Jim Hendry Understands Basic Economics

In perusing the interwebs (or as I like to call it, ?The Gore Zone?) the last two days, I have seen some fairly ridiculous comments made concerning Hendry?s most recent two trades. That is, Rich Hill for a PTBNL was the first move, and Michael Wuertz for two Oakland prospects was the second. In general, these moves are being criticized as ?salary dumps.? The problem is defining ?salary dump? in the first place. Generally, I would assert that most baseball fans would describe a ?salary dump? as follows: a move made primarily to decrease salary, such as trading a big salary player (or one who will soon become a big salary player) for prospects. When this is done on a large scale, it is generally part of a rebuilding program. Obviously, this is not what Hendry is doing with the Cubs, as the team is not in a rebuilding mode. When this is done on an individual-by-individual basis, it is generally done to economize, or get the most return for the team payroll. First, I am extremely hesitant to characterize freeing up less than a million as a ?salary dump.? Wuertz was due $1.1 million in 2009, while Richie Robnett and Justin Sellers cannot make more than $800,000.00 combined (although they would make much less in the minors). I cannot confirm Hill?s 2009 salary, but it was $445,000.00 in 2008. Second, getting Rich Hill off the ledger isn?t a ?salary dump;? it is ?refusing to throw away good money after bad.? Third, there really is no reason to retain players that Piniella won?t use in any meaningful way, if at all. Most Cub fans do not seem to understand some of the basic economic principles at work here. First, 140-150 million may make a big enough pile for us all to roll around in, laughing maniacally, but it is still a finite amount. In other words, the $1.1 million due to Wuertz was essentially going to be flushed down the toilet. I am not saying that Wuertz was a complete waste as a pitcher (like Hill), but he was likely going to be wasted by the 2009 Cubs. (Not to be confused with completely wasted pitchers like Gaudin or Doc Ellis.) Second, major league salaries are guaranteed; therefore, they are sunk costs. Someone/ has to pay Hill and Wuertz this year; the only question was, ?who would foot the bill?? In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred. This should not be confused with fixed overhead, or a cost that does not increase with output. For example, an expansion franchise fee is both a sunk cost and a part of the fixed overhead. That is, the fee cannot be recovered or refunded if the new team is not successful, nor does the franchise fee depend on output (i.e. the number of games played). Typically, both variable and fixed overhead costs become sunk costs when they are paid. See http://en.wikipedia.org/wiki/Sunk_cost for more details. In contrast, a variable cost changes in proportion to a change in a company?s activity or sales revenue. For example, we will assume that all MLB teams wash their players? uniforms for them. An industrial washer and dryer represent fixed overhead costs. It doesn?t matter how much they are used, if at all. They simply cost the team X dollars, period. However, the amount of electricity, water, soap, and fabric softener used will vary depending on how many uniforms are washed. The costs of these items will vary depending on the time of the year (zero in the offseason, more in Spring Training, and less in the regular season). For this reason alone, Lenny Dykstra was severely undercompensated, as his lack of personal hygiene saved the Phillies major bucks back in the 1990s. At any rate, I bring all of this to your attention to highlight that while people may question his baseball acumen, Hendry is no dummy. In point of fact, it is obvious to me that he understands economics much better than the typical Cub fan. Let?s look at a concrete example: Nope Angel Guzman is out of options and has too much talent in that right arm for the Cubs to let him walk away for nothing. Cubs have stuck with Guzman for a very long time. by BLou on Feb 2, 2009 1:21 PM CST up reply 0 recs This statement demonstrates that most people simply do not understand how to manage assets and liabilities. Sorry, but MLB is just like any other business in the final analysis. A player under contract is not an interchangeable ?commodity;? he is either an asset or a liability. Let?s break this down logically. 1) ?Angel Guzman is out of options.? This is at least an empirical fact, thank God. Since Guzman is in fact out of options, the Cubs cannot continue to ?store? him at AAA in the hope that he becomes a reliable MLB pitcher in some role. The fact that Guzman has exhausted his options in a futile attempt to make the big club should be telling us something. Based on that information, is it more or less likely that he does not have MLB caliber talent? (Hint: Guzman is 27 years old.) 2) ?[Guzman] has too much talent in that right arm for the Cubs to let him walk away for nothing.? As we saw above, this is a fairly controversial statement. At 27, we should be able to make the determination that Guzman is either an asset or a liability. In my opinion, it is clear that Guzman may have many problems, but ?too much talent in that right arm? isn?t one of them. Obviously, the author of this statement doesn?t understand the concept of opportunity costs and alternatives. If the Cubs were to let Guzman ?walk away,? they would receive the following benefits: Guzman would not be blocking the promotion and development of other players; Guzman would receive $0.00, as opposed to $400,000.00 (2009 MLB minimum salary), and Guzman would not be tying up a spot on the pro roster. More importantly, the author has committed a serious fallacy. The time, money, and effort that the Cubs have expended on Guzman in the past are sunk costs. Nothing the Cubs can do will ever ?recover? that money. Let?s look at a hypothetical. In April of 2009, you purchase a ticket for the last Cubs? home game of the 2009 season. Two days before the game, the records of the Cubs and the visiting team make it clear that both teams will be playing their AAA call-ups and various scrubs. You decide that you have no desire to go to this game. Assuming that you couldn?t scalp the ticket, what should you do? The average person would probably say, ?if I don?t go, then I wasted the $40 I spent on the ticket.? This is a fallacy; the money is long gone. Not only is your time worth something, the alleged ?waste? occurred when the two managers decided to turn a MLB game into a Triple A game. The case with Guzman is even more extreme, because you would be continuing to pound sand down a rat hole (?wasting? further salary on the player). 3) ?Cubs have stuck with Guzman for a very long time.? This is not relevant. For centuries, European physicians practiced bleeding and leechcraft. Obviously, this doesn?t make desanguination a good idea. (For all the traditionalists out there, it isn?t a good idea, just for the record.) The line between ?loyal? and ?deluded? isn?t thin at all. While it may be possible to criticize some of Hendry?s moves in isolation, they aren?t occurring in a vacuum. Thus far, they have all demonstrated a firm understanding of economic decision-making. Furthermore, Hendry has actually improved the team overall. No doubt many alleged Cub fans will continue to bleat idiocies such as ?Fontenot and Gregg are no substitute for DeRosa and Wood.? While this may be strictly true as far as it goes, it ignores the fact that multiple transactions can?t be compartmentalized. That is, there is no question that Bradley/Fontenot/Miles/Gregg > DeRosa/Wood, which is the more accurate comparison.