The Irrelevance of Money in Baseball

    There was a time when money meant everything in baseball.  Harkening back to the glory days of the George Steinbrenner Yankees.  The high paying, free spending, guaranteed playoffs every year to the Yankees.  George Steinbrenner was the face of this movement, famously pushing player salaries higher and higher, outspending other teams to land superstars seemingly at will.  The Yankees were the face of big spending and big winning.

    Although the Yankees led the charge, other teams got in on the game too and eventually started to mimic the ways of the Yankees.  The Red Sox, Mets, and Angels all used their status as bigger market teams to significantly beef up payroll.  Although none of them came close to the Yankees in terms of total payroll, they all used their position to their advantage.

    It became the glory days for big market teams.  They had the best players, in the prime of their careers, and were essentially using small market teams like the Pirates and A’s as their own personal farm systems.

    Recently though, things have begun to shift.  Rule changes, revenue sharing, and policies distinctively favoring smaller market teams are starting to take effect.  Young players have become the most important part of the game, and by nature, young players are inexpensive to acquire.  Money is no longer king when determining long term success.

    Qualified statistically, ten years ago money accounted for 25% of a team’s success in terms of win-lost record.  Currently, payroll accounts for approximately 4% of a team’s success.  The impact of money has receded so much that near the end of the 2014 season, you could better predict the chances of a team making the playoffs by using alphabetical order than by using payroll figures.

    Some changes throughout the sport that have led to this dramatic shift include more overall revenue, changes in draft structure, limits on signing international players, limits on signing high school players, and the decline of steroid use.  Recently, new television deals for teams have helped increase revenue throughout the game including for small market teams.  Coupled with smart budgeting, smaller market teams now have the ability to give long term contracts to their best players and prevent them from reaching free agency.  They also are able to give them longer term deals earlier in their careers, allowing them to keep players at a lower cost per season, and keep them on the team through their prime years.  The effect here is that if and when star players do become free agents, they are now free agents in their late 20’s and early 30’s as opposed to at 25 or 26 as they were historically.  The bigger market teams who sign them then are given less productivity, as players typically start to decline in their mid 30s.

    Draft rule changes are another large factor in helping smaller market teams be competitive.  Previously, a major issue for smaller market teams would relate to the size of the bonus given to a draft pick.  Prospects known to be seeking larger bonuses may have fallen in the draft because smaller market teams could not afford to pay them.  It created a situation where the best players in the draft might be taken later in the first round where the more free spending teams picked.  Changes to the bonus rules limit the amount each team can spend and penalizes them for going over.  This has helped to mitigate the spending advantage of bigger market teams.

    Lastly, the decrease in steroid use throughout the game has helped to limit the supply of useful and productive players in their late 30s.  Typically these are the players most readily available via free agency as their most productive days are behind them, and can be had slightly cheaper.  At the height of the steroid era, players were more and more productive deep into their 30s and sometimes early 40s.  As steroids have faded, so has the availability of this type of player to bigger market teams willing to pay a large amount for one or two years of service.  These short terms contracts were a staple of big market teams during the steroid era.

    All of these changes have helped to level the playing field in major league baseball while decreasing the importance of money in relation to winning.  Scouting, advanced analytics, strong decision making, and the all mighty young player now rule the roost in the MLB, and with that has come more competitive balance and more exciting baseball.

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