Sport  

Diamonds, In the Rough

by Nelson Hultberg

Baseball owners and players may have agreed on another labor deal, but the sport will remain at risk until the playing field is leveled.

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It has been almost 13 years since a strike shut down America's national sport, cancelling the World Series. In fall 1994 there was overwhelming misery in Mudville, and the country's baseball fans are still skittish because of it.

Can such a disaster happen again? The Major League Baseball Players Association and the team owners have signed a five-year agreement that apparently assures peace between players and owners until December 2011. But anything can happen when you're dealing with the kind of money that flows into baseball from the national TV networks. The players and team owners are human, and humans are prone to large parcels of greed and the desire to use legislative privilege to get more out of the system than they could get through voluntary interchange in a free market.

In this essay, I want to examine the issue of "free agency" in baseball from a libertarian point of view. I also want to look at the alleged nemesis of free agency, the "reserve clause," considering the pros and cons of each and the ways in which they are sought after, defined, misunderstood, and abused by the protagonists of the sport.

For the benefit of those who do not ardently follow baseball, these two crucial terms need to be defined, and a brief history provided.

1) Free agency means the ability of players to negotiate, without hindrance, with any team in any league. It came into being in baseball during the 1970s in reaction to the fact that major-league team owners had always required their players to play only for the team that originally signed them up. With the onset of free agency, players were free to move from team to team upon expiration of any contract they had signed.

Before free agency, owners had always held an option on the players' services, an option that could be renewed if the owners wished. Players were locked into one team only. They could not go to other teams and try to get higher salary offers; they could not start a bidding war. A player had to seek a higher salary solely on the basis of his production on the field the previous year. His bargaining strength consisted of his ability to "hold out" and not play in a given year if he felt the owner of his team was being unfair in his salary offer.

2) The reserve clause was language contained in all standard player contracts that bound the players to the teams with which they originally signed. It began to be used in the late 19th century, when baseball teams became businesses and started making large amounts of money. Owners realized that if their players were free to roam from team to team each year, bidding wars would break out, salaries would skyrocket, and profits would be diminished. Thus the reserve clause. All rights to the player were retained by his original team and its owner. The player was able to work for another team in the National and American Leagues only if his original team and owner released him.

The courts of the early 20th century ruled that playing professional baseball did not constitute "interstate commerce," and thus antitrust laws did not apply to baseball. This allowed the reserve clause to stand as a permissible requirement between owners and players. But by the 1970s this began to change. The Major League Baseball Players Association started demanding elimination of the reserve clause. In 1975 Andy Messersmith of the Los Angeles Dodgers managed to test the strength of the reserve clause by playing the whole year without a contract and then declaring himself a free agent for 1976 — a player capable of signing with other teams. The case was decided by an independent arbitrator, Peter Seitz, in favor of Messersmith; and a new era was born. Now players were granted free agency after six years of service to their original major-league signing team. This allowed them to solicit other teams' salary offers and bid up their earnings.

No one can dispute that the demise of the reserve clause changed the game dramatically. Whether the change was beneficial or detrimental is a contentious issue among baseball fans and many legal authorities. Yet the labor-management problems that have resulted from the demise of the reserve clause are terribly misunderstood by the American people. Their misunderstanding is worsened because media pundits usually side with the players against the owners whenever the two start disputing over salaries, free agency, employment conditions, and so forth.

During the last ten years, some of this bias has begun to wear away, at least among sports writers and commentators. But other pundits are still heavily arrayed on one side. Many would still be willing to follow the example of columnist James J. Kilpatrick, who in 1994 stated his very clear idea about how to handle the owner-player impasse during the baseball strike: "If Congress had acted to make baseball subject to federal antitrust laws, that would have put the fear of prosecution into the hearts of the baseball owners." He went on to explain that "fear of prosecution" was the way to have ended the baseball strike before it began. We expect such statist reasoning from liberal punditry — but despite conservative encomiums to free enterprise, most conservatives (such as Kilpatrick) also feel that whenever economic disruption occurs in the market, we must turn to Congress and the courts for a solution. We dare not leave people alone to work out their problems on their own.

But if Congress is to "make baseball subject to federal antitrust laws," that is, elim-inate the baseball owners' antitrust exemption, then by all the rules of equity, Congress should also axe the players' exemption. Why do we hear so much clamor about the owners' cartel and not the players' cartel? Why are owners considered wicked when they collude, but players pronounced righteous when they do so? What else is the players' union but a cartel of all the best talent? What else are its mandatory agreements about tactics but collusion?

Of course, eliminating antitrust exemptions is not the solution to any of this. If we want to solve baseball's labor-management predicament in a substantive way, then we need to eliminate antitrust itself. We need to refrain from temptations to drag players and owners into the courts so as to inflict more regulation. We need to be working toward rescinding the Byzantine body of antitrust law.

Owner Lords and Player Serfs?

In America, we are supposed to uphold freedom of contract. This means that any two parties of adult age are free to sign any agreement they wish, and if they sign it they must abide by it. No one holds a gun to the players' heads and commands them to play major-league baseball. They are free to join a team in the American or the National League, or not to join. They are free to join other leagues, or form their own leagues. They are also free to work at other jobs. The major-league "reserve clause" was not forced upon the players, as shackles were placed on slaves in the Old South — although this is the image that the media often present. Baseball's century-old reserve clause did cartelize the industry and reduce salary competition among teams. But this was not unjust, and it was not contradictory to a free-market philosophy.

As numerous libertarian economists have pointed out, both competition and cooperation are necessary in a market economy. There need not be 100% competition within one particular industry; there need only be free movement and competition within the marketplace as a whole. Many cartelized industries are beneficial — so long as the cartelizers gained their position through persuasion and productivity, and not through coercion, or the coercive mandate of the legislature or judiciary. In other words, as long as the baseball owners lack the force of law to restrict the entrance of other teams and leagues into the field, then even though there is no immediate competition present between the existing teams, there is always the threat of competition if exploitative tactics are adopted by the owners' cartel. Potential competition acts in the same manner as actual competition to limit the power of corporate owners. Over the past 30 years, this fact has been clearly documented and articulated in the works of such scholars such as Dominick Armentano and Yale Brozen.

To the collectivist mentality, baseball's owners appear to possess "unchecked power" and to be abusing it, and this must of course be prohibited by antitrust laws or other means. But owners in a free market do not have "unchecked power" so long as the cartelization is achieved by meeting market demand, not by legislative exclusion. Workers in a cartelized industry are free to unionize and strike at any time to alter unfair working conditions or upgrade pay scales they deem too low. Consumers can withdraw their patronage at any time to lower a cartel's exorbitant prices. Competitors can enter the scene at any time to neutralize a cartel's irrational policies. All these things happen, with great frequency. Capital can and does flow to competitors of cartelized industries, whether to bring exploiters into line or simply to offer an alternative to the cartel. This is what the American Football League did in the 1960s, and the American Basketball Association did in the 1970s.

The real "unchecked power" is that gained by legislation and judicial rulings. This is the power that unions fall back on, seeking special privileges granted to them through the Norris-LaGuardia Act of 1932 and the Wagner Act of 1935 (the National Labor Relations Act). Those acts prohibited the federal courts from issuing injunctions against unions in most cases and forced employers to bargain only with the organized union of their industry. Moreover, they established that the NLRB and federal court system can almost always be brought into play as a last resort to dictate terms in favor of labor if an impasse is reached at the bargaining table.

Here is the crux of baseball's labor problems: the bargaining process is grossly rigged in favor of the players. Because violence (or the threat of violence) is a tolerated tactic for labor to use, and because government intervention favorable to labor always lurks in the background as a potential last option, the players have a greatly diminished incentive to negotiate the vital issues at a bargaining table. Even if violence is not employed against replacement workers, the threat of it is always there. Those who dare to cross a picket line run the risk of intimidation, ostracism, and physical harm for their desire to work.

The replacement players of 1994 felt the sting of this in a big way. All minor-league players who signed on to play for the owners during the strike of 1994–95 as replacement players were branded pariahs by the players' union — people never to be associated with, never to be spoken to; people to be treated with contempt once they made it to the major leagues after the strike was settled. They were insulted and demeaned in their clubhouses; they had to sit alone at the end of the dugout bench; often, their lockers were sabotaged. Some of the insults naturally flared into physical altercations.

And, of course, Congress got into the game. No sooner had the owners begun to hire replacements before spring training in 1995 than congressmen began braying about how greedy they were, and how Congress would have to withdraw the owners' antitrust exemption if they were not able to settle the conflict soon. Half a dozen members of the players' union paraded up to Capitol Hill to testify about how "unfair" the owners were being for locking them out and attempting to bring in replacements. This intensified Congress' interventionist threats, which understandably intimidated the owners. Members of the media jumped in with articles about the owners' stupidity, the ridiculousness of trying to play a full season with nothing but minor-league replacement players, the probability of Americans' abandoning the grand old game if the owners didn't come to their senses pronto, etc., etc.

It didn't take long for the pressure to have its effect. Midway in the strike, the players' lawyers filed unfair labor practice charges with the NLRB, which voted to seek an injunction against the owners. When U.S. District Judge Sonia Sotomayor backed it up, the owners capitulated. They had been fully prepared to go the distance on the strike and play the entire season with replacement players if Congress and the courts had remained neutral. Unfortunately, the process was not allowed to continue under a neutral government.

Now, if the threat of government meddling had been absent, and the owners had continued to buck the strike with replacement players, it is very possible that the members of the players' union would have shown their true colors and indulged in violence on the picket line, instead of insults and ostracism. Unions often refrain from violence only so long as they don't need it. In this case the players didn't need it, because they were able to win through congressional threats and court rulings.

Why should players negotiate a settlement that requires compromises they do not wish to make, when all they need to do is pretend to negotiate, arouse congressional sympathy, let an impasse be declared, then bring in the NLRB and its federal officers, who are almost certain to settle the issue by fiat in favor of the players? This is why owners usually cave in to players' demands. The players bargain from strength because their lawyers know that government is always there to back them up.

This past year the negotiations between owners and players were said to be a "smooth process" leading up to the new basic agreement on Oct. 23, 2006. But the "smoothness" only came about because the owners were forced to cave in during the 1994 strike, when they understood the impossibility of confronting a players' union backed by a labor-friendly NLRB and congressional threats to "force a settlement" once the use of replacements was attempted by the owners. Such backing and threats from government destroyed the owners' only bargaining leverage, which was their ability to use replacements. This time around, the owners decided to take what they could get without any fight, so as not to be pilloried as ogres by the media. They had found the players' union cartel an unbeatable adversary.

The way to solve the problem is obvious: repeal the Norris-LaGuardia Act and the Wagner Act. Government should not be an intervener in these issues at all; it should merely be a neutral umpire to make sure that both sides refrain from physical force. This was supposed to be the American way.

The Beauty of the Reserve Clause

None of this can be rectified, however, until a better understanding is gained of baseball's structure under the reserve clause. The clause developed as a profit maximizer; but it also created stable, workable leagues, playing a game in which the audience could remain interested, because individual teams were able to hold onto good players.

To this end, the reserve clause gave owners the ability to build up and maintain extensive farm systems to develop players. Without such a clause, any player who reached the major leagues could skip out on his team after millions of dollars had been invested in his development over five or six years in the minors. There are, of course, other ways of developing talent. As critics of the reserve clause point out, soccer leagues in England get talent from independent teams. This may be, but it is not the superior talent development that major-league baseball desired. The reserve clause gave owners the ability to develop sophisticated minor-league systems that they owned and regulated according to their philosophy of talent development. This sort of development would be hard to achieve by using independent teams.

The guiding of a rookie baseball player toward the major leagues is a very intricate and intuitive art. Teaching a youth how to throw a slider or a changeup, how to judge the strike zone at the plate, how to read a pitcher in order to steal a base, how to avoid getting a sore arm, how to perform countless training routines that might accelerate his path to the big leagues, how to assure his health by surgically correcting his injuries along the way — these were all things that the team owners and managers wanted to control very strictly. They had an investment in the rookie from the day he emerged from high school, and they could teach him their brand of baseball from that day forward. His development was not to be left up to "independent" teams with less than no stake in his ultimate arrival in the big leagues.

There was certainly nothing un-American about players' contracting to stay with a team. The voluntary relinquishment of certain freedoms is one of the signal characteristics of civilized societies. We relinquish freedom all the time, in countless areas of our lives — when we agree to pay union dues, when we accept company workplace restrictions, when we subordinate ourselves to the bylaws of our church, when we enter into marriage, when, if we are major-league athletes, we agree to stand at the playing of the national anthem. All of life is a process of voluntarily giving up certain freedoms in order to achieve other freedoms or reach other goals. The only requisite is that there be no threat of force or violence restricting our freedom of voluntary, contractual choice.

The players maintain that they only want what is their right in America — free agency. But true free agency would encompass freedom of contract, and it would be totally dependent upon persuasion among parties, not upon the ability of the federal government and the NLRB to dictate terms, void agreements, terminate strikes and lockouts, and so forth. True free agency would mean that both parties have the right to accept or refuse the other's offers.

What this means for major-league baseball is that if the team owners wish, they may require employment of a reserve clause in player contracts, and if they don't like the players' salary demands, they are free to lock the players out and contract with other players. Similarly, if the players don't like the way the American and National Leagues operate, they are free to ignore the owners, to walk out or strike for a change in the rules. They are also free to hook up with another league, or form their own league if the owners are too unyielding. And of course they are always free to look into other occupations if they feel they are being "exploited." There are other industries, other fields, other careers in America. They don't have to endure the pitiful $2 million salaries they receive for playing a boy's game seven months out of the year, then vacationing at Phoenix golf courses and Florida fishing harbors during the winter. No man has to put up with such "exploitation."

None of this should be construed to mean that the major-league owners are angels, or that they are without undeserved advantages in this drama. They are, like all humans, out for the best deal they can get, and are quite capable of exploiting the rules of the system to aid their cause. Their stadiums are paid for by taxpayers, a custom that a truly free market would not allow. The owners also benefit from capital gains; few of their ventures are the losing efforts they publicly claim them to be. They lie about what they earn — and they have to lie, because they are up against a statist, pro-labor mindset in America. Baseball owners are human creatures prone to all the vices and weaknesses of humanity. But the rigged system exacerbates their vices and rewards them.

What's Up With Ownership

Baseball fans, who revel in the great performances of their favorite teams, need to realize that economic ventures of vast scope (which is what baseball teams are) require far more than star employee performances. They require hundreds of millions of dollars of risk capital — to purchase franchises, lease stadiums, maintain personnel, support farm teams, operate scouting networks, run spring training camps, fund travel schedules, and on and on and on.

Baseball is a business subject to the same economic laws as all other businesses. It requires long-range, innovative thinking, acute judgment and instincts, the capacity to make managerial decisions quickly and authoritatively, tremendous self-assurance, leadership, inspirational talent and organizational ability, combined with hefty profit incentives to sustain its operations. Baseball is not only a "team sport"; it is a vast, interlocking organizational venture.

Owners are first of all entrepreneurs. And what interests them — understandably — is not just profits, but big profits. Baseball owners are wise enough to realize that a good deal of their capital gains will be eaten up by inflation. That leaves annual revenues as an important motivating element in their enthusiasm for ownership. If revenues get eaten up by bidding-war salaries, then a great deal of the appeal for team ownership is negated. Owners invest, say, $200 million of their hard earned capital, and they are not interested in making a paltry 4 to 5% annual return on it. They can get that 4 to 5% in quiet, secure Treasury bonds. High-voltage personalities like Steinbrenner of the Yankees, Reinsdorf of the White Sox, and McCourt of the Dodgers came into the game with expectations of action and 20 to 30% yearly returns, as do all talented entrepreneurs who thrive on risk and the challenge of building something from scratch.

When the owners see mere bench warmers receiving $1 million annual raises from outside arbitrators who know nothing about the game, when owners see sore-armed pitchers conspiring with their agents to extract three-year, $30 million contracts (all the while knowing that their arms are shot and only one subpar year is left in them), they see financial disaster lurking ahead. When owners observe average players demanding and getting $50 million for five years, and superstars demanding and getting $150 million for ten years, when they observe mega-million-dollar stars shooting cocaine and steroids (and taking time off, while still being paid, to lounge in rehab), the owners know the system is insane — that they have gone down the rabbit hole and have landed at the Mad Hatter's tea party. (There are insurance policies to indemnify owners against injuries to players, but they are extremely expensive, and they are written with so much wiggle room that it becomes very difficult to collect meaningful amounts of compensation for the majority of injuries. The policies help, but not nearly enough.)

It may be asked, "Why do owners pay all that money if they don't think the players are worth it? The owners should discipline themselves." The problem with such a claim is that "discipline" is futile when labor is allowed to walk out, but management is not allowed to hire replacements. Discipline is meaningless in a bidding war in which one's business existence is dependent upon hiring from a talent pool, the content of which is dictated by the players' union, backed up by Congress and the courts — a talent pool that is not plentiful enough to fill all the owners' rosters with high-caliber players. In such a system, salaries must be bid up. "Discipline" wins an owner last place in the standings and a sparsely-filled stadium the following year. Some of the wiser owners (e.g., Peter O'Malley of Los Angeles and Wayne Huizenga of Florida) saw the writing on the wall and realized that something was sick about the present structure of the game. They opted out of the sickness and sold their teams.

Huizenga might have been a ruthless, uncaring entrepreneur (as some say) because he gutted the Florida Marlins. No doubt he wasn't a high-class guy, but he knew there was something wrong with the sport. Within one year of getting into it, he could see that there were going to be no big profits in Miami, and he resolved to get out unless he could entice the city of Miami to provide him with a stadium that might attain those profits. When he couldn't pull it off, he sold his players and then sold his team.

There's an old adage that says we get the politicians we deserve. In baseball, we get the owners we deserve because of the sick system we have allowed to evolve. We get the Huizengas instead of the O'Malleys. Few would doubt that baseball was better off under the old rules, when it was run by men such as Walter O'Malley of the Dodgers, Phil Wrigley of the Cubs, Larry McPhail of the Reds, Tom Yawkey of the Red Sox, and Horace Stoneham of the Giants.

Commissioner Bud Selig and the team owners understand that the present system of arbitration and "free agency" is a disaster, but they are boxed into the idiocy of it all. They don't realize that the source of their plight lies in the ideological fallacies patched into our political and legal systems over the past 80 years. They only know that they can't make big profits if they don't produce a winning team, and that they can't produce a winning team without the better players. Thus, they are dragged into the annual, lunatic bidding war that the players' coercive cartel of pseudo-free agency has created.

Baseball will, no doubt, survive its present dementia. What kind of game it will become is another question. Our hope should be that the regimenters in Congress and the courts will stay away from it, allowing the contestants of the boardroom and the ball field to work out their differences on their own. Adam Smith would have wanted it that way, and if the issues could be explained properly to them, I'm sure that the great majority of America's baseball fans would too.

© Copyright 2010, Liberty Foundation

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