exceed the contribution of the lower-performing free agents. However, the best underpaid talent will not be underpaid for long, nor will they be with their original team. In the end, Coase was right again in theory; but free agency created a transaction cost in the form of rising salaries that altered the distribution of major league baseball talent. Baseball then and now, is in many ways, a monetary phenomenon.