Entrepreneurship in Baseball

At North Dakota State this semester, I took a course titled “Economics of Entrepreneurship”. It was a deep dive into economic theory with a focus on entrepreneurship. Throughout the course, it surprised me how often I was able to connect anecdotes from sports to the various theories we were learning about. When it came time to write a research paper for the semester, I was able to take an in-depth look at the relation between economic theory and MLB front offices, especially since Billy Beane. Following a few excerpts from what I wrote, I’ll take a look at the Levine-Falvey administration in this context.

“While a firm, all-encompassing theory of the entrepreneur has not yet been properly developed, we have come to understand and agree on at least one thing: Entrepreneurs utilize knowledge or methods that the rest of the industry has not caught on to in order to make a profit for themselves or their firm. In this paper, I will develop an economic system in the terms of Major League Baseball, demonstrate that team general managers are the key agents in this system, and expand on how some of them have been entrepreneurs in their position in order to profit (win games) since the turn of the century.”

“The bottom line is, even though there are next to no league-wide spending restrictions, some owners will set budgets for the general manager that are significantly lower or higher than other teams. The general managers for the highest few have the luxury to simply bid the highest for proven commodity players; general managers on teams that are lower on the payroll ladder need to utilize entrepreneurial creativity. It is very easy to connect the dots from Hayek “Competition as a Discovery Procedure” (2002) to a low budget-constrained general manager. The baseball market is very clearly competitive, and those with the best labor will field a team (product) that out-competes the others. Therefore, when a firm is unable to compete for the “known” best labor, new discoveries must be made to allow them to exploit labor market inefficiencies.”

“the entrepreneur general manager has existed at times in MLB history. However, since the turn of the century, it has almost become a prerequisite that the general manager have entrepreneurial ideas about how to build a team- that is how prevalent it has become. This is the Age of the Entrepreneur GM, and there’s a general format that we can identify by studying these general managers.

First of all, most entrepreneur general managers take over a team that has some issue holding it back from success. The team may be hampered by a low budget constraint- the owner isn’t willing to spend enough money in order to get players who are wanted by teams who are willing to pay more. Another problem may be years upon years of poor player development. The cheapest way to build a profitable team is to develop young players that the team drafts into good, useful resources. If a team has been struggling to develop good players for years, they will always need to be paying for the top-dollar free agents in order to compete. This often requires a full system overhaul. There are some cases where the entrepreneur general manager simply finds a better way to do something, even if the team wasn’t particularly struggling in the first place, but these are the exception to the rule.

The next step is for the general manager to identify or become aware of a market inefficiency. I say “become aware of” because it is often not actually the general manager who initially identifies the market inefficiency, but an advisor. These advisors are often analytics experts, or may have some knowledge of biomechanics that helps them identify how a “resource” could be tweaked to make it more useful. I liken these advisors and the general managers to Steve Wozniak and Steve Jobs- Jobs identified that Wozniak was someone who would be able to help him achieve great things with his engineering prowess. Jobs exhibited entrepreneurial judgment in choosing to work with Wozniak, even if the entrepreneurial discoveries that followed weren’t strictly Jobs’ ideas.

These market inefficiencies are quite often related to performance evaluation. The groupthink of the league will overvalue certain statistics and undervalue others, so a smart general manager can take advantage of this by properly valuing them. Sometimes, teams even find new ways to quantify a part of a player’s performance that was known to have an effect, but could previously not be measured. There still isn’t a statistic that fully and accurately quantifies a player’s defense.

The inefficiencies may also have to do with how the “resources” are employed. General managers may develop theories about strategy or technique that may help a team’s or player’s performance when implemented. Recently, we’ve seen examples of this with the implementation of extreme defensive shifts and the launch angle revolution.

The third and final step is then for the general manager to use their judgment to alter the firm’s infrastructure in order to exploit the identified market inefficiency. First of all, the general manager needs to hire managers and coaches who will buy into any strategy or technique changes that the GM intends to implement. In the case of undervalued players, the GM needs to hire scouts that will be able to identify these “resources”, rather than just stick to what they know. This is often-times a large obstacle to overcome for the entrepreneur general manager, as often-times scouts can be pretty set in their ways and have been with the firm for many years.”

You can find the paper in its entirety here.

Now, how do Derek Falvey and Thad Levine relate to my research?

The interesting part about the Falvey-Levine administration is that they, together, essentially fill the traditional general manager position as a duo. Falvey, the President of Baseball Operations, is technically Levine’s boss, but they work together on player acquisitions and the like. With that established, let’s follow the “Entrepreneurial GM Blueprint” that is laid out above and see if we can fill in the blanks for Falvine.

1- Take Over a Struggling Team

When the front office whiz kids were hired, the Twins had not reached the playoffs since 2010, and had not even sniffed .500 for all but one of those years. A chronic inability to develop impact pitchers had been hampering the team for even longer than that, and a relatively low budget constraint from the “cheap Pohlads” made things even more difficult for the Minnesota front office.

2- Identify a Market Inefficiency

The main market inefficiency that Falvey and Levine identified was a lack of focus on successfully developing players. Rather than this being an outward-facing market inefficiency (such as the famous OBP vs. BA war waged by Billy Beane), this was more of an inefficiency that was taking place inside the organization. Coaches were not always on the same page between each level, and the best coaches possible were not being hired, due to a preference for “organizational familiarity” that the previous front office had shown.

3- Alter the Infrastructure

Throughout the Falvine regime, the Twins have been focused on great coaching. They overhauled the minor league coaching system to focus on new techniques and coordination between levels- this included the unpopular firing of Doug Mientkiewicz. They hired coaches from the college level, which was previously a generally untapped resource for MLB coaches, to bring in new and bright ideas about pitching (Wes Johnson) and catching defense (former minor league catching coordinator Tanner Swanson, who fixed Mitch Garver). Following a two-year grace period, they fired the incumbent manager Paul Molitor to bring in their “own guy”, Rocco Baldelli, who had his own new ideas about the impacts rest and relaxation can have on a team. Last year, we saw the fruits of these labors, as the team took off after the entire coaching change had been completed.

Going forward, the front office needs to stay on the forefront of player development techniques as well as sabermetric research, in order to keep up the advantage they have built on many of the teams of the league. With a young and promising team, an owner who has opened up the pocketbooks a little bit, and an almost unparalleled organizational infrastructure, its easy to see a long future of sustained success.