Abolish the minor leagues

It will likely be months before we know how the slotting system fared in the 2009 Rule 4 draft, as Scott Boras and the Nationals have quite some time to hash out Stephen Strasberg’s incredible signing bonus. In the meantime, let us ponder the question: Is there a better way than this?

On one hand, we have Fox Sports’ Michael Rosenberg:

Major League Baseball needs a true slotting system—not just a ridiculous, unenforceable commissioner’s recommendation. It needs a system like the NBA, where the top pick is locked into a certain figure and the contract values diminish with each subsequent pick. The only way to get one is to negotiate it into the next collective bargaining agreement.

That would give the owners cost certainty. It would keep signing bonuses reasonable. And it would allow teams to draft the best available talent, instead of the most signable player.

On the other hand, we have Baseball Musings’ David Pinto:

International players are free agents, and that seems to work just fine. Let teams sign whomever they like in a fixed period of time. The Yankees can’t sign everybody. Teams like Washington might be able to sign two or three very good players for the price a better team pays for Strasburg. That’s what teams like Pittsburgh and Washington need, a way to get many good players onto their roster.

Abolish the draft, and let these amateurs sign for what the market will bear. Then we can stop having these idiotic discussions about what’s wrong with the draft. The draft is just wrong, period.

This is where it would be cute to ask, “So who’s right?” But in reality, it’s possible for neither of them to be right; both of them represent extreme positions, and of course there are innumerable positions between the extremes, the current status quo not least among them. But there is (theoretically) a correct answer, even if it is none of the ones currently mentioned. How can we decide which one it is?

The reserve clause

Did you think the reserve clause went away in the mid-70s? Because it didn’t. Check the Collective Bargaining Agreement:

Subject to the rights of Players as set forth in this Agreement, each Club may have title to and reserve up to 40 Player contracts. A Club shall retain title to a contract and reservation rights until [a player a player becomes a free agent] … Following the completion of the term of his Uniform Player’s Contract, any Player with 6 or more years of Major League service who has not executed a contract for the next succeeding season shall be eligible to become a free agent, subject to and in accordance with the provisions of this Section B.

And the Uniform Player’s Contract:

The Player agrees that, while under contract, and prior to expiration of the Club’s right to renew this contract, he will not play baseball otherwise than for the Club… Unless the Player has exercised his right to become a free agent as set forth in the Basic Agreement, the Club may retain reservation rights over the Player by instructing the Office of the Commissioner to tender to the Player a contract for the term of the next year.

This is what an MLB team gets out of the draft: the rights to control a player’s rights for the six years after they reach the majors, including at least two years without salary arbitration. These rights can add up to a savings of millions of dollars a season, compared to what comparable players could command in free agency.

But is this exploitation?

A brief digression into Marxist and Austrian theories of labor value

Before we can call a signing bonus “reasonable” or unreasonable, or decide whether or not we are paying players what they are worth, we first need to decide what a player is worth, in broader terms. (The specifics I have addressed in my series on marginal revenue product: Parts 1, 1a, 2, 3.) For the moment, let’s simply assume (for the sake of the argument) that it’s clear on how to measure a baseball player’s worth in dollars.

If we look at some of the top young players in the game, they are vastly underpaid compared to other top players, or even some mediocre veteran players on their own teams. We can express the notion in simple terms:

Real Worth – Actual Salary = Surplus Value

Teams get to hold onto the surplus value that would otherwise accrue to the player.

If you’re of a Marxist, this is a consequence of an owner exploiting a player based upon their control of the means of production. If you’re a free-market Austrian School sort, it’s exploitation because MLB is using their monopoly power to deprive players the opportunity to compete for jobs openly on the free market. (See? We’ve found common ground between the left and the right. Progress!)

But this analysis misses the biggest picture.

Playing dice

The draft, quite frankly, is a crapshoot. Looking at the history of the draft going back to 1978, Matt Swartz has found that only 51 percent of players drafted in the first two rounds ever make the major leagues at all, even for a September cup of coffee. (And those figures have been steadily on the decline for years.) In short, the ones “exploited” are the fortunate ones: the ones who survive the culling of the herd.

And the culling process is expensive. According to the financial disclosures of the Milwaukee Brewers, “other baseball operating expenses” which “consist primarily of costs for scouting and player development” accounted for 53 percent of the team’s non-payroll expenses from 1998 to 2003, or roughly $21 million a season. This includes not only signing bonuses but also the considerable expense of running a farm system. (Also recall that 40-man roster costs are included in the Major League player payroll.) The Brewers are a pretty representative team, with an average ranking of 15th among MLB teams in other baseball operating expenses from 2000-2003.

(The above ignores the rising costs of player development, including recent increases in draft bonuses. Assuming 10 percent growth from last season, which is typical for free agent salaries, and you’re looking at a estimated $63 million for 2009.)

So Major League teams need the reserve clause just to simply break even on the development of baseball players. So what would the consequences of abolishing the draft and the accompanying reserve clause? We can look to the other major sports leagues in the U.S. to come up with a good idea of how they could achieve just that.

Back to school

The NCAA already maintains a baseball program that serves as a feeder system for draftable talent to MLB. But it is not nearly as robust as the programs for football and basketball, which are amateur sporting leagues in name only. If the costs of running a minor league farm system and developing players start to exceed the surplus value teams can recover from controlled players, expect to see MLB’s player development model start to resemble the NFL’s and the NBA’s.

Now, from 2008-2009, the average out-of-state expense at a four year state school was $29,193; an athlete on a full-ride scholarship to play basketball or football in Division I is probably far more exploited than anyone on an MLB roster right now.

But at least they’re getting an education. (Or paying someone to take the SATs for them. Either way.)

The Fallout

But what would we lose along the way? Well, for starters, we probably lose the low minors. Right now, you can take a family of four to a game and get a meal and a few souvenirs for under $55. Minor league teams can charge so little for their product because their largest expenses are subsidized by their parent clubs. If that subsidy dwindled, so would the minor leagues.

Next to go? Training academies in Latin America. If the draft is abolished, teams would likely focus on domestic training academies instead. In other words, it’ll do to players from the Dominican, Venezuela and elsewhere what MLB did to Puerto Rico when it included them in the draft. Puerto Rican baseball has suffered for it, and so have Puerto Rican baseball players.

And Major League free agents will suffer, as they have to compete against a larger pool of players in the free agency market.

Maybe these things are desirable, but they are real consequences and cannot simply be ignored.

References & Resources
Rodney Fort’s Sports Data Collection was an invaluable resource in preparing this article.

Another case typically made against total free agency is the notion of competative imbalance. This is not clearly so; Simon Rottenburg articluated the invariance principle, which states (in the words of Fort):

“The distribution of talent in a league is invariant to who gets the revenues generated by players; talent moves to its highest valued use in the league whether players or owners receive players’ [marginal revenue products].”

In reality there are some caveats to the invariance principle as stated; transactional costs impose friction against the factors at work in the invariance principle, for instance. But it is unclear that the effect on competative imbalance would be significant.