The Visible Hand of the Baseball Economy

Image credit: Troy Taormina-USA TODAY Sports

Gerrit Cole laid waste to the American League en route to an eight-win season. Not only that, but he also tied an AL playoff record in October with 15 strikeouts in the ALDS. Yet the Houston Astros, who figure to be competitive for the foreseeable future, have indicated that they don’t feel that the 29-year-old Cy Young candidate will be a good investment for the team going forward.

Not that they can’t afford Cole, of course. They can. Astros’ owner Jim Crane recently intimated as much to reporters. However, the Astros almost certainly would then push their payroll over the luxury tax threshold, which Crane said he’d “prefer not to” do. The language is revealing because he made it clear that this is a matter of preference, rather than capacity—and the latter is the line normally trotted out by executives as to why they won’t pony up the cash to sign a player.

The Astros are the same organization that in 2014 dropped $10 million guaranteed on Jonathan Singleton, who was a sub-replacement-level player for two seasons and is now out of baseball. The luxury tax penalty for signing Cole would figure to be in the neighborhood of that same amount of money.

I don’t need to explain the various different ways that the luxury tax penalty shouldn’t be a big deal for a company that’s valued at almost $2 billion. What’s more interesting is asking why a baseball team might be willing to risk $10 million on someone like Singleton, with the full acknowledgement that they might wind up getting jackshit out of that investment, while they won’t risk the same amount (in the form of a luxury tax penalty) in order to secure the services of one of the best pitchers in all of baseball.

The Astros’ risk tolerance has to do with the potential return on investment (or surplus value). The $10 million on Singleton could have saved the Astros gobs of money in the future, while the potential tax payment on a Cole deal is more than likely dead money—barring multiple hefty postseason payments or Cole somehow taking even another step forward in terms of production. Again, Crane is clear that the Astros can afford to expend that dead money for Cole, but it’s simply not “smart business” for a team that’s trying to maximize their overall profit… and win in the process, if they can.

Teams are getting smarter, yes, but it often feels like franchises operate more like venture capital firms than big-league ball clubs these days.

And although hearing a billionaire like Jim Crane cry about not being able to afford something makes baseball fans want to smash their respective heads into a wall, there’s something else going on here, too. Crane is signaling to Cole’s agent, Scott Boras, that externalities (the luxury tax threshold) exist that will set limits on any contract offer they might extend to Cole. A team like the Yankees might tell Boras the same thing (they had that goal for the 2018 season). Another organization, like the White Sox, might indicate that they’re still rebuilding, and they’ve got a cost-controlled pitcher in Michael Kopech who they need to develop in the big leagues.

It turns out that many externalities exist in the baseball economy that might depress Cole’s market. It turns out that market conditions might just drive Cole right back into the Astros’ loving arms. If that happens, it would surely be at a discount, compared to what Cole is “worth” in terms of dollars per projected WARP. And, my goodness, what a smart bit of business that would be for those savvy Astros, eh?

If Cole were to return to the Astros on a discount, you know damn well that two things would immediately happen. One part of Twitter would fire off tweets about collusion and how much Cole got cheated out of his big payday. Meanwhile, another part of Twitter would audibly shrug their shoulders and say that’s what the market was willing to pay. And who can argue with The Market?

Both of those points are right to an extent. But, importantly, they’re also incredibly misleading. Teams are colluding, just maybe not how people think. And appealing to The Market is problematic because it turns out that the all-knowing and invisible “market” has Major League Baseball’s grubby little fingerprints all over it.

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The Market. We’ve come to think about capitalism and unregulated market forces, thanks to Adam Smith, in terms of the invisible hand metaphor. The idea is that supply and demand naturally find an equilibrium without any external interference, such as the state or a regulating body. In other words, if people would just get out of the way, both labor and capital would be able to flourish due to predictable, knowable, and ahistorical economic processes.

Importantly, the idea that impersonal forces manipulate the invisible strings of business, like an unseen puppeteer, has become an easy way to explain many difficult questions. Why does one business succeed and another does not? Why are wages unequal, and how do businesses determine what to pay an individual? It’s all determined by The Market.

Brewers’ GM David Stearns appealed to The Market this week when explaining why his team made the surprising decision to part ways with Eric Thames over a mere $6.5 million ($7.5 million option minus a $1 million buyout). Thames was nearly a two-win player in 2019, posting a 112 DRC+. That would look decent on a club that currently has a gaping chasm at first base following the departures of Jesús Aguilar and now Thames. But Stearns said the club is not pinching pennies. He told reporter Tom Haudricourt that The Market tells him what players are worth—implying that The Market may have already spoken on Thames.

Ah, yes, The Market. Guided by that pesky invisible hand.

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The invisible hand supposedly reigned supreme in the 19th century. Economic liberalism, a hands-off policy better known as “laissez-faire,” was the ethos that guided the American political economy. Economic historian and sociologist Karl Polanyi demonstrated in the 1940s that this was not the case (he wrote, “Laissez-faire was planned; planning was not.”^[1]), but it is certainly true that government regulation of business was much lower in the nineteenth century than the twentieth. Market transactions increased in frequency and incorporated more of the country geographically, and due to various technological and demographic developments in the second half of the nineteenth century, the United States pushed forward into full-blown industrial capitalism. Major corporations dominated the economic landscape.

Crucially, many Americans have thought—both in the nineteenth century and now—that laissez-faire policies allowed that massive, chaotic growth to occur.

American capitalism, contrary to popular belief, has often been a story of an all-too-visible hand. Business historian Alfred Chandler Jr.’s The Visible Hand, published in 1977, exemplifies this.^[2] Using the example of the nineteenth-century railroad industry, Chandler showed that companies, left to their own devices, will strive to lessen risk at all costs. Railroad tycoons tirelessly sought to control prices and lessen competition, so much so that railroad companies formed cooperatives to artificially inflate fares and punish companies that undercut the cooperatives.

When trying to understand U.S. capitalism, Chandler pointed to a core irony. He showed that capitalism with few regulations, as it was in the nineteenth century, did not allow markets to achieve any sort of natural equilibrium. Instead, capitalism with fewer regulations directly led to businesses becoming larger in size and more efficient in their activities. These larger businesses, in an effort to aid efficiency and lessen risk, sought to control the markets themselves. That’s what anti-monopoly and antitrust movements in the late nineteenth and early twentieth centuries were really about. People asked the state to ensure that companies could not engage in unfair anti-competitive practices.

In short, as companies grow, professionalize, and rationalize, they will seek to manipulate the market at all times to minimize their financial risk. It’s rational. It’s the sign of a mature, effective corporation. Chandler demonstrates through his railroad example that the combination of corporate growth and anti-competitiveness is a feature of American capitalism, not a bug.

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That brings us back to the current baseball economic maelstrom. Baseball franchises are a bit like 19th-century railroad corporations—at least once the railroads had achieved enough power and size due in large part to the aid of national, state, and local governments—in that they operate in a closed market. No new franchises can upset the apple cart and change the game. Thus, it’s imperative to remember that baseball teams are profit-seeking corporations, and as Chandler (and subsequently many others) has previously shown, it’s inevitable that managerial teams will work to maximize efficiency and lessen risk as much as possible. And Chandler showed that companies will even work together, when beneficial, to lessen their overall financial risk.

This is not to argue that baseball teams are engaging in any kind of large-scale, nefarious collusion activities. It’s unlikely that they’re operating in dark corners, scheming to hold down prices. Instead, baseball franchises have long used their size and market power to formally depress competition and drive down labor costs out in the open. This can be seen in international bonus limits, MLB Draft bonus pools, the arbitration and pre-arbitration systems, free-agent compensation, and revenue sharing. Yes, various analytics systems have changed the way baseball teams value aging free agents, but the core reason why free agency has changed lies in the pre-existing ways teams have already worked to reduce their financial risk. The visible hand of Major League Baseball has manipulated the market for decades.

The Braves’ Alex Anthopoulos basically said as much. “If you’re trading for a 30-year-old player,” Anthopoulos mused, “how long are you going to extend him? If you’re trading for a 22-year-old, you have seven years of control and can extend longer.” Owners have successfully structured a closed labor system in which a player’s prime productive years are artificially depressed. Hell, Anthopoulos is already building into the equation how teams will game a player’s service time. It is a perfect recipe for maximizing profits without sacrificing on-field production.

It’s not just Atlanta, either. This past summer the Blue Jays’ Ross Atkins bragged after the Marcus Stroman trade that they “turned 14 years of contractual control into 42 years of control.” He’s not particularly concerned about the quality of those 42 years of control, it seems, because the main point is this: Those 42 years of control are low-risk investments for the team. Being a GM is primarily about lessening financial risk, not winning baseball games. The ultimate goal is to win baseball games, of course, but only if profits are not threatened. If profits are threatened, winning baseball doesn’t matter.

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As fans, we talk about The Market as if it’s a set of invisible forces that consistently find various equilibriums as baseball evolves. But something has obviously changed these last few years. But what? Teams have continued to professionalize, adding people from the managerial class that Alfred Chandler said changed the railroad industry, and they’ve simply gotten more efficient with their capital outlays.

All of this raises the question: Why do teams get away with this? They do this much in the same way that Amazon engages in countless anti-competitive activities and has grown to a monstrous size: their anti-competitive practices don’t detract from consumer enjoyment. The public actually likes the fact that Amazon and Major League Baseball reduce their financial risk. MLB simply calls it competitive balance.

While many structures within the baseball economy do increase competitive balance across Major League Baseball, it is imperative to note two things. First, artificially depressing player wages is not the only way to achieve competitive balance. Second, these policies haven’t been done out of charity or in service of fans. The Angels, for example, continue to raise ticket prices because they’ve learned that their profit is maximized by attracting the “right kind” of fan, rather than as many fans as possible.

Here’s the key point: Franchises are willing to enact measures that improve competitive balance when they also create institutional structures that enable owners to lessen their financial risk and maximize their profits. Teams extend this same thinking to the fan base. The fact that decreasing risk and maximizing profits somewhat (but not completely or in all cases) improves the product for small-market fans is just a public-relations bonus.

The question of stakes is key. If baseball franchises rake in record profits and some millionaire players make a couple million dollars less, it’s difficult to make a case for the average baseball fan to care about the Labor Question. Politically left-leaning fans are more apt to engage because they believe that capital-labor dynamics are a key driving force in American culture. This is largely what inspired much of the Twitter criticism regarding the “cute” story about Randy Dobnak needing to drive for Uber to pay his bills while pursuing professional baseball. As politics continue to polarize in the United States, too, it’s possible that more fans will understand and engage with labor issues for their own sake.

For the average fan, though, what it’s going to take is for the on-field product to decline in entertainment. Corporate power in American history has rarely been checked in a meaningful way unless the anti-competitive processes begin to negatively affect the consumer product. There’s an argument that this is happening, too, with more teams undertaking deep rebuilding projects with young, cost-controlled talent and fewer teams willing to spend money on the marginal (and monetarily inefficient) improvements that can potentially push a team into postseason contention. But I personally think the game would have to get stupidly uncompetitive before the average fan would be willing to tolerate work stoppages or start calling for structural changes to the baseball economy.

So what’s the takeaway? History is not a prescriptive discipline, by its nature, but I think historians do their best work when they destabilize ideas or institutions that modern-day citizens take for granted, or think of as normal. Alfred Chandler did this when he wrote The Visible Hand, demonstrating that modern corporations have not historically found success because they have expertly navigated impersonal market forces better than the rest, but because they deliberately intervened to control those market forces to their own benefit.

The Major League Baseball Players Association (MLBPA) would be wise to learn from historians like Chandler. Instead of treating the modern baseball economy as a kind of anomaly or a product of “bad actors,” the MLBPA should recognize that this is the natural progression of an unchecked corporate capitalist system. Teams and owners will continue to professionalize, innovate, and work to lessen their profit risks in the labor market. And that’s not necessarily a bad thing in itself! No one is asking for baseball teams to chuck around tens of millions of dollars to replacement-level players. Teams are not working with unlimited budgets, after all, and still need to build their teams with some level of efficiency.

Instead, what the MLBPA should prioritize in the upcoming CBA negotiations is dismantling structures that have been put in place to limit competitiveness in the labor market. That means targeting MLB Draft bonus pools, international free-agent bonus pools, the pre-arbitration and arbitration systems, free-agent qualifying offers, and time-to-free-agency policies. Of course, not all of these policies can be fixed at once. It will be a long-term project. And part of that project should be prioritizing ways to promote competition between teams that do not solely offer up players as the collective sacrificial lamb.

But, ultimately, the MLBPA and fans should recognize that, no matter how much teams pay lip service to civic pride and fan loyalty, teams are first and foremost profit-seeking corporations. By learning about the history of U.S. capitalism, by studying historical processes and how they have manifested themselves in American society, it should be clear that Major League Baseball was never primarily interested in competitive balance. Every single “competitive balance” structure that has been put into place has been in the service of lessening corporate risk for major-league teams. The fact that this finally extended into the free-agent system as much as it has is not an accident. It’s a product of Major League Baseball’s success in every other realm of the baseball labor market. It’s how corporate capitalism works. Alfred Chandler called it “the visible hand,” and that hand now is firmly grasping at the throats of both baseball players and their fans.

Thank you to both Craig Goldstein and Jon Hegglund for their keen analytical eyes and editorial assistance.

^[1] Polanyi, Karl. The Great Transformation: The Political and Economic Origins of Our Time. 1944. Reprint, Boston: Beacon Press, 2001, p. 147.

^[2] Chandler, Jr., Alfred D. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: Harvard University Press, 1977.