The Baseball Economist: The Real Game Exposed (18 page)

While the league is prohibited from testing for drugs of abuse—the classification of marijuana—under the current collective bargaining agreement, the information is still there. Vials can go missing and lab technicians can be bribed; as long as the information is available, there is the risk of exposure of information players wish to keep private. In 2004, federal agents seized urine samples of players, matching names with samples, that both owners and players had agreed to keep anonymous. I don’t blame the players for being suspicious. Would you want a potential employer to be the keeper of personal information, at which he promised not to peek?

Players have an incentive to support the availability of drugs that harm performance for the same reason they want to prevent performance-enhancers. The spillovers from performance-inhibiting drugs work in a similar way, except using drugs lowers the income of users and raises the income of abstainers. It is interesting to note that the incentives facing owners and players is diametrically opposite. Many players probably feel that the value of protecting recreational drug users is greater than that of identifying cheaters.

Ultimately, the opposition to testing may come from simple concerns over personal privacy. I think that players are predisposed to oppose testing because the testing procedure itself is costly in terms of the discomfort it causes. I would certainly prefer less salary if it meant that I didn’t have to stand naked in a room to urinate into a cup held by a stranger. Rafael Palmeiro’s positive test probably did more to motivate players to seek testing from a practical point of view than a political one. Here was a very good player who was taking steroids, even with all of his success. While players would prefer not to incur the embarrassment of testing, if it means sacrificing hundreds of thousands of dollars in free agency because a few players use them, it’s an inconvenience that many can learn to live with.

There is a solution to all of this that can make the players happy without giving in to the potential ulterior motives of owners. The MLBPA should adopt its own testing policy. As a requirement for membership, players would be subject to fines—not suspension, since owners would not like this—for using drugs deemed to be performance-enhancing. The fine revenue would be distributed equally across players of similar quality. This fine would act like a tax on the incomes of players who choose to take steroids along with a corresponding subsidy to cover the costs of those who suffer lower incomes because they choose not to use steroids. I suspect the players could find the right penalty to make the returns from steroids sufficient to offset incomes from steroid-enhanced performance. Of course, the owners will hate it and can preach from the altar about how the MLBPA cannot be trusted. But I think the MLBPA has a much better chance of keeping steroids out of the game than any joint solution between the parties.

The tough steroid policy instituted in 2005, which included random tests and fines, did seem to be effective at deterring steroid use. Less than 1 percent of major-league players tested positive during its first year. However, the gains from using steroids don’t disappear with testing. In fact, there is a greater opportunity for gains. Wherever profits exist, human beings will find a way to get them. Some players will surely figure out ways to beat the test. These leaks will eventually be discovered and closed, but there will always be new ones. I have more confidence in the players than the owners to close them, because incentives matter.

Part Three

WAY OFF THE FIELD

10

Innovating to Win

—BRANCH RICKEY
⁵⁷

IF YOU WANT a fun but practical exercise in constrained maximization, join a fantasy baseball league. In most leagues, each owner has a budget to spend on teams of real major-league players. Not only must you be careful with the money you spend, but you have to compete for talent with the other owners in the league. Owning a fantasy team is similar to being a real major-league general manager, which probably explains the game’s popularity. But if you’ve ever played in a league, you also know how frustrating it can be. Every other owner seems to know the exact same things about players that you do. Even that tip about your ace reliever favoring his elbow after the game on your pay-for-access roto-website seems to have made its rounds on the Internet before you palm him off on one of your competitors. Everyone wants the players you do and doesn’t want the ones you want to get rid of. In the end, you realize you can’t win by just reading the Internet. You have to learn something new about evaluating the players in order to win, which most people don’t have the time or skill to do. For most of us, we just hold out hope that everyone else in the league will lose his best players to injury.

Major-league GMs aren’t allowed to give up or hope for the best. Either they win or get fired. So maybe fantasy baseball isn’t all that similar to the real thing, but you gain an appreciation for what it takes to win. To succeed, a GM has to be able to innovate, to find new ideas before his competitors do. And once new ideas proliferate, they must be replaced by newer ones. In short, the good GM is an entrepreneur.

Pinning down an exact meaning of entrepreneurship gets a bit tricky. And I’ve seen economists go to war over the most trivial aspects of the definition. I don’t want to get caught up in all of this, so I’ll just keep it simple. An entrepreneur is a person who develops a new method for earning extra profits—taking in more revenue than is spent on costs. The entrepreneur might find an untapped market, develop a new technology to produce a product more cheaply, or invent a new product altogether. And it is in this quest for profits that he serves a valuable function for society. New and cheap products only survive in the market if they bring customers what they want. The entrepreneur is finding ways to help citizens get more of what they want.

To function and grow, market economies need entrepreneurs, which is why economists often stress their importance. This explains why Michael Lewis’s
Moneyball
generated a buzz among economists following its publication in 2003.
Moneyball
chronicles the entrepreneurial quest of the Oakland A’s general manager, Billy Beane. The A’s new ownership group gave Beane a task that is given to thousands of CEOs across the country every year: do as much as you can on a fixed budget. But the sum the A’s ownership group gave Beane to work with was quite small compared to what other owners had given their teams. Beane had two choices: give up, or find a way to win within his current constraints. It’s a simple economic problem of constrained maximization, and a seemingly unfair one. Many other owners didn’t constrain their front offices as much as the A’s did theirs.

But Beane’s story is not unique. All owners place limits on what their GMs can do, and expect them to win with what they have. And it’s not necessarily the whims of owners that restrict the financial resources that the GM has to do his job. Important determinants of budgets include the size of the fan base, the wealth of the fans, the appetite for winning, and even the generosity of the owner. It doesn’t really matter. The point is that these things do differ from team to team, meaning that some teams have fewer resources at their disposal than other teams, and there is not much that can be done about it unless the structure of the league is radically altered. A GM who is asked to win with less can’t afford to play with the same methods other teams use. And even if teams were equally constrained, as most fantasy owners are, the only way a GM can get a leg up is to discover new methods for winning that others GMs have missed. Success requires innovation. One source of innovation is to find
inefficiencies
—meaning incorrectly priced commodities—in the input market for wins. By winning more games, the team will bring in more revenue. The main input to winning is players; therefore, a good place to find inefficiencies is in the market for players.

When inputs sell for prices equal to the returns they generate, economists say that the market is
efficient
. We can view the returns-to-inputs ratio in many different ways. For example, in a competitive labor market, a worker who generates $10 an hour for the labor he provides to the employer generally earns $10 an hour. Why? Because, if the employer pays him less (say $7 an hour), an alternate employer will hire him away, because he knows that input is more valuable than $7. Paying the worker more than the value he produces would be inefficient as well. An employer who pays the same worker $15 an hour will not be returning enough on the output produced by the worker to cover the cost of his employment. Firms that overpay for inputs will spend more money than they take in, and that will lead to losses, and eventually bankruptcy. Therefore, in a competitive market for inputs, we expect the price of all inputs to be equal to the amount of revenue they generate.

Without innovation, this proves to be a huge problem for the general manger. If everyone knows Joe Blow is worth five extra wins a year, which generates an extra $12 million in revenue, the GM has no choice but to pay the market price for Joe Blow’s skills. And with a small budget, a GM won’t be able to field a team of players who could win a lot of games. He would run out of money before he had assembled his team. Winning within his constraints requires finding mistakes in the market, a frequent pursuit of entrepreneurs. This might involve using statistical methods to find hidden talent, sending scouts to foreign countries to find neglected talent, or developing new training methods.

Let’s say a GM wants to find inefficiencies in the market for baseball talent. The first step is to find out what every action on the field is worth. Hitting, pitching, fielding, and possibly even leadership have quantitative values. How much do the things players do in these areas affect winning? Once the question is answered, the GM can sift through the players themselves to find whose skills were mis-priced in the market. Joe Blow might be worth $12 million in the current players market, but maybe there is another player who can produce those same five wins for a fraction of the price. Entrepreneurship is about finding bargains.

But finding bargains isn’t all that easy. There isn’t a coupon section in the back of Baseball Weekly that GMs can clip. Finding cheaper players requires technological innovation. Technology is not just some fancy new gadget with wires, it is also ideas that lead to new ways of doing things. The gadgets we often refer to as technology are just junk without a human mind to turn the pile of raw materials into something useful. Take, for example, the growing use of computers in scouting players through statistical analysis. What is important about the numbers that come out of the computers is not the product of that computer. The numbers are a product of discoveries of mathematical truths and statistical properties. These things existed long before the invention of computers; they are just difficult to employ without them. Every statistical procedure done on a computer can be done by a human being with a pencil and paper. Yes, the computer and the computer programs used are also products of technological innovation and make these calculations much easier, but without the ideas to create the need for computing help, the computer is useless.

New technologies help teams in their quest to get more from less. Every instance of finding a new way to win for less frees up more of the budget to hire better players. How is it that these new ideas generate wins? Let’s assume that teams can buy wins by purchasing players. Consistent with the law of demand, teams are willing to purchase more wins the cheaper each win is. By finding cheaper methods for acquiring the things that lead to wins—an undervalued player, a coach who motivates his players, or a new training regimen—a team can purchase more wins on the same budget. Or by finding a new way to market the team—better concessions, a new start time for games, or adding seats— a GM can generate more revenue to purchase more wins.

Finding new ways to win baseball games is easier said than done, particularly when it comes to identifying undervalued talent. The wealth of stats produced by the game makes following talent from a distance simpler than most business activities. Compare a player posting a stat-line in a box score to a résumé on
Monster.com
. Baseball teams can identify and find talent quickly. Innovation can be tough, especially when it involves finding new information in the stats that passed in front of every GM’s eyes.

Branch Rickey is the man all general managers aspire to be. Rickey made his mark on the baseball world by bringing several innovations to the game. His first notable invention was the modern minor-league farm system, which he employed with the St. Louis Cardinals to win six NL pennants and four World Series for the previously inept franchise. He is also known for trading star players before age caused their play to decline, employing a statistician, and attempting to start a third major league. But his most famous innovation was the integration of Major League Baseball, with the signing of Jackie Robinson to the Brooklyn Dodgers in 1947. This was not just an important ethical move and the beginning of the correction of gross social injustice. Rickey certainly realized the political importance of this moment, but even from a baseball management standpoint this was a fantastic move. It took advantage of an untapped talent pool that was ignored out of racial prejudice. The Negro Leagues contained many players who could not only play major-league-quality baseball, but would excel at it. Robinson exploded into the National League, winning “Rookie of the Year” in 1947, a batting title (1949), and MVP (1949), while taking the Dodgers to six World Series over his career.

Rickey didn’t just get lucky. He knew the Negro Leagues contained a gold mine of big-league players, and the only thing holding them back was an irrational prejudice. After signing Robinson to a minor-league deal in 1946, Rickey announced to the world what he was doing. “The greatest untapped reservoir of raw material in the history of our game is the black race,” he said. Rickey also signed other Negro League stand-outs, who would become National League All-Stars, such as Roy Campanella and Don Newcombe.