Comparative Advantage: Red Sox and Yankees

One way to explain this offseason is through the prism of Economics. From this perspective, the decisions taken by Theo and co. make a lot more sense.

A key idea in Economics is comparative advantage. The quick definition of this term is the ability of one individual or group to do something more easily than another. I'll illustrate this with an example.

Let's say that Theo is superb at solving equations, while Brian is the best there is at making hamburgers. In one hour, Theo can do his and Brian's homework, while Brian can make ten hamburgers. If the roles are reversed, Theo makes only two hamburgers,* while Brian can't even finish his own homework, let alone Theo's honors Calculus problems.

The core of comparative advantage is something called opportunity cost. Opportunity cost is basically the cost of missed alternatives. For example, you could have put your $40,000 retirement fund into an interest-paying bank account, rather than into Lehman Brothers stock. Whoops. In our example above, both Theo and Brian benefit most if Theo does the homework and Brian makes lunch.

I know what you're thinking - what does any of this have to do with baseball? Well, teams also have comparative advantages and opportunity costs, and these are especially visible on the free agent market.

The Yankees, for example, have access to the most funds, and can field a team with the highest payroll. Their comparative advantage is the ability to sign the most expensive free agents, like C.C. Sabathia or Mark Teixeira. The inherent risk of signing a guy like Tex (injury, cost) is mitigated by these resources. Having Tex and CC doesn't mean the Yankees won't get Matt Holliday next year.

On the other end of the payroll spectrum, the Florida Marlins had a $22.65 million 2008 payroll. (Let's kindly ignore that last year they received about $25 million in revenue sharing money.) If payroll remained static, the opportunity cost of signing Mark Teixeira would be the inability to field a full roster of players. The Marlins front office necessarily focuses on player development and drafting, since they cannot afford most free agents.

The Red Sox, with a payroll around $70-80 million south of the Yankees, can still make big signings and throw their money around. But when they come into direct competition with the Yankees, they lose.

So what, then, is Boston's comparative advantage? In the past few years, Theo and company have markedly improved the player development system (which wasn't terrible to begin with - Lester and Youkilis were both pre-Theo). In recent years, the system has produced role players like Lowrie and Ellsbury, and impact players like Pedroia and Papelbon. With young and inexpensive players, it is easier to sign new players, and to retain.

The pipeline of minor talent, as well as the base of players still in their prime, allows Boston to take low-rish high-reward chances. Look at this offseason. Rather than break the bank for a marquee free agent, the Sox have made depth signings, grabbing Baldelli, Penny, Smoltz, and (probably) Kotsay. Those signings probably add up to between $13-20 million, depending on performance (the contracts are heavily incentivized). For less than the cost of Mark Teixeira (and no draft picks!), they signed four players to improve the bench and rotation. In other words, the opportunity cost of signing Mark Teixeira is two good bench players and two potentially dominant starters filling out the back of the rotation.

Finally, the Red Sox have enjoyed recent playoff success. They've won two World Series in the six years of Theo's reign, and were a game away from competing in number three. There is little pressure, internal (ownership) or external (i.e. media, fans), to make big moves and try to "win now." The Yankees, by contrast, are under these pressures, largely because they've set the bar higher. Such pressure can lead to moves that may be good in the short-term, but terrible long-term. Signing Tex, while good now, constrains the Yankees' options at 1B long-term; without him, they could have put Jeter, A-Rod, Damon, or Posada there in the near future as their defensive skills declined.

To conclude, Boston's comparative advantage:
- $100 million player development machine. Enough money to sign overslot draftees (ex. Casey Kelly).
- Ability to beat or match non-Yankees teams on free agents. See J.D. Drew, Julio Lugo, Mike Lowell.
- Recent success. It is not necessary to make big, risky moves with potentially bad long-term consequences.
- Ability to make low-risk, high-reward investments without endangering the overall quality of the team. See Ortiz, David (circa 2003) and this offseason's signings.

Because of these qualities, I am confident that the Red Sox are in very good shape going forward. The big weakness of the 2008 Red Sox squad going into the playoffs was their lack of depth. We had the offense, a good top three starters, and a solid closer, but the pen, bench and rotation were both weak. With some luck, we won't have to worry about the 4th starter in the playoffs (it'll be Smoltz or Penny, not Wakefield), or about the quality of our bench players (Kotsay and Baldelli > Cora and Cash).

All that remains is to sign a new catcher. With our added depth in the rotation and pen, I think Justin Masterson may be heading to warmer climates very soon, and Bryan Anderson or Jarrod Saltalamacchia will be putting on a Sox uniform.

*In fairness, those hamburgers are as perfectly symmetrical as balanced quadratic equations. Even if they are badly burnt.

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