Saturday, December 27, 2008

Solving The Yankees Problem

Alright, so I have outlined the general strategy of the Yankees Dynasty yesterday and mentioned that I would do this follow-up post covering the drawbacks of their method and the solution. Let's go over the drawbacks first.

The most obvious disadvantage to the way the Yankees spend money is that they have a huge amount of capital dedicated to payroll, which is not something you want typically. On a typical team it is to your advantage to pay your athletes as little as you can get away with but with the Yankees their advantage comes when they can pay their athletes as much as they can. It's tough making a profit with the payroll numbers they have on there but luckily the Steinbrenners care more about having a winning team than the dollars. Baseball is a business, however, and by raising cost they are bleeding money all over the place.

Another drawback is the fact that players who hit free agency are usually in the early thirties or late twenties and in the decline phase of their careers. Whereas young teams get better as time goes on, veteran heavy teams just get worse (excluding the effects of steroids and players who simply buck the trends). In the late nineties and early two thousands this effect wasn't as pronounced, due to the aforementioned steroid abuse and the simple fact that contract lengths were a lot shorter. Before, they had guys running out their contracts when they were 33 or 34, now it's 36 - 37. Their team becomes older and, thanks to the decline of steroids, less effective.

There's also the curious result that the Yankees cannot seem to win in the playoffs since 2001. Many commentators would be quick to blame individual players (ie. A-Rod and Giambi) but such pathological failure has to run deeper than that. Another team with a very engrained methodology, Billy Beane's A's, suffers from a similar problem. There's no obvious root for this problem but I figured I would mention it anyways.

The Yankees' Dilemma - or - How They're Gonna Fall

The continued lifespan of the Evil Empire is very tenuous. Like every empire in history and monopoly in business it had a time when it rose, it had its golden age, it had its decline, and soon we will see its fall. I will give an economic interpretation of this eventually.

The problem with their strategy of escalating player contract inflation is that it has a cap. More than a salary cap could kill the Yankees, the Yankees will fall when they simply can't pay their players more than they already do. Players are already making money in the hundreds of millions and it's reaching the point where salary inflation simply cannot rise at this ridiculous rate. Player contract inflation will soon fall down to match monetary inflation and the Yankees will lose every bit of competitive advantage they've been enjoying up until this point. They'll still get some of the best players in free agency but they won't be able to grab salary dumps like they used to.

It just needs one domino for the entire set to fall, and this economic crisis the world is going through can be that catalyst. Many teams are either keeping their payroll the same or reducing it in advance of the bad times to come and this will have a huge effect on payroll inflation. Sure the top players are still getting paid more, but the mid and low level free agents won't get a proportional payday letting more teams afford players. Next offseason will see a huge dip in player contract inflation with teams in the midst of a global recession and the Yankees unlikely to buy the entire market again. This can spark a trend towards more modest salary growth in the future.

With their strategy obsolete the Yankees will no longer be the powerhouse they once were.

Aside: The Economic Interpretation

This shouldn't really be an aside per se as it's what I'm basing this blog around, but anyways. In economics there is this idea of "creative destruction," popularized by Joseph Schumpeter. The gist of it is that innovations (of product, marketing, or whatever) give one party a great competitive advantage that turns into monopolies. What destroys monopolies is another party coming up with an even better innovation (which in turn creates a new monopoly). I won't bother to give real world examples, but the important thing to take away from it is that innovations create and destory monopolies.

In the economic interpretation of baseball, where instead of dollars we have wins and world series rings, each team and head office is their own company competing with every other team. So the Yankees use of salary inflation was their innovation that allowed them to form a monopoly over the AL East for a decade. Billy Beane is the ultimate example of an innovator in baseball, where his innovation was better evaluating tools for players in order to get a better team with less payroll.

What destroys these monopolies is a superceding monopoly, and we really already saw that with the Red Sox overtaking the Yankees to be the "beast of the east." So really the Yankee Dynasty is already finished and they can no longer hope to remain competitive without changing their strategy - developing a new innovation. Problem is and the problem with many who come up with a great idea is that they lucked into their innovation and are soon pushed aside when they can't do something new.

Now with the emergence of the Rays (draft and scouting based innovation), I think we've seen the final nail in the Yankee Dyansty's coffin.

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