We return to the sports world today to talk about the economic concept of value. Albert Pujols was one of the greatest baseball players of the 2000's (if not the best), is currently on track to break a number of records which are sacred in the eyes of baseball fans, and, barring any Bonds-ian or Clemens-esque controversies, is a lock for the Hall of Fame. Heading into the most recent off-season, he was also a free agent, and, at the age of 31, was very clearly was on track for one last big payday.
So what was he worth? This was the question being asked by the management of the only team he had, to that point, suited up for, The St. Louis Cardinals, as well as other baseball executives and fans. He seemed almost certain to be baseball's second $200 million dollar man (after Alex Rodriguez who has twice signed contracts giving him that distinction). But how much more than $200 million?
At least according to one team, the Los Angeles Angels, the final answer was $254 million over the next 10 years. This left many pundits, happy fans in California, stunned fans in St. Louis and dozens of baseball executives wondering whether the deal was 'worth it'. In other words, was this the correct value to put on Pujols?
Of course value is a term with many different meanings to different people. Many people will subjectively look at the contract and think that there is no way someone should be paid that much money to play a game. Of course $254 million is a lot of money. Of course America is in a recession. Of course Mr. Pujols is getting paid to play a child's game. Of course numbers like this don't seem to make a lot of sense to people who are digging ditches every day or fighting for our country on the front lines.
However, subjective analysis is, well, subjective, and it isn't the best way to analyze this (or really any) contract. After all, many executives make more money that Pujols will under his contract just for the honor of destroying shareholder value (though that might be a post for another day).
One way to get baseball discussions to shift a little closer to the realm of objectivity is to use statistics. For those who don't follow the sport, or might only be passingly familiar with statistics like RBIs and home runs, there are baseball-specific ways to measure value called sabermetrics. These are most often measures of how much a player's specific statistics more generally benefit a team. Jamesian terms like win-share and wins over replacement, once the realm of uber-stat geeks, have become more familiar to common baseball fans.
In addition to being fan favorites, these types of measurements are helpful for executives as they allow for direct comparisons between players. They also help to set the market for free agents as a player statistically worth a relatively high number of wins can usually expect a nicer payday in comparison to lesser players. Many teams have gone so far as to base their scouting programs on such advanced metrics. Even non-fans might be familiar with this approach, or at least its name, as the 'moneyball' concept recently featured in a Hollywood movie of the same name.
While a subjective statement that someone is paid 'too much' and the use of sabermetrics are certainly ways to explain value, they also don't get right to the heart of the concept we are talking about today. Why is this? Well, the parties to the contract were thinking in economic terms when they signed it. And, in economic terms, the subjective concept of value we noted above is really inconsequential. Addtionally, the baseball measures of value explain how someone impacts a game, but not how they impact the bottom line at company they work for. Yes, that is correct, not the team they play for, but the company they work for. Let's not forget that it is the owners, and not the fans, who sign the checks.
Some owners care more about on-field results than others, but hardly any take too kindly to losing money. Therefore, in the analysis of 'is he worth it,' the owners really adhere to the economic definition of value. Of course most owners care what the fans think to some extent (subjective value), and of course, all things equal, most owners would prefer to win (sabermetrics analysis). However what they care about more is creating profits, and economic analysis is uniquely suited to determine whether they will be successful in that endeavor.
Players, of course care about economics as well. Quite simply, the equation is usually the more money the better.
However, what type of economic analysis is appropriate in this situation is something we struggled with a bit. Regular readers might be a bit surprised to hear that we first turned to Karl Marx for the answer, as we mulled over the idea that the labor theory of value is the best way to analyze whether Pujols is 'worth' his contract. At some point, however, this didn't hold up as we couldn't figure out any way to fit what Pujols 'produces' nicely into labor theory. In other words, since Pujols 'makes' hits, not, say, balls, bats or gloves, there is nothing to base his worth on in traditional Marxian analysis (of course to the extent that there are any neo-Marxists who are also baseball fans out there who think they can refute this there is always the comment section).
We also took a look at some other theories of value, but long story short, (and like we often do on the site) we finally settled on a simple supply and demand type of analysis. At the base of this analysis is the idea that Pujols is 'worth' the price someone assigns to his services that he accepts. As Pujols was offered $254 million, and he signed the contract, $254 is what he (or rather his services) are 'worth' (On a side note, while services can of course be valued under Marxian analysis, we still couldn't get around to understanding what is 'produced' by Pujols' labor...so supply and demand it is!)
We couldn't merely end the analysis there, however. Supply and demand should be thought of as an ethereal concept rather than a static one, so it is helpful to look ahead a bit as well. Therefore, we took the analysis a step further. However, our readers will have to wait for Part II for that...