THE ANALYTICAL ECONOMIST

The MBAs of Summer

T he national pastime is a strange business. Indeed, many observers have denied over the years that

baseball is a business at all. According to the traditionalists, it is played for the very love of it by young men who smite the horsehide with their straight-grained bats of ash and run the limed diamond or sprint across the verdant outfields in pursuit of high flies. Owners, in this idyll, bring a team to their home city and at best break even as they public­spiritedly provide a spectacle to throngs of loyal fans.

That may have been baseball in the good old days, but it certainly is not baseball today. Star players pull down salaries that would make some Fortune 500 chief executives blush. Club own­ers pull up franchise stakes at the drop of a new stadium. Has greed overcome a sport whose nobility is so ingrained in U.S. consciousness that it is even ex­empt from the federal antitrust laws?

Economists don't think so. Under their sharp pencils, the National and American Leagues reveal themselves as always having been governed by the same profit motive as any other enter­prise. The bizarre constraints under which baseball's markets function have simply obscured this fact, according to Gerald W. Scully of the University of Texas, an economist and author of The Business of Major League Baseball.

Consider the free-agent rule and its effect on players' salaries. From 1903 until the "reserve clause" was aban­doned, players had a choice between playing for whoever owned their con­tract and retiring from the game. As a result, their market value was deter­mined by opportunity cost: the amount of money they could earn in some other profession (which was often not much). In 1975 the balance of power (and prof­its) shifted away from owners and to­ward players; stars could sell their ser­vices to the highest bidder. Their mar­ket value is now determined by what other owners are willing to bid: in short, the value of adding a particular player to their franchise.

Baseball is replete with statistics, and so Scully and others have estimated not only the contribution various free agents make to their teams' won-lost percent­age but also the proportion of ticket

120 SCIENTIFIC AMERICAN June 1992

sales, broadcast revenues and other in­come they generate. Whereas the top players in the old days received no more than 10 percent of the money that they earned for their ball clubs, Scully's data suggest that by the mid-1980s typical free agents could haul in about a quarter to a third of the rev­enue they generated.

Since then, according to Rodney D. Fort of Washington State University, some stars have negotiated contracts that net 100 percent and occasionally more of the marginal revenue they con­tribute. Not that owners are stupid; such overpayments are simply an ex­ample of the "winner's curse" that be­sets any bidding war. The high bidder is the one who has the most optimistic valuation of the asset being sold; often as not, that optimism is misplaced.

Luckily for owners, the curse of buy­ing high-priced free agents is counter­balanced by the blessing of deducti-

Under the economists ' sharp pencils, baseball 's profit motives emerge.

bility. Since the 19 50s, tax laws have allowed those who buy a baseball fran­chise to earmark part of the purchase price (currently no more than half) to "the value of player contracts" and de­preciate that amount over five years. As a result, a club that has recently changed hands may take in millions of dollars more than it pays out and still show an accounting loss.

Owners may also make helpful ar­rangements with other businesses they run. For example, the St. Louis Cardi­nals, which are owned by brewer August Busch, Jr., pay a higher-than-average rental to the owner of the team's stadi­um, a subSidiary of Anheuser-Busch. Yet the team receives none of the revenue from stadium parking or other conces­sions, several million dollars every year.

Owners have a full rotation of ac­counting curves, sliders and spitters. In 1982, the worst year for baseball's fi­nances in current memory, Scully reck­ons that unraveling the sport's unique accounting practices converted an ap-

parent $10 5 -million league-wide loss into an $ 11-million profit.

Until 19 5 3, the year the first major league teams abandoned their home­towns, most clubs built the stadiums they played in and paid for them direct­ly, recalls James Quirk, a retired Cali­fornia Institute of Technology econo­mist. Today that number has shrunk to a handful, and the rest play in pub­licly owned parks built at taxpayer ex­pense-often specifically to attract a new team or keep an existing one in town. Quirk estimates that overall local subsidies to professional sports teams (football, baseball, basketball and hock­ey) exceed half a billion dollars annually.

Although many municipalities (not to mention engineering firms pushing stadium projects) have proclaimed the benefits of a team in residence, Quirk contends that no studies have ever demonstrated that a city actually reaps increases in local business income or economic growth as a result of a major league franchise. "Any notion that a city can break even on these facilities is just wild imagination," he says. In­trigued by this observation, Fort has be­gun investigating just why cities con­tinue to build stadiums but has found no convincing answers as yet.

If players can achieve cislunar salaries thanks to a reallocation of power in the labor market and owners can make money while apparently losing it, is there anything fans can do to better their lot? Curiously, says Philip K. Porter of the University of South Florida, the most rational thing they can do is to be fickle. Loyal fans, who come to the ball­park regardless of whether their team wins or loses, free owners to hire cheap­er players and so increase profits.

If a pennant-winning season fills the park but a year in the cellar empties it, then owners who want to make a profit will be forced to hire top-quality, top­dollar stars. Indeed, Scully has devel­oped an economist's equivalent of the team slugging average: his "quality-ad­justed ticket price" measures dollars per game won. In 1991, for example, Atlanta rated best at $11.41 and the New York Yankees worst at $24.11. If your team isn't supplying enough bats for the buck, just stay away from the ballpark and, in the immortal words of Red Sox fans through the generations, wait till next year.

-Paul Wallich and Elizabeth Corcoran

© 1992 SCIENTIFIC AMERICAN, INC