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The Economic History of Major League Baseball

Michael J. Haupert, University of Wisconsin — La Crosse

“The reason baseball calls itself a game is because it’s too screwed up to be a business” — Jim Bouton, author and former MLB player

Origins

The origin of modern baseball is usually considered the formal organization of the New York Knickerbocker Base Ball Club in 1842. The rules they played by evolved into the rules of the organized leagues surviving today. In 1845 they organized into a dues paying club in order to rent the Elysian Fields in Hoboken, New Jersey to play their games on a regular basis. Typically these were amateur teams in name, but almost always featured a few players who were covertly paid. The National Association of Base Ball Players was organized in 1858 in recognition of the profit potential of baseball. The first admission fee (50 cents) was charged that year for an All Star game between the Brooklyn and New York clubs. The association formalized playing rules and created an administrative structure. The original association had 22 teams, and was decidedly amateur in theory, if not practice, banning direct financial compensation for players. In reality of course, the ban was freely and wantonly ignored by teams paying players under the table, and players regularly jumping from one club to another for better financial remuneration.

The Demand for Baseball

Before there were professional players, there was a recognition of the willingness of people to pay to see grown men play baseball. The demand for baseball extends beyond the attendance at live games to television, radio and print. As with most other forms of entertainment, the demand ranges from casual interest to a fanatical following. Many tertiary industries have grown around the demand for baseball, and sports in general, including the sports magazine trade, dedicated sports television and radio stations, tour companies specializing in sports trips, and an active memorabilia industry. While not all of this is devoted exclusively to baseball, it is indicative of the passion for sports, including baseball.

A live baseball game is consumed at the same time as the last stage of production of the game. It is like an airline seat or a hotel room, in that it is a highly perishable good that cannot be inventoried. The result is that price discrimination can be employed. Since the earliest days of paid attendance teams have discriminated based on seat location, sex and age of the patron. The first “ladies day,” which offered free admission to any woman accompanied by a man, was offered by the Gotham club in 1883. The tradition would last for nearly a century. Teams have only recently begun to exploit the full potential of price discrimination by varying ticket prices according to the expected quality, date and time of the game.

Baseball and the Media

Telegraph Rights

Baseball and the media have enjoyed a symbiotic relationship since newspapers began regularly covering games in the 1860s. Games in progress were broadcast by telegraph to saloons as early as the 1890s. In 1897 the first sale of broadcast rights took place. Each team received $300 in free telegrams as part of a league-wide contract to transmit game play-by-play over the telegraph wire. In 1913 Western Union paid each team $17,000 per year over five years for the rights to broadcast the games. The movie industry purchased the rights to film and show the highlights of the 1910 World Series for $500. In 1911 the owners managed to increase that rights fee to $3500.

Radio

It is hard to imagine that Major League Baseball (MLB) teams once saw the media as a threat to the value of their franchises. But originally, they resisted putting their games on the radio for fear that customers would stay home and listen to the game for free rather than come to the park. They soon discovered that radio (and eventually television) was a source of income and free advertising, helping to attract even more fans as well as serving as an additional source of revenue. By 2002, media revenue exceeded gate revenue for the average MLB team.

Originally, local radio broadcasts were the only source of media revenue. National radio broadcasts of regular season games were added in 1950 by the Liberty Broadcasting System. The contract lasted only one year however, before radio reverted to local broadcasting. The World Series, however has been nationally broadcast since 1922. For national broadcasts, the league negotiates a contract with a provider and splits the proceeds equally among all the teams. Thus, national radio and television contracts enrich the pot for all teams on an equal basis.

In the early days of radio, teams saw the broadcasting of their games as free publicity, and charged little or nothing for the rights. The Chicago Cubs were the first team to regularly broadcast their home games, giving them away to local radio in 1925. It would be another fourteen years, however, before every team began regular radio broadcasts of their games.

Television

1939 was also the year that the first game was televised on an experimental basis. In 1946 the New York Yankees became the first team with a local television contract when they sold the rights to their games for $75,000. By the end of the century they sold those same rights for $52 million per season. By 1951 the World Series was a television staple, and by 1955 all teams sold at least some of their games to local television. In 1966 MLB followed the lead of the NFL and sold its first national television package, netting $300,000 per team. The latest national television contract paid $24 million to each team in 2002.

Table 1:

MLB Television Revenue, Ticket Prices and Average Player Salary 1964-2002

(real (inflation-adjusted) values are in 2002 dollars)

Year Total TV revenue(millions of $) Average ticket price Average player salary
nominal real nominal real nominal real
1964 $ 21.28 $ 123 $ 2.25 $13.01 $ 14,863.00 $ 85,909
1965 $ 25.67 $ 146 $ 2.29 $13.02 $ 14,341.00 $ 81,565
1966 $ 27.04 $ 149 $ 2.35 $12.95 $ 17,664.00 $ 97,335
1967 $ 28.93 $ 156 $ 2.37 $12.78 $ 19,000.00 $ 102,454
1968 $ 31.04 $ 160 $ 2.44 $12.58 $ 20,632.00 $ 106,351
1969 $ 38.04 $ 186 $ 2.61 $12.76 $ 24,909.00 $ 121,795
1970 $ 38.09 $ 176 $ 2.72 $12.57 $ 29,303.00 $ 135,398
1971 $ 40.70 $ 180 $ 2.91 $12.87 $ 31,543.00 $ 139,502
1972 $ 41.09 $ 176 $ 2.95 $12.64 $ 34,092.00 $ 146,026
1973 $ 42.39 $ 171 $ 2.98 $12.02 $ 36,566.00 $ 147,506
1974 $ 43.25 $ 157 $ 3.10 $11.25 $ 40,839.00 $ 148,248
1975 $ 44.21 $ 147 $ 3.30 $10.97 $ 44,676.00 $ 148,549
1976 $ 50.01 $ 158 $ 3.45 $10.90 $ 52,300.00 $ 165,235
1977 $ 52.21 $ 154 $ 3.69 $10.88 $ 74,000.00 $ 218,272
1978 $ 52.31 $ 144 $ 3.98 $10.96 $ 97,800.00 $ 269,226
1979 $ 54.50 $ 135 $ 4.12 $10.21 $ 121,900.00 $ 301,954
1980 $ 80.00 $ 174 $ 4.45 $9.68 $ 146,500.00 $ 318,638
1981 $ 89.10 $ 176 $ 4.93 $9.74 $ 196,500.00 $ 388,148
1982 $ 117.60 $ 219 $ 5.17 $9.63 $ 245,000.00 $ 456,250
1983 $ 153.70 $ 277 $ 5.69 $10.25 $ 289,000.00 $ 520,839
1984 $ 268.40 $ 464 $ 5.81 $10.04 $ 325,900.00 $ 563,404
1985 $ 280.50 $ 468 $ 6.08 $10.14 $ 368,998.00 $ 615,654
1986 $ 321.60 $ 527 $ 6.21 $10.18 $ 410,517.00 $ 672,707
1987 $ 349.80 $ 553 $ 6.21 $9.82 $ 402,579.00 $ 636,438
1988 $ 364.10 $ 526 $ 6.21 $8.97 $ 430,688.00 $ 622,197
1989 $ 246.50 $ 357 $ 489,539.00 $ 708,988
1990 $ 659.30 $ 907 $ 589,483.00 $ 810,953
1991 $ 664.30 $ 877 $ 8.84 $11.67 $ 845,383.00 $ 1,116,063
1992 $ 363.00 $ 465 $ 9.41 $12.05 $1,012,424.00 $ 1,296,907
1993 $ 618.25 $ 769 $ 9.73 $12.10 $1,062,780.00 $ 1,321,921
1994 $ 716.05 $ 868 $ 10.62 $12.87 $1,154,486.00 $ 1,399,475
1995 $ 516.40 $ 609 $ 10.76 $12.69 $1,094,440.00 $ 1,290,693
1996 $ 706.30 $ 810 $ 11.32 $12.98 $1,101,455.00 $ 1,263,172
1997 $ 12.06 $13.51 $1,314,420.00 $ 1,472,150
1998 $ 13.58 $14.94 $1,378,506.00 $ 1,516,357
1999 $ 14.45 $15.61 $1,726,282.68 $ 1,864,385
2000 $ 16.22 $16.87 $1,987,543.03 $ 2,067,045
2001 $1,291.06 $ 1,310 $ 17.20 $17.45 $2,343,710.00 $ 2,378,093
2002 $ 17.85 $17.85 $2,385,903.07 $ 2,385,903

Notes: 1989 and 1992 national TV data only, no local TV included. Real values are calculated using Consumer Price Index.

As the importance of local media contracts grew, so did the problems associated with them. As cable and pay per view television became more popular, teams found them attractive sources of revenue. A fledgling cable channel could make its reputation by carrying the local ball team. In a large enough market, this could result in substantial payments to the local team. These local contracts did not pay all teams, only the home team. The problem from MLB’s point of view was not the income, but the variance in that income. That variance has increased over time, and is the primary source of the gap in payrolls, which is linked to the gap in quality, which is cited as the “competitive balance problem.” In 1962 the MLB average for local media income was $640,000 ranging from a low of $300,000 (Washington) to a high of $1.2 million (New York Yankees). In 2001, the average team garnered $19 million from local radio and television contracts, but the gap between the bottom and top had widened to an incredible $51.5 million. The Montreal Expos received $536,000 for their local broadcast rights while the New York Yankees received more than $52 million for theirs. Revenue sharing has resulted in a redistribution of some of these funds from the wealthiest to the poorest teams, but the impact of this on the competitive balance problem remains to be seen.

 

Franchise values

Baseball has been about profits since the first admission fee was charged. The first professional league, the National Association, founded in 1871, charged a $10 franchise fee. The latest teams to join MLB, paid $130 million apiece for the privilege in 1998.

Early Ownership Patterns

The value of franchises has mushroomed over time. In the early part of the twentieth century, owning a baseball team was a career choice for a wealthy sportsman. In some instances, it was a natural choice for someone with a financial interest in a related business, such as a brewery, that provided complementary goods. More commonly, the operation of a baseball team was a full time occupation of the owner, who was usually one individual, occasionally a partnership, but never a corporation.

Corporate Ownership

This model of ownership has since changed. The typical owner of a baseball team is now either a conglomerate, such as Disney, AOL Time Warner, the Chicago Tribune Company, or a wealthy individual who owns a (sometimes) related business, and operates the baseball team on the side – perhaps as a hobby, or as a complementary business. This transition began to occur when the tax benefits of owning a baseball team became significant enough that they were worth more to a wealthy conglomerate than a family owner. A baseball team that can show a negative bottom line while delivering a positive cash flow can provide significant tax benefits by offsetting income from another business. Another advantage of corporate ownership is the ability to cross-market products. For example, the Tribune Company owns the Chicago Cubs, and is able to use the team as part of its television programming. If it is more profitable for the company to show income on the Tribune ledger than the Cubs ledger, then it decreases the payment made to the team for the broadcast rights to its games. If a team owner does not have another source of income, then the ability to show a loss on a baseball team does not provide a tax break on other income. One important source of the tax advantage of owning a franchise comes from the ability to depreciate player salaries. In 1935 the IRS ruled that baseball teams could depreciate the value of their player contracts. This is an anomaly since labor is not a depreciating asset.

Table 2: Comparative Prices for MLB Salaries, Tickets and Franchise Values for Selected Years

Nominal values
year Salary ($000) Average ticketprice Average franchisevalue ($millions$)
minimum mean maximum
1920 5 20 1.00 0.794
1946 11.3 18.5 1.40 2.5
1950 13.3 45 1.54 2.54
1960 3 16 85 1.96 5.58
1970 12 29.3 78 2.72 10.13
1980 30 143.8 1300 4.45 32.1
1985 60 371.2 2130 6.08 40
1991 100 851.5 3200 8.84 110
1994 109 1153 5975 10.62 111
1997 150 1370 10,800 12.06 194
2001 200 2261 22,000 18.42 286
Real values (2002 dollars)
year Salary ($000) Average ticketprice Average franchisevalue ($millions)
minimum mean maximum
1920 44.85 179.4 8.97 7.12218
1946 104.299 170.755 12.922 23.075
1950 99.351 336.15 11.5038 18.9738
1960 18.24 97.28 516.8 11.9168 33.9264
1970 55.44 135.366 360.36 12.5664 46.8006
1980 65.4 313.484 2834 9.701 69.978
1985 100.2 619.904 3557.1 10.1536 66.8
1991 132 1123.98 4224 11.6688 145.2
1994 131.89 1395.13 7229.75 12.8502 134.31
1997 168 1534.4 12096 13.5072 217.28
2001 202 2283.61 22220 18.6042 288.86

The most significant change in the value of franchises has occurred in the last decade as a function of new stadium construction. The construction of a new stadium creates additional sources of revenue for a team owner, which impacts the value of the franchise. It is the increase in the value of franchises which is the most profitable part of ownership. Eight new stadiums were constructed between 1991 and 1999 for existing MLB teams. The average franchise value for the teams in those stadiums increased twenty percent the year the new stadium opened.

 

The Market Structure of MLB and Players’ Organizations

Major League Baseball is a highly successful oligopoly of professional baseball teams. The teams have successfully protected themselves against competition from other leagues for more than 125 years. The closest call came when two rival leagues, the established National League, and a former minor league, the Western League, renamed the American League in 1900, merged in 1903 to form the structure that exists to this day. The league lost some of its power in 1976 when it lost its monopsonistic control over the player labor market, but it retains its monopolistic hold on the number and location of franchises. Now the franchise owners must share a greater percentage of their revenue with the hired help, whereas prior to 1976 they controlled how much of the revenue to divert to the players.

The owners of professional baseball teams have acted in unison since the very beginning. They conspired to hold down the salaries of players with a secret reserve agreement in 1878. This created a monopsony whereby a player could only bargain with the team that originally signed him. This stranglehold on the labor market would last a century.

The baseball labor market is one of extremes. Baseball players began their labor history as amateurs whose skills quickly became highly demanded. For some, this translated into a career. Ultimately, all players became victims of a well-organized and obstinate cartel. Players lost their ability to bargain and offer their services competitively for a century. Despite several attempts to organize and a few attempts to create additional demand for their services from outside sources, they failed to win the right to sell their labor to the employer of their choice.

Beginning of Professionalization

The first team of baseball players to be openly paid was the 1869 Redstockings of Cincinnati. Prior to that, teams were organized as amateur squads who played for the pride of their hometown, club or college. The stakes in these games were bragging rights, often a trophy or loving cup, and occasionally a cash prize put up by a benefactor, or as a wager between the teams. It was inevitable that professional players would soon follow.

The first known professional players were paid under the table. The desire to win had eclipsed the desire to observe good sportsmanship, and the first step down the slope toward full professionalization of the sport had been taken. Just a few years later, in 1869, the first professional team was established. The Redstockings are as famous for being the first professional team as they are for their record and barnstorming accomplishments. The team was openly professional, and thus served as a worthy goal for other teams, amateur, semi-professional, and professional alike. The Cincinnati squad spent the next year barnstorming across America, taking on, and defeating, all challengers. In the process they drew attention to the game of baseball, and played a key part in its growing popularity. Just two years later, the first entirely professional baseball league would be established.

National Association of Professional Baseball Players

The formation of the National Association of Professional Base Ball Players in 1871 created a different level of competition for baseball players. The professional organization, which originally included nine teams, broke away from the National Association of Base Ball Players, which used amateur players. The amateur league folded three years after the split. The league was reorganized and renamed the National League in 1876. Originally, professional teams competed to sign players, and the best were rewarded handsomely, earning as much as $4500 per season. This was good money, given that a skilled laborer might earn $1200-$1500 per year for a 60 hour work week.

This system, however, proved to be problematic. Teams competed so fiercely for players that they regularly raided each other’s rosters. It was not uncommon for players to jump from one team to another during the season for a pay increase. This not only cost team owners money, but also created havoc with the integrity of the game, as players moved among teams, causing dramatic mid-season swings in the quality of teams.

Beginning of the Reserve Clause, 1878-79

During the winter of 1878-79, team owners gathered to discuss the problem of player roster jumping. They made a secret agreement among themselves not to raid one another’s rosters during the season. Furthermore, they agreed to restrain themselves during the off-season as well. Each owner would circulate to the other owners a list of five players he intended to keep on his roster the following season. By agreement, none of the owners would offer a contract to any of these “reserved” players. Hence, the reserve clause was born. It would take nearly a century before this was struck down. In the meantime, it went from five players (about half the team) to the entire team (1883) and to a formal contract clause (1887) agreed to by the players. Owners would ultimately make such a convincing case for the necessity of the reserve clause, that players themselves testified to its necessity in the Celler Anti-monopoly Hearings in 1951.

In 1892 the minor league teams agreed to a system that allowed the National League teams to draft players from their teams. This agreement was in response to their failure to get the NL to honor their reserve clause. In other words, what was good for the goose, was not good for the gander. While NL owners agreed to honor their reserve lists among one another, they paid no such honor to the reserve lists of teams in other organized, professional leagues. They believed they were at the top of the pyramid, where all the best players should be, and therefore they would get those players when they wanted them. As part of the draft agreement, the minor league teams allowed the NL teams to select players from their roster for fixed payments. The NL sacrificed some money, but restored a bit of order to the process, not to mention eliminated expensive bidding wars among teams for the services of players from the minor league teams.

The Players League

The first revolt by the players came in 1890, when they formed their own league, called the Players League, to compete with the National League and its rival, the American Association (AA), founded in 1882. The Players League was the first and only example of a cooperative league. The league featured profit sharing with players, an abolition of unilateral contract transfers, and no reserve clause. The competing league caused a bidding war for talent, leading to salary increases for the best players. The “war” ended after just one season, when the National League and American Association agreed to allow owners of some Players League teams to buy existing franchises. The following year, the NL and AA merged by buying out four AA franchises for $130,000 and merging the other four into the National League, to form a single twelve-team circuit.

Syndicates

This proved to be an unwieldy league arrangement however, and some of the franchises proved financially unstable. In order to preserve the structure of the league and avoid bankruptcy of some teams, syndicate ownership evolved, in which owners purchased a controlling interest in two teams. This did not help the stability of the league. Instead, it became a situation in which the syndicates used one team to train young players and feed the best of them to the other team. This period in league history exhibits some of the greatest examples of disparity between the best and worst teams in the league. In 1899 the Cleveland Spiders, the poor stepsister in the Cleveland-St. Louis syndicate, would lose a record 134 out of 154 games, a level of futility that has never been equaled. In 1900 the NL reduced to eight teams, buying out four of the existing franchises (three of the original AA franchises) for $60,000.

Western League Competes with National League

Syndicate ownership was ended in 1900 as the final part of the reorganization of the NL. It also sparked the minor Western League to declare major league status, and move some teams into NL markets for direct competition (Chicago, Boston, St. Louis, Philadelphia and Manhattan). All out competition followed in 1901, complete with roster raiding, salary increases, and team jumping, much to the benefit of the players. Syndicate ownership appeared again in 1902 when the owners of the Pittsburgh franchise purchased an interest in the Philadelphia club. Owners briefly entertained the idea of turning the entire league into a syndicate, transferring players to the market where they might be most valuable. The idea was dropped, however, for fear that the game would lose credibility and result in a decrease in attendance. In 1910 syndicate ownership was formally banned, though it did occur again in 2002, when the Montreal franchise was purchased by the other 29 MLB franchises as part of a three way franchise swap involving Boston, Miami and Montreal. MLB is currently looking to sell the franchise and move it to a more profitable market.

National and American Leagues End Competition

Team owners quickly saw the light, and in 1903 they made an agreement to honor one another’s rosters. Once more the labor wars were ended, this time in an agreement that would establish the major leagues as an organization of two cooperating leagues: the National League and the American League, each with eight teams, located in the largest cities east of the Mississippi (with the exception of St. Louis), and each league honoring the reserved rosters of teams in the other. This structure would prove remarkably stable, with no changes until 1953 when the Boston Braves became the first team to relocate in half a century when they moved to Milwaukee.

Franchise Numbers and Movements

The location and number of franchises has been a tightly controlled issue for teams since leagues were first organized. Though franchise movements were not rare in the early days of the league, they have always been under the control of the league, not the individual franchise owners. An owner is accepted into the league, but may not change the location of his or her franchise without the approval of the other members of the league. In addition, moving the location of a franchise within the vicinity of another franchise requires the permission of the affected franchise. As a result, MLB franchises have been very stable over time in regard to location. The size of the league has also been stable. From the merger of the AL and NL in 1903 until 1961, the league retained the same sixteen teams. Since that time, expansion has occurred fairly regularly, increasing to its present size of 30 teams with the latest round of expansion in 1998. In 2001, the league proposed going in the other direction, suggesting that it would contract by two teams in response to an alleged fiscal crisis and breakdown in competitive balance. Those plans were postponed at least four years by the labor agreement signed in 2002.

Table 3: MLB Franchise Sales Data by Decade

Decade Average purchase price in millions (2002 dollars) Average annual rate of increase in franchise sales price Average annual rate of return on DJIA (includes capital appreciation and annual dividends) Average tenure of ownership of MLB franchisein years Number of franchise sales
1910s .585(10.35) 6 6
1920s 1.02(10.4) 5.7 14.8 12 9
1930s .673(8.82) -4.1 - 0.3 19.5 4
1940s 1.56(15.6) 8.8 10.8 15.5 11
1950s 3.52(23.65) 8.5 16.7 13.5 10
1960s 7.64(43.45) 8.1 7.4 16 10
1970s 12.62(41.96) 5.1 7.7 10 9
1980s 40.7(67.96) 12.4 14.0 11 12
1990s 172.71(203.68) 15.6 12.6 15.8 14

Note: 2002 values calculated using the Consumer Price Index for decade midpoint

Negro Leagues

Separate professional leagues for African Americans existed, since they were excluded from participating in MLB until 1947 when Jackie Robinson broke the color barrier. The first was formed in 1920, and the last survived until 1960, though their future was doomed by the integration of the major and minor leagues.

Relocations

As revenues dried up or new markets beckoned due to shifts in population and the decreasing cost of trans-continental transportation, franchises began relocating in the second half of the twentieth century. The period from 1953-1972 saw a spate of franchise relocation: teams moved to Kansas City, Minneapolis, Baltimore, Los Angeles, Oakland, Dallas and San Francisco in pursuit of new markets. Most of these moves involved one team moving out of a market it shared with another team. The last team to relocate was the Washington D.C. franchise, which moved to suburban Dallas in 1972. It was the second time in just over a decade that a franchise had moved from the nation’s capitol. The original franchise, a charter member of the American League, had moved to Minneapolis in 1961. While there have been no relocations since then, there have been plenty of examples of threats to relocate. The threat to relocate has frequently been used by a team trying to get a new stadium built with public financing.

There were still a couple of challenges to the reserve clause. Until the 1960s, these came in the form of rival leagues creating competition for players, not a challenge to the legality of the reserve clause.

Federal League and the 1922 Supreme Court Antitrust Exemption

In 1914 the Federal League debuted. The new league did not recognize the reserve clause of the existing leagues, and raided their rosters, successfully luring some of the best players to the rival league with huge salary increases. Other players benefited from the new competition, and were able to win handsome raises from their NL and AL employers in return for not jumping leagues. The Federal League folded after two seasons when some of the franchise owners were granted access to the major leagues. No new teams were added, but a few owners were allowed to purchase existing NL and AL teams.

The first attack on the organizational structure of the major leagues to reach the US Supreme Court occurred when the shunned owner of the Baltimore club of the Federal League sued major league baseball for violation of antitrust law. Federal Baseball Club of Baltimore v the National League eventually reached the Supreme Court, where in 1922 the famous decision that baseball was not interstate commerce, and therefore was exempt from antitrust laws was rendered.

Early Strike and Labor Relations Problems

The first player strike actually occurred in 1912. The Detroit Tigers, in a show of unison for their embattled star Ty Cobb, refused to play in protest of what they regarded as an unfair suspension of Cobb, refusing to take the field unless the suspension was lifted. When warned that the team faced the prospect of a forfeit and a $5000 fine if they did not field a team, owner Frank Navin recruited local amateur players to suit up for the Tigers. The results were not surprising: a 24-2 victory for the visiting Philadelphia Athletics.

This was not an organized strike against the system per se, but it was indicative of the problems existent in the labor relations between players and owners. Cobb’s suspension was determined by the owner of the team, with no chance for a hearing for Cobb, and with no guidance from any existing labor agreement regarding suspensions. The owner was in total control, and could mete out whatever punishment for whatever length he deemed appropriate.

Mexican League

The next competing league appeared in 1946 from an unusual source: Mexico. Again, as in previous league wars, the competition benefited the players. In this case the players who benefited most were those players who were able to use Mexican League offers as leverage to gain better contracts from their major league teams. Those players who accepted offers from Mexican League teams would ultimately regret it. The league was under-financed, the playing and travel conditions far below major league standards, and the wrath of the major leagues deep. When the first paychecks were missed, the players began to head back to the U.S. However, they found no jobs waiting for them. Major League Baseball Commissioner Happy Chandler blacklisted them from the league. This led to a lawsuit, Gardella v MLB. The case was eventually settled out of court after a Federal Appeals court sided with Danny Gardella in 1949. Gardella was one of the blacklisted players who sued MLB for restraint of trade after being prevented from returning to the league after accepting a Mexican League offer for the 1946 season. While many of the players ultimately returned to the major leagues, they lost several years of their careers in the process.

Player Organizations

The first organization of baseball players came in 1885, in part a response to the reserve clause enacted by owners. The National Brotherhood of Professional Base Ball Players was not particularly successful however. In fact, just two years later, the players agreed to the reserve clause, and it became a part of the standard players contract for the next 90 years.

In 1900 another player organization was founded, the Players Protective Association. Competition broke out the next year, when the Western League declared itself a major league, and became the American League. It would merge with the National League for the 1903 season, and the brief period of roster raiding and increasing player salaries ended, as both leagues agreed to recognize one another’s rosters and reserve clauses. The Players Protective Association faded into obscurity amid the brief period of increased competition and player salaries.

Failure and Consequences of the American Baseball Guild

In 1946 the foundation was laid for the current Major League Baseball Player’s Association (MLBPA). Labor lawyer Robert Murphy created the American Baseball Guild, a player’s organization, after holding secret talks with players. Ultimately, the players voted not to form a union, and instead followed the encouragement of the owners, and formed their own committee of player representatives to bargain directly with the owners. The outcome of the negotiations was changes in the standard labor contract. Up to this point, the contract had been pretty much dictated by the owners. It contained such features as the right to waive a player with only ten days notice, the right to unilaterally decrease salary from one year to the next by any amount, and of course the reserve clause.

The players did not make major headway with the owners, but they did garner some concessions. Among them were a maximum pay cut of 25%, a minimum salary of $5000, a promise by the owners to create a pension plan, and $25 per week in living expenses for spring training camp. Until 1947, players received only expense money for spring training, no salary. The players today, despite their multimillion-dollar contracts, still receive “Murphy money” for spring training as well as a meal allowance for each day they are on the road traveling with the club.

Facing eight antitrust lawsuits in 1950, MLB requested Congress to pass a general immunity bill for all professional sports leagues. The request ultimately led to MLB’s inclusion in the Celler Anti-monopoly hearings in 1951. However, no legislative action was recommended. In fact, the owners by this time had so thoroughly convinced the players of the necessity of the reserve clause to the very survival of MLB that several players testified in favor of the monopsonistic structure of the league. They cited it as necessary to maintain the competitive balance among the teams that made the league viable. In 1957 the House Antitrust Subcommittee revisited the issue, once again recommending no change in the status quo.

Impacts of the Reserve Clause

Simon Rottenberg was the first economist to seriously look into professional baseball with the publication of his classic 1956 article “The Baseball Players’ Labor Market.” His conclusion, not surprisingly, was that the reserve clause transferred wealth from the players to owners, but had only a marginal impact on where the best players ended up. They would end up playing for the teams in the market in the best position to exploit their talents for the benefit of paying customers – in other words, the biggest markets: primarily New York. Given the quality of the New York teams (one in Manhattan, one in the Bronx and one in Brooklyn) during the era of Rottenberg’s study, his conclusion seems rather obvious. During the decade preceding his study, the three New York teams consistently performed better than their rivals. The New York Yankees won eight of ten American League pennants, and the two National League New York entries won eight of ten NL pennants (six for the Brooklyn Dodgers, two for the New York Giants).

Foundation of the Major League Baseball Players Association

The current players organization, the Major League Baseball Players Association, was formed in 1954. It remained in the background, however, until the players hired Marvin Miller in 1966 to head the organization. Hiring Miller, a former negotiator for the U.S. steel workers, would turn out to be a stroke of genius. Miller began with a series of small gains for players, including increases in the minimum salary, pension contributions by owners and limits to the maximum salary reduction owners could impose. The first test of the big item – the reserve clause – reached the Supreme Court in 1972.

Free Agency, Arbitration and the Reserve Clause

Curt Flood

Curt Flood, a star player for the St. Louis Cardinals, had been traded to the Philadelphia Phillies in 1970. Flood did not want to move from St. Louis, and informed both teams and the commissioner’s office that he did not intend to leave. He would play out his contract in St. Louis. Commissioner Bowie Kuhn ruled that Flood had no right to act in this way, and ordered him to play for Philadelphia, or not play at all. Flood chose the latter and sued MLB for violation of antitrust laws. The case reached the Supreme Court in 1972, and the court sided with MLB in Flood v. Kuhn. The court acknowledged that the 1922 ruling that MLB was exempt from antitrust law was an anomaly and should be overturned, but it refused to overturn the decision itself, arguing instead that if Congress wanted to rectify this anomaly, they should do so. Therefore the court stood pat, and the owners felt the case was settled permanently: the reserve clause had once again withstood legal challenge. They could not, however, have been more badly mistaken. While the reserve clause never has been overturned in a court of law, it would soon be drastically altered at the bargaining table, and ultimately lead to a revolution in the way baseball talent is dispersed and revenues are shared in the professional sports industry.

Curt Flood lost the legal battle, but the players ultimately won the war, and are no longer restrained by the reserve clause beyond the first two years of their major league contract. In a series of labor market victories beginning in the wake of the Flood decision in 1972 and continuing through the rest of the century, the players won the right to free agency (i.e. to bargain with any team for their services) after six years of service, escalating pension contributions, salary arbitration (after two to three seasons, depending on their service time), individual contract negotiations with agent representatives, hearing committees for disciplinary actions, reductions in maximum salary cuts, increases in travel money and improved travel conditions, the right to have disputes between players and owners settled by an independent arbitrator, and a limit to the number of times their contract could be assigned to a minor league team. Of course the biggest victory was free agency.

Impact of Free Agency – Salary Gains

The right to bargain with other teams for their services changed the landscape of the industry dramatically. No longer were players shackled to one team forever, subject to the whims of the owner for their salary and status. Now they were free to bargain with any and all teams. The impact on salaries was incredible. The average salary skyrocketed from $45,000 in 1975 to $289,000 in 1983.

Table 4: Maximum and Average MLB Player Salaries by Decade

(real values in 2002 dollars)

Period Highest Salary Year Player Team Average Salary Notes
Nominal Real Nominal Real
1800s $ 12,500.00
$ 246,250.00
1892 King Kelly Boston NL $ 3,054
$ 60,163.80
22 observations
1900s $ 10,000.00
$ 190,000.00
1907 Honus Wagner Pittsburgh Pirates $ 6,523
$ 123,937.00
13 observations
1910s $ 20,000.00
$ 360,000.00
1913 Frank Chance New York Yankees $ 2,307
$ 41,526.00
339 observations
1920s $ 80,000.00
$ 717,600.00
1927 Ty Cobb Philadelphia Athletics $ 6,992
$ 72,017.60
340 observations
1930s $ 84,098.33 $899,852 1930 Babe Ruth New York Yankees $ 7,748
$ 82,903.60
210 observations
1940s $ 100,000.00 $755,000 1949 Joe DiMaggio New York Yankees $ 11,197
$ 84,537.35
Average salary calculated using 1949 and 1943 seasons plus 139 additional observations.
1950s $ 125,000.00 $772,500 1959 Ted Williams Boston Red Sox $ 12,340
$ 76,261.20
Average salary estimate based on average of 1949 and 1964 salaries.
1960s $ 111,000.00
$572,164.95
1968 Curt Flood St. Louis Cardinals $ 18,568
$95,711.34
624 observations
1970s $ 561,500.00
$1,656,215.28
1977 Mike Schmidt Philadelphia Phillies $ 55,802
$164,595.06
2208 observations
1980s $ 2,766,666.00
$4,006,895.59
1989 Orel Hershiser, Frank Viola Dodgers, Twins $ 333,686
$483,269.38
approx 6500 observations
1990s $11,949,794.00
$ 12,905,777.52
1999 Albert Belle Baltimore Orioles $1,160,548
$ 1,253,391.84
approx 7000 observations
2000s $22,000,000.00
$22,322,742.55
2001 Alex Rodriguez Texas Rangers $2,165,627
$2,197,397.00
2250 observations

Real values based on 2002 Consumer Price Index.

Over the long haul, the changes have been even more dramatic. The average salary increased from $45,000 in 1975 to $2.4 million in 2002, while the minimum salary increased from $6000 to $200,000 and the highest paid player increased from $240,000 to $22 million. This is a 5200% increase in the average salary. Of course, not all of that increase is due to free agency. Revenues increased during this period by nearly 1800% from an average of $6.4 million to $119 million, primarily due to the 2800% increase in television revenue over the same period. Ticket prices increased by 439% while attendance doubled (the number of MLB teams increased from 24 to 30).

Strikes and Lockouts

Miller organized the players and unified them as no one had done before. The first test of their resolve came in 1972, when the owners refused to bargain on pension and salary issues. The players responded by going out on the first league-wide strike in American professional sports history. The strike began during spring training, and carried on into the season. The owners finally conceded in early April after nearly 100 games were lost to the strike. The labor stoppage became the favorite weapon of the players, who would employ it again in 1981, 1985, and 1994. The latter strike cancelled the World Series for the first time since 1904, and carried on into the 1995 season. The owners preempted strikes in two other labor disputes, locking out the players in 1976 and 1989. After each work stoppage, the players won the concessions they demanded and fended off attempts by owners to reverse previous player gains, particularly in the areas of free agency and arbitration. From the first strike in 1972 through 1994, every time the labor agreement between the two sides expired, a work stoppage ensued. In August of 2002 that pattern was broken when the two sides agreed to a new labor contract for the first time without a work stoppage.

Catfish Hunter

The first player to become a free agent did so due to a technicality. In 1974 Catfish Hunter, a pitcher for the Oakland Athletics, negotiated a contract with the owner, Charles Finley, which required Finley to make a payment into a trust fund for Hunter on a certain date. When Finley missed the date, and then tried to pay Hunter directly instead of honoring the clause, Hunter and Miller filed a complaint charging the contract should be null and void because Finley had broken it. The case went to an arbitrator who sided with Hunter and voided the contract, making Hunter a free agent. In a bidding frenzy, Hunter ultimately signed what was then a record contract with the New York Yankees. It set precedents for both its length – five years guaranteed, and its annual salary of $750,000. Prior to the dawning of free agency, it was a rare circumstance for a player to get anything more than a one-year contract, and a guaranteed contract was virtually unheard of. If a player was injured or fell off in performance, an owner would slash his salary or release him and vacate the remainder of his contract.

The End of the Reserve Clause – Messersmith and McNally

The first real test of the reserve clause came in 1975, when, on the advice of Miller, Andy Messersmith played the season without signing a contract. Dave McNally also refused to sign a contract, though he had unofficially retired at the time. Up to this time, the reserve clause meant that a team could renew a player’s contract at their discretion. The only changes in this clause that occurred since 1879 were the maximum amount by which the owner could reduce the player’s salary. In order to test the clause, which allowed teams to maintain contractual rights to players in perpetuity, Messersmith and McNally refused to sign contracts. Their teams automatically renewed their contracts from the previous season, per the reserve clause. The argument the players put forth was that if no contract was signed, then there was no reserve clause. They argued that Messersmith and McNally would be free to negotiate with any team at the end of the season. The reserve clause was struck down by arbitrator Peter Seitz on Dec. 23, 1975, clearing the way for players to become free agents and sell their services to the highest bidder. Messersmith and McNally became the first players to challenge and successfully escape the reserve clause. The baseball labor market changed permanently and dramatically in favor of the players, and has never turned back.

Current Labor Arrangements

The baseball labor market as it exists today is a result of bargaining between owners and players. Owners ultimately conceded the reserve clause and negotiated a short period of exclusivity for a team with a player. The argument they put forward was that the cost of developing players was so high, they needed a window of time when they could recoup those investments. The existing situation allows them six years. A player is bound to his original team for the first six years of his MLB contract, after which he can become a free agent – though some players bargain away that right by signing long-term contracts before the end of their sixth year.

During that six-year period however, players are not bound to the salary whims of the owners. The minimum salary will rise to $300,000 in 2003, there is a 10% maximum salary cut from one year to the next, and after two seasons players are eligible to have their contract decided by an independent arbitrator if they cannot come to an agreement with the team.

Arbitration

After their successful strike in 1972, the players had increased their bargaining position substantially. The next year they claimed a major victory when the owners agreed to a system of salary arbitration for players who did not yet qualify for free agency. Arbitration was won by the players at in 1973, and has since proved to be one of the costliest concessions the owners ever made. Arbitration requires each side to submit a final offer to an arbitrator, who must then choose one or the other offer. The arbitrator may not compromise on the offers, but must choose one. Once chosen, both sides are then obligated to accept that contract.

Once eligible for arbitration, a player, while not a free agent, does stand to reap a financial windfall. If a player and owner (realistically, a player’s agent and the owner’s agent – the general manager) cannot agree on a contract, either side may file for arbitration. If the other does not agree to go to arbitration, then the player becomes a free agent, and may bargain with any team. If arbitration is accepted, then both sides are bound to accept the contract awarded by the arbitrator. In practice, most of the contracts are settled before they reach the arbitrator. A player will file for arbitration, both sides will submit their final contract offers to the arbitrator, and then will usually settle somewhere in between the final offers. If they do not settle, then the arbitrator must hear the case and make a decision. Both sides will argue their point, which essentially boils down to comparing the player to other players in the league and their salaries. The arbitrator then decides which of the two final offers is closer to the market value for that player, and picks that one.

Collusion under Ueberroth

The owners, used to nearly a century of one-sided labor negotiations, quickly grew tired of the new economics of the player labor markets. They went through a series of labor negotiators, each one faring as poorly as the next, until they hit upon a different solution. Beginning in 1986, under the guidance of commissioner Peter Ueberroth, they tried collusion to stem the increase in player salaries. Teams agreed not to bid on one another’s free agents. The strategy worked, for awhile. During the next two seasons, player salaries grew at lower rates and high profile free agents routinely had difficulty finding anybody interested in their services. The players filed a complaint, charging the owners with a violation of the labor agreement signed by owners and players in 1981, which prohibited collusive action. They filed separate collusion charges for each of the three seasons from 1985-87, and won each time. The ruling resulted in the voiding of the final years of some players contracts, thus awarding them “second look” free agency status, and levied fines in excess of $280 million dollars on the owners. The result was a return to unfettered free agency for the players, a massive financial windfall for the impacted players, a black eye for the owners, and the end of the line for Commissioner Ueberroth.

Table 5:

Average MLB Payroll as a Percentage of Total Team Revenues for Selected Years

Year Percentage
1929 35.3
1933 35.9
1939 32.4
1943 24.8
1946 22.1
1950 17.6
1974 20.5
1977 25.1
1980 39.1
1985 39.7
1988 34.2
1989 31.6
1990 33.4
1991 42.9
1992 50.7
1994 60.5
1997 53.6
2001 54.1

Exploitation Patterns

Economist Andrew Zimbalist calculated the degree of market exploitation for baseball players for the years 1986-89, a decade after free agency began, and during the years of collusion, using a measure of the marginal revenue product of players. The marginal revenue product of a player is a measure of the additional revenue a team receives due to the addition of that player to the team. This is done by calculating the impact of the player on the performance of the team, and the subsequent impact of team performance on total revenue. He found that on average, the degree of exploitation, as measured by the ratio of marginal revenue product to salary, declined each year, from 1.32 in 1986 to 1.01 in 1989. The degree of exploitation, however, was not uniform across players. Not surprisingly, it decreased as players obtained the leverage to bargain. The degree of exploitation was highest for players in their first two years, before they were arbitration eligible, fell for players in the 2-5 year category, between arbitration and free agency, and disappeared altogether for players with six or more years of experience. In fact, for all four years, Zimbalist found that this group of players was overpaid with an average MRP of less than 75% of salary in 1989. No similar study has been done for players before free agency, in part due to the paucity of salary data before this time.

Negotiations under the Reserve Clause

Player contracts have changed dramatically since free agency. Players used to be subject to whatever salary the owner offered. The only recourse for a player was to hold out for a better salary. This strategy seldom worked, because the owner had great influence on the media, and usually was able to turn the public against the player, adding another source of pressure on the player to sign for the terms offered by the team. The pressure of no payday – a payday that, while less than the player’s MRP, still exceeded his opportunity cost by a fair amount, was usually sufficient to minimize the length of most holdouts. The owner influenced the media because the sports reporters were actually paid by the teams in cash or in kind, traveled with them, and enjoyed a relatively luxurious lifestyle for their chosen occupation. A lifestyle that could be halted by edict of the team at any time. The team controlled media passes and access and therefore had nearly total control of who covered the team. It was a comfortable lifestyle for a reporter, and spreading owner propaganda on occasion was seldom seen as an unacceptable price to pay.

Recent Concerns

The major labor issue in the game has shifted from player exploitation, the cry until free agency was granted, to competitive imbalance. Today, critics of the salary structure point to its impact on the competitive balance of the league as a way of criticizing the rising payrolls. Many fans of the game openly pine for a return for “the good old days,” when players played for the love of the game. It should be recognized however, that the game has always been a business. All that has changed has been the amount of money at stake and how it is divided among the employers and their employees.

Suggested Readings

A Club Owner. “The Baseball Trust.” Literary Digest, December 7, 1912.

Burk, Robert F. Much More Than a Game: Players, Owners, and American Baseball since 1921. Chapel Hill: University of North Carolina Press, 2001.

Burk, Robert F. Never Just a Game: Players, Owners, and American Baseball to 1920. Chapel Hill: University of North Carolina Press, 1994.

Dworkin, James B. Owners versus Players: Baseball and Collective Bargaining. Dover, MA: Auburn House, 1981.

Haupert, Michael, baseball financial database.

Haupert, Michael and Ken Winter. “Pay Ball: Estimating the Profitability of the New York Yankees 1915-37.” Essays in Economic and Business History 21 (2002).

Helyar, John. Lords of the Realm: The Real History of Baseball. New York: Villard Books, 1994.

Korr, Charles. The End of Baseball as We Knew It: The Players Union, 1960-1981. Champagne: University of Illinois Press, 2002.

Kuhn, Bowie, Hardball: The Education of a Baseball Commissioner. New York: Times Books, 1987.

Lehn, Ken. “Property Rights, Risk Sharing, and Player Disability in Major League Baseball.” Journal of Law and Economics 25, no. 2 (October1982): 273-79.

Lowe, Stephen. The Kid on the Sandlot: Congress and Professional Sports, 1910-1992. Bowling Green: Bowling Green University Press, 1995.

Lowenfish, Lee. “A Tale of Many Cities: The Westward Expansion of Major League Baseball in the 1950s.” Journal of the West 17 (July 1978).

Lowenfish, Lee. “What Were They Really Worth?” The Baseball Research Journal 20 (1991): 81-2.

Lowenfish, Lee. The Imperfect Diamond: A History of Baseball’s Labor Wars. New York: Da Capo Press, 1980.

Miller, Marvin. A Whole Different Ball Game: The Sport and Business of Baseball. New York: Birch Lane Press, 1991.

Noll, Roger G. and Andrew S. Zimbalist, editors. Sports Jobs and Taxes: Economic Impact of Sports Teams and Facilities. Washington, D.C.: Brookings Institute, 1997.

Noll, Roger, editor. Government and the Sports Business. Washington, D.C.: Brookings Institution, 1974.

Okkonen, Mark. The Federal League of 1914-1915: Baseball’s Third Major League. Cleveland: Society of American Baseball Research, 1989.

Orenstein, Joshua B. “The Union Association of 1884: A Glorious Failure.” The Baseball Research Journal 19 (1990): 3-6.

Pearson, Daniel M. Baseball in 1889: Players v Owners. Bowling Green, OH: Bowling Green State University Popular Press, 1993.

Quirk, James. “An Economic Analysis of Team Movements in Professional Sports.” Law and Contemporary Problems 38 (Winter-Spring 1973): 42-66.

Rottenberg, Simon. “The Baseball Players’ Labor Market.” Journal of Political Economy 64, no. 3 (December 1956) 242-60.

Scully, Gerald. The Business of Major League Baseball. Chicago: University of Chicago Press, 1989.

Sherony, Keith, Michael Haupert and Glenn Knowles. “Competitive Balance in Major League Baseball: Back to the Future.” Nine: A Journal of Baseball History & Culture 9, no. 2 (Spring 2001): 225-36.

Sommers, Paul M., editor. Diamonds Are Forever: The Business of Baseball. Washington, D.C.: Brookings Institution, 1992.

Sullivan, Neil J. The Diamond in the Bronx: Yankee Stadium and the Politics of New York. New York: Oxford University Press, 2001.

Sullivan, Neil J. The Diamond Revolution. New York: St. Martin’s Press, 1992.

Sullivan, Neil J. The Dodgers Move West. New York: Oxford University Press, 1987.

Thorn, John and Peter Palmer, editors. Total Baseball. New York: HarperPerennial, 1993.

Voigt, David Q. The League That Failed, Lanham, MD: Scarecrow Press, 1998.

White, G. Edward. Creating the National Pastime: Baseball Transforms Itself, 1903-1953. Princeton: Princeton University Press, 1996.

Wood, Allan. 1918: Babe Ruth and the World Champion Boston Red Sox. New York: Writers Club Press, 2000.

Zimbalist, Andrew. Baseball and Billions. New York: Basic Books, 1992.

Zingg, Paul, “Bitter Victory: The World Series of 1918: A Case Study in Major League Labor-Management Relations.” Nine: A Journal of Baseball History and Social Policy Perspectives 1, no. 2 (Spring 1993): 121-41.

Zweig, Jason, “Wild Pitch: How American Investors Financed the Growth of Baseball.” Friends of Financial History 43 (Summer 1991).

Citation: Haupert, Michael. “The Economic History of Major League Baseball”. EH.Net Encyclopedia, edited by Robert Whaples. December 3, 2007. URL
http://eh.net/encyclopedia/the-economic-history-of-major-league-baseball/

The Age of Ruth and Landis: The Economics of Baseball during the Roaring Twenties

Author(s):Surdam, David George
Haupert, Michael G.
Reviewer(s):Bradbury, John Charles

Published by EH.Net (October 2018)

David George Surdam and Michael G. Haupert, The Age of Ruth and Landis: The Economics of Baseball during the Roaring Twenties. Lincoln: University of Nebraska Press, 2018. xi + 405 pp. $45 (hardcover), ISBN: 978-0-8032-9682-4.

Reviewed for EH.Net by John Charles Bradbury, Department of Economics, Kennesaw State University.

 
David Surdam (University of Northern Iowa) and Michael Haupert (University of Wisconsin-La Crosse) have both made notable contributions to the economic history of baseball. Surdam has authored several authoritative books in the field (e.g., The Big Leagues Go to Washington (2015) and Wins, Losses, and Empty Seats (2013)). Haupert has written several articles on baseball economic history, and he is responsible for compiling an extensive database of baseball player salaries through archival research.

The Age of Ruth of Landis is what you might expect from two baseball economic historians writing about baseball during the 1920s. The book includes many facts and figures from the era, including profit and loss statements, payroll data, franchise values, host-city characteristics, and important performance statistics. It is meticulously sourced with nearly seventy pages of notes and references. Two appendices offer descriptions of the New York Yankees’ financial records and player compensation data that was painstakingly culled from paper card files in the National Baseball Hall of Fame by Haupert. In short, it is a well-documented work of history that anyone who wishes to understand the economic atmosphere of the game during this period can use as a trusted source.

Yet, the book also diverges from what you might expect. The facts and figures are there, but to understand this era, it is important to understand the stories behind the numbers. The book is dominated by prose, so much so that the reader can grasp the information without turning to the notes or tables that are relegated to the back matter. This structure makes for a more readable book, similar to the style of Harold Seymour and Dorothy Seymour Mills’s book series on the early history of baseball; therefore, it remains a pleasant read for the layman with a casual interest in the economics of early baseball. The downside of this style is that it is more difficult to skim the book for hard numbers. Researchers seeking to hone in on particular aspects of history contained in the book will need to make heavy use of its thorough index and multiple bookmarks.

A lot happened in the early-twentieth century that shaped the game to be what it is today. Baseball would emerge as the national pastime, rules became standardized, and the play on the field would evolve into a game with clean pitches and home runs from its smallball origins with spitballs and shenanigans on the basepaths. On the economic side of the game, the National and American Leagues would vanquish their final corporeal competitor, the Federal League, in 1915. This not only established the leagues as a monopoly cartel, but subsequent legal decisions regarding the entrant’s challenge gave professional baseball its antitrust-exempt status that continues to insulate baseball from antitrust scrutiny. By 1920, the business and play of baseball had begun to stabilize into its current form; thus, this date is often used to denote the birth baseball’s “modern era.”

Kenesaw Mountain Landis, a subject of the title, played a major role as a key jurist in the legal decisions that established baseball’s antitrust exemption. He would also transition, with an awkward overlap, to become the heavy-handed Commissioner of Baseball from 1920 to 1944. The book also covers several other important off-field figures of the time. American League President Ban Johnson deftly led the fight against the rival Federals, which was aided by the experience of his successful challenge of the National League a few years earlier, but butted heads with Landis. Charles Comiskey, the powerful and influential owner of the Chicago White Sox — which were shamed by the 1919 World Series gambling scandal that caused the owners to recruit Landis to reestablish baseball’s credibility — supported the new commissioner even after he banned eight of his players for life. Harry Frazee owned the Boston Red Sox for only a short time, but during his tenure he managed to irritate his fellow owners and fans, stripping the team of its talent before selling it for a hefty profit as if they were they were the modern-day Miami Marlins. His most infamous transaction was the sale of Babe Ruth to the New York Yankees, setting the stage for changes to the game’s business and play on the field, which were closely intertwined.

The authors record that the 1920s were a prosperous decade, but the owners were aware of competition for their customers’ growing discretionary incomes, especially from the upstart motion-picture business. And what brought fans to the ballpark? Winning! Success on the field was a key determinant to financial success then, as it is today; and losing teams could limit losses by avoiding spending too much on players that brought little in return. The owners anticipated Scully (1974) by fifty years, and Moneyball (2003) by eighty years.

Babe Ruth transformed the game on the field, becoming baseball’s answer to movie stars, switching from being one of the game’s best pitchers to being undoubtedly its best hitter. Ruth changed the way teams scored, hitting more home runs than all but one team in the major leagues in 1920 — Ruth had 54 dingers, only ten fewer than the Philadelphia Phillies. Ruth became a draw for home and visiting fans alike, which translated into dollars at the gate, making the Yankees generally more profitable than a similar investment in the stocks listed on the Dow Jones Industrial Average. Yankee dominance raised concerns regarding competitive balance, but the limited potential remedies owners instituted, such as roster limits and revenue sharing, did not stop the growing imbalance. Yet, baseball remained financially sound, indicating that concerns over competitive balance may have been over-stressed.

Ruth and Landis were no doubt the key figures of their time in their respective roles. Though they are focal points, the breadth of the material covered in this long book makes it clear that the game was bigger than just these two men. Labor relations, minor leagues, and the Negro leagues are also covered at length. The economics of baseball are unique, if not peculiar (Neale 1964), and Surdam and Haupert make a worthy contribution to our understanding of this pivotal era of the game’s economic history.

References:

Lewis, Michael (2003). Moneyball: The Art of Winning an Unfair Game. New York: W.W. Norton.

Neale, Walter (1964). “The Peculiar Economics of Professional Sports.” Quarterly Journal of Economics, 78: 1-14.

Scully, Gerald (1974). “Pay and Performance in Major League Baseball.” American Economic Review, 65: 915-930.

Seymour, Harold and Dorothy Seymour Mills (Various years). Baseball, New York: Oxford University Press.

 
John Charles Bradbury is Professor of Economics at Kennesaw State University and is the author of two books on the economics of baseball, The Baseball Economist and Hot Stove Economics. He wrote this review in the shadow of the actual Kennesaw Mountain.

Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (October 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Business History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The History of the Radio Industry in the United States to 1940

Carole E. Scott, State University of West Georgia

The Technological Development of Radio: From Thales to Marconi

All electrically-based industries trace their ancestry back to at least 600 B.C. when the Greek philosopher Thales observed that after it is rubbed, amber (electron in Greek) attracts small objects. In 1600, William Gilbert, an Englishman, distinguished between magnetism, such as that displayed by a lodestone, and what we now call the static electricity produced by rubbing amber. In 1752, America’s multi-talented Benjamin Franklin used a kite connected to a Leyden jar during a thunderstorm to prove that a lightning flash has the same nature as static electricity. In 1831, an American, Joseph Henry, used an electromagnet to send messages by wire between buildings on Princeton’s campus. Assisted by Henry, an American artist, Samuel F. B. Morse, developed a telegraph system utilizing a key to open and close an electric circuit to transmit an intermittent signal (Morse Code) through a wire.

The possibility of transmitting messages through the air, water, or ground via low frequency magnetic waves was discovered soon after Morse invented the telegraph. Induction was the method used in the first documented “wireless telephone” demonstration by Nathan B. Stubblefield, a Kentucky farmer, in 1892. Because Stubblefield transmitted sound through the air via induction, rather than by radiation, he was not the inventor of radio.

Transmission by radiation owes its existence to the discovery in1877 of electromagnetic waves by a German, Heinrich Rudolf Hertz. Electromagnetic waves of from 10,000 cycles a second to 1,200,000,000 cycles a second are today called radio waves. Eight years after Hertz’s discovery, an American, Thomas Alva Edison, took out a patent for wireless telegraphy through the use of discontinuous radio waves. A few years later, in 1894, using a different and much superior wireless telegraphy system, an Italian, Guglielmo Marconi, used discontinuous waves to send Morse Code messages through the air for short distances over land. Later he sent them across the Atlantic Ocean. On land in Europe Marconi was stymied by laws giving government-operated postal services a monopoly on message delivery, and initially only over water was he able to transmit radio waves very far.

Several Americans transmitted speech without the benefit of wires prior to 1900. Alexander G. Bell, for example, experimented in 1890 with transmitting sound with rays of light, whose frequency exceeds that of radio waves. His test of what he called the photophone was said to be the first practical test of such a device ever made. Although Marconi is widely given the credit for being the first man to develop a successful wireless system, some believe that others, including Nicola Tesla preceded him. However, it is clear that Marconi had far more influence on the shaping of the radio industry than these men did.

The Structure of the Radio Industry before 1920: Inventor-Entrepreneurs

As had been true of earlier high-tech industries such as the telegraph and electric lighting in their formative years, what was accomplished in the early years of the radio industry was primarily brought about by inventor/entrepreneurs. None of the major electrical and telephone companies played a role in the formative years of the radio industry. So this industry’s early history is a story of individual inventors and entrepreneurs, many of whom were both inventors and entrepreneurs. However, after 1920 this industry’s history is largely one of organizations.

Scientists obtain their objective by discovering the laws of nature. Inventors, on the other hand, use the laws of nature to find a way to do something. Because they do not know or do not care what scientists’ laws say is possible, inventors will try things that scientists will not. When the creations of inventors work in seeming defiance of scientists’ work, scientists rush to the lab to find out why. Scientists thought that radio waves could not be transmitted beyond the horizon because they thought that this would require that they bend to follow the curvature of the Earth. Marconi tried transmitting beyond the horizon anyway and succeeded. A typical scientist would not have tried to do this because he knew better and his fellow scientists might laugh at him.

Marconi

Marconi may not have been visionary enough to found the radio broadcasting industry. Vision was required because, while there was already an established market for electronic, point-to-point communication, there was no existing market for broadcasting, nor could the technology for transmitting speech be as easily developed as could that for transmitting dots and dashes. In point-to-point communications radio’s disadvantage was lack of privacy. Its competitive advantage was much lower cost than transmission by wire over land and undersea cable.

Due in part to his Marconi Company’s purchase of competitors who had infringed on its patents, by the time World War I broke out, the American Marconi Company dominated the American radio market. As a result, it had no overwhelming need to develop a new service. In addition, Marconi had no surplus funds to plow into a new business. Shortly after the end of World War I, the United States’ government’s hostile attitude convinced Marconi that his British-based company had no future in America, and he agreed to sell it to the General Electric Company (GE). Marconi had wanted to create an international wireless monopoly. However, the United States government opposed the creation of a foreign-owned wireless monopoly. During World War I the United States Navy was given control of all the nation’s private wireless facilities. After the war the Navy wanted wireless to continue to be a government-controlled monopoly. Unable to achieve this, the Navy recommended that an American-owned company be established to control the manufacture and marketing of wireless in the United States. As a result, the government-sponsored Radio Corporation of America was created to take over the assets of Marconi’s American company.

The four chief players in American radio’s early years, Marconi, Canadian-born Aubrey Fessenden, Lee deForest, and John Stone Stone [sic] were all inventor/entrepreneurs. Marconi successfully exploited the interdependence among technology, business strategy, and the press. He was the only one of the four to have an adequate business strategy. Only he and deForest took full advantage of the press. However, deForest seems to have used the press more to sell stock than apparatus. Marconi was also more astute in his patent dealings than were his American competitors. For example, to protect himself from a possible patent suit, he purchased from Thomas A. Edison his patent on a system of wireless telegraphy that Edison had never used. Marconi never used it either because it was inferior to one he developed.

Fessenden

Fessenden, a very prolific inventor, first experimented with voice transmission while working for the United States Weather Bureau. In 1900 he left what is now the University of Pittsburgh, where he was head of the electrical engineering department, to develop a method for the U.S. Weather Bureau to transmit weather reports. That year, through the use of a transmitter that produced discontinuous waves, he succeeded in transmitting speech.

Although discontinuous waves would satisfactorily transmit the dots and dashes of Morse code, high quality voice and music cannot be transmitted in this way. So, in 1902, Fessenden switched to using a continuous wave, becoming the first person to transmit voice and music by this method. On Christmas Eve, 1906, Fessenden made history by broadcasting music and speech from Massachusetts that was heard as far away as the West Indies. After picking up this broadcast, the United Fruit Company purchased equipment from Fessenden to communicate with its ships. Navies and shipping companies were among those most interested in purchasing early radio equipment. During World War I armies also made significant use of radio. Important among its army uses was communicating with airplanes.

Because he did not provide a regular schedule of programming for the public, Fessenden is not usually credited with having operated the first broadcasting station. Nonetheless, he is widely recognized as the father of broadcasting because those who had gone before him had only used radio to deliver messages from one person to another. However, despite being preoccupied with laboratory work and being unsuited by temperament and experience to be a businessman, he chose to directly manage his company. It failed, and an embittered Fessenden left the radio industry.

deForest

Lee deForest, whose doctoral dissertation was about Hertzian waves, received his Ph.D. from Yale in 1896. His first job was with Western Electric. By 1902 he had started the DeForest Wireless Telegraph Company, which became insolvent in 1906. His second company, the DeForest Radio Telephone Company began to fail in 1909. In 1912 he was indicted for using the mails to defraud by promoting “a worthless device,” the Audion tube. He was acquitted. The Audion tube (later known as a triode tube) was far from being a worthless device, as it was a key component of radios so long as vacuum tubes continued to be used.

The development of a commercially viable radio broadcasting industry could not have taken place without the invention of the vacuum tube, which had its origins in Englishman Michael Faraday’s belief that an electric current could probably pass through a vacuum. (The vacuum tube’s obsolescence was the result of a study of semiconductors in 1948 by William Shockley, Walter Brattain, and John Bardeen. They discovered that the introduction of impurities into semiconductors provided a solid-state material that would not only rectify a current, but also amplify it. Transistors using this material rapidly replaced vacuum tubes. Later it became possible to etch transistors on small pieces of silicon in integrated circuits.)

In 1910, deForest broadcast, probably rather poorly, the singing of opera singer Enrico Caruso. Possibly stimulated by the American Telephone and Telegraph Company transmitting from the Navy’s Arlington, Virginia facility in 1915 radio telephone signals heard both across the Atlantic and in Honolulu, deForest resumed experimenting with broadcasting. He installed a transmitter at the Columbia Gramophone building in New York and began daily broadcasts of phonograph music sponsored by Columbia. Because in the late nineteenth century the new electrical industry had made some investors multimillionaires almost over night, Americans like deForest and his partners found easy pickings for awhile, as many people were eager to snap up the stock offered by overly optimistic inventors in this new branch of the electrical industry. The quick failure of firms whose end, rather than their means, was selling stock made life more difficult for ethical firms.

Amateur Radio

In the United States in 1913 there were 322 licensed amateur radio operators who would ultimately be relegated to the seemingly barren wasteland of the radio spectrum, short wave. By 1917 there were 13,581 amateur radio operators. At that time building a radio receiver was a fad. The typical builder was a boy or young man. Many older people thought that all radio would ever be was a fad, and certainly so long as the public had to build its own radios, put up with poor reception, and listen to dots and dashes and a few experimental broadcasts of music and speech over earphones, relatively few people were going to be interested in having a radio. Laying the groundwork for making radio a mass medium was Edwin H. Armstrong’s invention based on work he did in the U.S. Army during World War I of the super heterodyne that made it possible to replace earphones with a loudspeaker.

In 1921, the American Radio Relay league and a British amateur group assisted by Armstrong, an engineer and college professor, proved that contrary to the belief of experts, short waves can travel over long distances. Three years later Marconi, who had previously used only long waves, showed that short-wave radio waves, by bounding off the upper atmosphere, can hopscotch around the world. This discovery led to short wave radio being used for long distance radio broadcasting. (Today telephone companies use microwave relay systems for long-distance, on-shore communication through the air.)

After 1920: Large Corporations Come to Dominate the Industry

In 1919, Frank Conrad, a Westinghouse engineer, began broadcasting music in Pittsburgh. These broadcasts stimulated the sales of crystal sets. A crystal set, which could be made at home, was composed of a tuning coil, a crystal detector, and a pair of earphones. The use of a crystal eliminated the need for a battery or other electric source. The popularity of Conrad’s broadcasts led to Westinghouse establishing a radio station, KDKA, on November 2, 1920. In 1921, KDKA began broadcasting prizefights and major league baseball. While Conrad was creating KDKA, the Detroit News established a radio station. Other newspapers soon followed the Detroit newspaper’s lead.

RCA

The Radio Corporation of America (RCA) was the government-sanctioned radio monopoly formed to replace Marconi’s American company. (Later, a government that had once considered making radio a government monopoly followed a policy of promoting competition in the radio industry.) RCA was owned by a GE-dominated partnership that included Westinghouse, American Telegraph and Telephone Company (AT&T), Western Electric, United Fruit Company, and others. There were cross-licensing agreements (patent pooling) agreements between GE, AT&T, Westinghouse, and RCA, which owned the assets of Marconi’s company. Patent pooling was the solution to the problem of each company owning some essential patents.

For many years RCA and its head, David Sarnoff, were virtual synonyms. Sarnoff, who began his career in radio as a Marconi office boy, gained fame as a wireless operator and showed the great value of radio when he picked up distress messages from the sinking Titanic. Ultimately, RCA expanded into nearly every area of communications and electronics. Its extensive patent holdings gave it power over most of its competitors because they had to pay it royalties. While still working for Marconi Sarnoff had the foresight to realize that the real money in radio lay in selling radio receivers. (Because the market was far smaller, radio transmitters generated smaller revenues.)

Financing Radio Broadcasts

Marconi was able to charge people for transmitting messages for them, but how was radio broadcasting to be financed? In Europe the government financed it. In this country it soon came to be largely financed by advertising. In 1922, few stations sold advertising time. Then the motive of many operating radio stations was to advertise other businesses they owned or to get publicity. About a quarter of the nation’s 500 stations were owned by manufacturers, retailers, and other businesses, such as hotels and newspapers. Another quarter were owned by radio-related firms. Educational institutions, radio clubs, civic groups, churches, government, and the military owned 40 percent of the stations. Radio manufacturers viewed broadcasting simply as a way to sell radios. Over its first three years of selling radios, RCA’s revenues amounted to $83,500,000. By 1930 nine out of ten broadcasting stations were selling advertising time. In 1939, more than a third of the stations lost money. However, by the end of World War II only five percent were in the red. Stations’ advertising revenues came both from local and national advertisers after networks were established. By 1938, 40 percent of the nation’s 660 stations were affiliated with a network, and many were part of a chain (commonly-owned).

Radio Networks

On September 25, 1926, RCA formed the National Broadcasting Company (NBC) to take over its network broadcasting business. In early 1927 only seven percent of the nation’s 737 radio stations were affiliated with NBC. In that year a rival network whose name eventually became the Columbia Broadcasting System (CBS) was established. In 1928, CBS was purchased and reorganized by William S. Paley, a cigar company executive whose CBS career spanned more than a half-century. In 1934, the Mutual Broadcasting System was formed. Unlike NBC and CBS, it did not move into television. In 1943, the Federal Communications Commission forced NBC to sell a part of its system to Edward J. Noble, who formed the American Broadcasting Corporation (ABC). To avoid the high cost of producing radio shows, local radio stations got most of their shows other than news from the networks, which enjoyed economies of scale in producing radio programs because their costs were spread over the many stations using their programming.

The Golden Age of Radio

Radio broadcasting was the cheapest form of entertainment, and it provided the public with far better entertainment than most people were accustomed to. As a result, its popularity grew rapidly in the late 1920s and early 1930s, and by 1934, 60 percent of the nation’s households had radios. One and a half million cars were also equipped with them. The 1930s were the Golden Age of radio. It was so popular that theaters dared not open until after the extremely popular “Amos ‘n Andy” show was over.

In the thirties radio broadcasting was an entirely different genre from what it became after the introduction of television. Those who have only known the music, news, and talk radio of recent decades can have no conception of the big budget days of the thirties when radio was king of the electronic hill. Like reading, radio demanded the use of imagination. Through image-inspiring sound effects, which reached a high degree of sophistication in the thirties, radio replaced vision with visualization. Perfected during the thirties was the only new “art form” radio originated, the “soap opera,” so called because the sponsors of these serialized morality plays aimed at housewives, who were then very numerous, were usually soap companies.

The Growth of Radio

The growth of radio in the 1920s and 30s can be seen in Tables 1, 2, and 3, which give the number of stations, the amount of advertising revenue and sales of radio equipment.

Table 1
Number of Radio Stations in the US, 1921-1940

Year Number
1921 5
1922 30
1923 556
1924 530
1925 571
1926 528
1927 681
1928 677
1929 606
1930 618
1931 612
1932 604
1933 599
1934 583
1935 585
1936 616
1937 646
1938 689
1939 722
1940 765

Source: Sterling and Kittross (1978), p. 510.

Table 2
Radio Advertising Expenditures in Millions of Dollars, 1927-1940

Year Amount in Millions of $
1927 4.8
1928 14.1
1929 26.8
1930 40.5
1931 56.0
1932 61.9
1933 57.0
1934 72.8
1935 112.6
1936 122.3
1937 164.6
1938 167.1
1939 183.8
1940 215.6

Source: Sterling and Kittross (1978).

Table 3
Sales of Radio Equipment in Millions of Dollars

Year Sales in Millions of $
1922 60
1923 136
1924 358
1925 430
1926 506
1927 426
1928 651
1929 843

Source: Douglas (1987), p. 75

Impact of TV and Later Developments

The most popular drama and comedy shows and most of their stars migrated from radio to television in the 1940s and 1950s. (A few stars, like the comedy star, Fred Allen, did not successfully make the transition.) Other shows died, as radio became a medium, first, of music and news and then of call-in talk shows, music, and news. Television sets replaced the furniture-like radios that dominated the nation’s living rooms in the thirties. Point-to-point radio communication became essential for the police and trucking and other companies with similar needs. New technology made portable radio sets popular. Many decades after the loss of comedy and drama shows to television the creation of the Internet provided radio stations both with a new way to broadcast and gave then a visual component.

Government Regulation

Radio’s Property Rights Problem

Because the radio spectrum is quite different from say, a piece of real estate, radio produced a property rights problem. Originally, it was viewed as being like a navigable waterway, that is, public property. However, it wasn’t long before so many people wanted to use it that there wasn’t enough room for everyone. The only ways to deal with an excess of demand over supply are either to raise price until some potential users leave the market or to turn to rationing. The selling of the radio spectrum does not appear to have been considered. Instead, the spectrum was rationed by the government, which parceled it out to selected parties for free.

The Free-Speech Issue

Navigable waterways present no free speech problem, but radio does. Was radio to be treated like newspapers and magazines, or were broadcasters to be denied free speech? Were radio stations to be treated, like telephone companies, as common carriers, that is, anyone desiring to make use of them would have to be allowed to use them, or would they be treated like newspapers, which are under no obligation to allow all comers access to their pages? It was also established that radio stations, like newspapers, would be protected by the First Amendment

Regulation and Legislation

Government regulation of radio began in 1904 when President Theodore Roosevelt organized the Interdepartmental Board of Wireless Telegraphy. In 1910 the Wireless Ship Act was passed. That radio was to be a regulated industry was decided in 1912, when Congress passed a Radio Act that required people to obtain a license from the government in order to operate a radio transmitter. In 1924, Herbert Hoover, who was secretary of the Commerce Department, said that the radio industry was probably the only industry in the nation that was unanimously in favor of having itself regulated. Presumably, this was due both to the industry’s desire to put a stop to stations interfering with each others’ broadcasts and to limit the number of stations to a small enough number to lock in a profit. The Radio Act of 1927 solved the problem of broadcasting stations using the same frequency and the more powerful ones drowning out less powerful ones. This Act also established that radio waves are public property; therefore, radio stations must be licensed by the government. It was decided, however, not to charge stations for the use of this property.

FM Radio: Technology and Patent Suits

One method of imposing speech and music on a continuous wave requires increasing or reducing the amplitude (modulating) the distance between a radio waves peaks and troughs. This type of transmission is called amplitude modulation (AM). It appears to have first been thought of by John Stone Stone in 1892. Many years after Armstrong’s invention of the super heterodyne, he solved radio’s last major problem, static, by inventing frequency modulation (FM), which he successfully tested in 1933. A significant characteristic of FM as compared with AM is that FM stations using the same frequency do not interfere with each other. Radios simply pick up whichever FM station is the strongest. This means that low-power FM stations can operate in close proximity. Armstrong was hindered in his development of FM radio by a Federal Communications Commission (FCC) spectrum reallocation that he blamed on RCA.

Astute patent dealings were a must in the early radio industry. As was true of the rest of the electric industry, patent litigation was very common in the radio industry. One reason for the success of Marconi in America was his astute patent dealings. One of the most acrimonious radio patent suits was one between Armstrong and RCA. Armstrong expected to receive royalties on every FM radio set sold and, because FM was selected for the audio portion of TV broadcasting, he also expected royalties on every TV set sold. Some television manufacturers paid Armstrong. RCA didn’t. RCA also developed and patented a FM system different from Armstrong’s that he claimed involved no new principle. So, in 1948, he instituted a suit against RCA and NBC, charging them with willfully infringing and inducing others to infringe on his FM patents.

It was to RCA’s advantage to drag the suit out. It had more money than Armstrong did, and it could make more money until the case was settled by selling sets utilizing technology Armstrong said was his. It might be able to do this until his patents ran out. To finance the case and his research facility at Columbia, Armstrong had to sell many of his assets, including stock in Zenith, RCA, and Standard Oil. By 1954, the financial burden imposed on him forced him to try to settle with RCA. RCA’s offer did not even cover Armstrong’s remaining legal fees. Not long after he received this offer he committed suicide.

Bibliography

Aitken, Hugh G. J. The Continuous Wave: Technology and American Radio, 1900-1932. Princeton, N.J.: Princeton University Press, 1985.

Archer, Gleason Leonard. Big Business and Radio. New York, Arno Press, 1971.

Benjamin, Louise Margaret. Freedom of the Air and the Public Interest: First Amendment Rights in Broadcasting to 1935. Carbondale: Southern Illinois University Press, 2001.

Bilby, Kenneth. The General: David Sarnoff and the Rise of the Communications Industry. New York: Harper & Row, 1986.

Bittner, John R. Broadcast Law and Regulation. Englewood Cliffs, N.J.: Prentice-Hall, 1982.

Brown, Robert J. Manipulating the Ether: The Power of Broadcast Radio in Thirties America. Jefferson, N.C.: McFarland & Co., 1998.

Campbell, Robert. The Golden Years of Broadcasting: A Celebration of the First Fifty Years of Radio and TV on NBC. New York: Scribner, 1976.

Douglas, George H. The Early Years of Radio Broadcasting. Jefferson, NC: McFarland, 1987.

Douglas, Susan J. Inventing American Broadcasting, 1899-1922. Baltimore: Johns Hopkins University Press, 1987.

Erickson, Don V. Armstrong’s Fight for FM Broadcasting: One Man vs Big Business and Bureaucracy. University, AL: University of Alabama Press, 1973.

Fornatale, Peter and Joshua E. Mills. Radio in the Television Age. New York: Overlook Press, 1980.

Godfrey, Donald G. and Frederic A. Leigh, editors. Historical Dictionary of American Radio. Westport, CT: Greenwood Press, 1998.

Head, Sydney W. Broadcasting in America: A Survey of Television and Radio. Boston: Houghton Mifflin, 1956.

Hilmes, Michele. Radio Voices: American Broadcasting, 1922-1952. Minneapolis: University of Minnesota Press, 1997.

Jackaway, Gwenyth L. Media at War: Radio’s Challenge to the Newspapers, 1924-1939. Westport, CT: Praeger, 1995.

Jolly, W. P. Marconi. New York: Stein and Day, 1972.

Jome, Hiram Leonard. Economics of the Radio Industry. New York: Arno Press, 1971.

Lewis, Tom. Empire of the Air: The Men Who Made Radio. New York: Edward Burlingame Books, 1991.

Ladd, Jim. Radio Waves: Life and Revolution on the FM Dial. New York: St. Martin’s Press, 1991.

Lichty, Lawrence Wilson and Malachi C. Topping. American Broadcasting: A Source Book on the History of Radio and Television (first edition). New York: Hastings House, 1975.

Lyons, Eugene. David Sarnoff: A Biography (first edition). New York: Harper & Row, 1966.

MacDonald, J. Fred. Don’t Touch That Dial! Radio Programming in American Life, 1920-1960. Chicago: Nelson-Hall, 1979.

Maclaurin, William Rupert. Invention and Innovation in the Radio Industry. New York: Arno Press, 1971.

Nachman, Gerald. Raised on Radio. New York: Pantheon Books, 1998.

Rosen, Philip T. The Modern Stentors: Radio Broadcasters and the Federal Government, 1920-1934. Westport, CT: Greenwood Press, 1980.

Sies, Luther F. Encyclopedia of American Radio, 1920-1960. Jefferson, NC : McFarland, 2000.

Slotten, Hugh Richard. Radio and Television Regulation: Broadcast Technology in the United States, 1920-1960. Baltimore: Johns Hopkins University Press, 2000.

Smulyan, Susan. Selling Radio: The Commercialization of American Broadcasting, 1920-1934. Washington: Smithsonian Institution Press, 1994.

Sobel, Robert. RCA. New York: Stein and Day/Publishers, 1986.

Sterling, Christopher H. and John M. Kittross. Stay Tuned. Belmont, CA: Wadsworth, 1978.

Weaver, Pat. The Best Seat in the House: The Golden Years of Radio and Television. New York: Knopf, 1994.

Citation: Scott, Carole. “History of the Radio Industry in the United States to 1940″. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL http://eh.net/encyclopedia/the-history-of-the-radio-industry-in-the-united-states-to-1940/

The Baseball Trust: A History of Baseball?s Antitrust Exemption

Author(s):Banner, Stuart
Reviewer(s):Bradbury, John Charles

Published by EH.Net (June 2013)

Stuart Banner, The Baseball Trust: A History of Baseball?s Antitrust Exemption. New York: Oxford University Press, 2013. xv + 276 pp. $30 (hardcover), ISBN: 978-0-199-93029-6.

Reviewed for EH.Net by John Charles Bradbury, Kennesaw State University.?

It would be hard to select a subtitle more apt for this book than ?a history of baseball?s antitrust exemption,? because that is exactly what it is.? The difficult task is writing a book on this subject that is both highly informative and entertaining, which Stuart Banner has done.

Baseball?s antitrust exemption is so well-known that even the most casual sports fan knows that baseball holds some type of preferential legal status. For every controversy baseball endures ? franchise relocation threats, steroids, the lack of instant replay, etc. ? there is a sportswriter demanding that Congress should take its antitrust exemption away.? Though it is very real, the famed antitrust exemption has become more like a batter advancing to first base on a third-strike wild pitch: a tradition that baseball fans accept, but few of them understand its origins or question why it remains.? From the precursors of Federal Baseball to the aftermath of Flood, Banner takes the reader down an organized timeline of disputes between players, owners, and rival leagues to demonstrate how well-intentioned judicial decisions would set ridiculous legal precedents that protect baseball from antitrust scrutiny to this day.? While courts stumbled upon the law and begged Congress for help, generations of congressmen feigned interest with meaningless hearings and empty demands for action that unsurprisingly led nowhere.

The early days of baseball were not profitable for teams; therefore, owners came up with a solution to cut their human capital costs: reserve players to their existing teams.? The reserve clause gave teams the right to unilaterally renew their players? contracts for the following season, granting de facto lifetime employment rights to their owning team.? Teams were free to transfer their ownership rights to any other club regardless of the wishes of the player.? The goal of this policy was to prevent competition between teams, in order to keep player salaries down.? While antitrust disputes often focused on other issues, it was the reserve clause that drew most of the attention, both before the antitrust exemption existed and after the courts refused to step in and remove it.

Despite the obvious financial damage the reserve clause inflicted on players due to Major League Baseball?s monopsony on baseball talent, congressmen, judges, and even players were convinced it was absolutely necessary for the game to survive.? It was believed that without reserve rights, the best players would all be bought up by big-market teams, thus destroying competitive balance.? No one seemed to notice that the best players invariably ended up in big markets anyway, as big-market teams like the New York Yankees routinely purchased young stars from small-market clubs like the Kansas City Athletics, with the clubs reaping the fortunes while the players remained poorly paid.? The reason for this was elucidated by economist Simon Rottenberg in 1956.[1]? Rottenberg?s Invariance Principle ? anticipating the soon-to-be-famous Coase Theorem ? correctly hypothesized that players should end up on teams where their returns are the highest regardless of who owns the rights to players.? The only difference is who gets the rents.? If the playing rights are owned by the team, as they were under the reserve clause, then the rents of the player accrue to the team; if the rights are owned by the player, then the player will capture his own rents.? Rottenberg was later proven correct when the reserve clause fell, as player salaries rose with free agency and competitive balance remained relatively unchanged.

Banner?s history and explanation are thorough, making this book an important source not just of baseball?s antitrust history, but also the antitrust history of all American professional sports.? Much of baseball?s exemption arises from cases involving other popular sports such as football (Radovich) and boxing (International Boxing Club), where judicial explanations for differences from baseball led to its unique antitrust exemption among American professional sports.

In the Introduction, Banner states, ?baseball?s cultural status is neither the primary reason it originally gained its exemption nor the primary reason the exemption has persisted for nearly a century. … It is a story in which a sophisticated business organization has been able to work the levers of the legal system to achieve a result favored by almost no one else.?? However, Banner documents many instances of congressional inaction or judicial opinions in which these supposedly objective public servants always seemed to find a way to make an exception for baseball.? From reading Banner?s history, I am inclined to believe sports-law specialist Paul Weiler that ?whatever the legal the reasons for the Supreme Court?s decision to preserve baseball?s unique exemption from antitrust law, a crucial motivating factor was the special place that baseball has long occupied in American life.?? Yes, Federal Baseball was understandable at the time, though the decision is difficult to understand now, and no cultural bias is needed to justify the decision the justices made.? But from Kenesaw Mountain Landis?s open refusal to rule against baseball for the love of the game to Justice Harry Blackman?s ode to baseball introduction in Flood v. Kuhn, I believe culture did play an important, if not primary, role in the jurisprudence and legislation that preserved the antitrust exemption. Similar cases fell, legislators and judges openly disagreed with decisions, yet often they found stare decisis as a convenient excuse for their fears that a childhood game would be ruined.? It took an arbitrator at the lowest end of the judicial hierarchy to do what judges at the courts? highest levels lacked the courage to do.? Independent arbitrator Peter Seitz, who cast the deciding vote that struck down baseball?s reserve clause, stated ?The [arbitration] Panel?s sole duty is to interpret and apply the agreements and the undertakings of the parties.?? To Seitz, as Banner describes it, ?the consequences of the decision were none of his business.?

The irony of baseball?s fight to preserve its special status is that it appears to have gained very little from its courtroom victories relative to its not-so-special professional sports counterparts.? Its reserve clause withstood court challenges, but fell to collective bargaining and the wiles of union leader Marvin Miller.? All American professional sports leagues now operate coordinated, player drafts, maintain territorial rights restrictions, and enter into national broadcast contracts.? Compared to baseball, football, basketball, and hockey have far greater restrictions on player wages, play fewer games, and charge similar prices.? Baseball has not been able to use its antitrust immunity to garner any additional market power advantages relative to the big-four sports leagues that lack similar protections.? While baseball no doubt gains some legal shelter from a particular class of lawsuits, the incoherent legal reasoning behind the exemption has not fully deterred legal challenges.? So, like reaching base on a wild-pitch strikeout, baseball?s antitrust exemption remains an odd vestige of baseball history that owes itself to a peculiar old tradition that we have come to accept.? The good news is that despite its nonsense justification, its practical damage has been minimal.

Note:
1. Simon Rottenberg (1956), ?The Baseball Players? Labor Market,? Journal of Political Economy, 64: 242-258.

John Charles Bradbury is Professor of Sport Management and Economics at Kennesaw State University.? He has published two books on baseball economics and statistics, The Baseball Economist (2007) and Hot Stove Economics (2010).? E-mail: jcbradbury@kennesaw.edu

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

City of American Dreams: A History of Home Ownership and Housing Reform in Chicago, 1871-1919

Author(s):Garb, Margaret
Reviewer(s):Smith, Fred H.

Published by EH.NET (May 2006)

Margaret Garb, City of American Dreams: A History of Home Ownership and Housing Reform in Chicago, 1871-1919. Chicago: University of Chicago Press, 2005. xv + 261 pp. $40 (cloth), ISBN: 0-226-28209-0.

Reviewed for EH.NET by Fred H. Smith, Department of Economics, Davidson College.

Home ownership rates in the United States have reached an all-time high during the first decade of the twenty-first century, and the record levels of home ownership have reached across lines of class, ethnicity, and race. Nearly fifty percent of African-American and Hispanic American households own their homes, which represents a dramatic increase in the ownership rate in just the past two decades. As the media report on homeownership trends in the United States, most Americans receive this news without giving any consideration to why we view ownership as an integral part of the American dream. Indeed, it is taken for granted that a necessary step in fulfilling the American dream is to own one’s home. In City of American Dreams: A History of Home Ownership and Housing Reform in Chicago, 1871-1919, Margaret Garb takes us back in time so that we may better understand the origins of the American obsession with home ownership.

City of American Dreams starts with an extended introduction, where Garb promises to examine the “changes in the ways Americans conceived of and assessed the economic and social value of residential property” (p. 2). The seven chapters that follow the introduction do an excellent job of carrying through on this promise. Chapter one introduces the reader to the urban (and socio-economic) landscape in 1872 Chicago. Devastated by the Great Fire in October of 1871, the residents of the city were forced to determine how they wanted to rebuild their city in the aftermath of the catastrophe. Garb uses a compelling description of a January 1872 demonstration by working class residents of Chicago at a Common Council meeting in order to introduce a principal theme of her book: Tension between different socio-economic and racial groups came about as these groups battled for control over property rights in residential housing markets. The controversy in January 1872 centered on how the boundaries of the “fire limits” building restrictions were to be drawn. The working class protestors viewed the building restrictions as an infringement on their ability to build homes and enjoy the benefits of home ownership. More specifically, the building restrictions were designed to limit the places within the city where one could construct a wood frame home. Fearing another catastrophic fire, the members of the economic elite and the members of the Common Council felt that restricting the construction of flammable housing units would serve the city’s long run interests. By preventing the construction of lower quality, highly flammable housing, the city would be more successful in its efforts to attract capital from the East as residents worked to rebuild the city.

Chapter one does an excellent job of setting the stage for the reader to understand the tensions that persisted between residents from different racial, ethnic, and socio-economic groups; chapter two is equally effective in providing the reader with a foundation from which to understand the role of home ownership in the American dream. Garb expertly argues that home ownership in the 1870s was something sought by lower income residents of Chicago. The second chapter plays a particularly pivotal role in the book, for the remaining chapters show the reader how home ownership ultimately became difficult — if not impossible — for residents on the lower rungs of the socio-economic latter.

Chapters three through six take the reader on a journey that explains how owner-occupied housing was transformed from something that lower income households strove for in order to supplement their incomes to something that the economic elite used to insulate themselves from the “less desirable” segments of society. Chapter four is particularly effective in establishing the distinct differences that existed between neighborhoods. The residential neighborhoods of the lower income households were often separated from the services — water, sewer, and adequate police protection — that so profoundly impacted the quality of life. Indeed, Garb does an excellent job of discussing the role that the privatization of these services played in transforming them from “public services” to amenities that could be purchased only in select neighborhoods.

Chapter seven discusses Chicago’s experiences with integrating its ever expanding African-American population. Garb’s story is a familiar one: Declining property values in African-American neighborhoods due to landlords failing to maintain properties rented to African-Americans, widespread blockbusting, and restricted access to credit for African-American households that were fortunate enough to save enough money to make a down payment on a home. The conditions imposed on black residents of Chicago led to an increasingly fragile truce between whites and blacks. Tensions reached a climax before abruptly exploding in July 1919. In the race riot that erupted, nearly forty Chicagoans lost their lives, and 1,000 residents were left homeless in the wake of the five-day disturbance.

It is rare that one has the opportunity to read a book that isn’t in need of some substantive changes, but Garb’s City of American Dreams certainly falls into that category. Her book is expertly researched, it is written in a clear and very engaging style, and it does an outstanding job of fulfilling the promise that she makes to her reader in the introduction. City of American Dreams will make an excellent addition to the syllabus for a wide variety of courses. It would serve as a superb resource for a course in urban economic history, regardless of whether the course is taught at the undergraduate or graduate level. It would also be a nice addition to an urban economics course. A great deal of the empirical research in urban economics focuses on Chicago, and it does so because of the exceptional data collected by Hoyt and Olcott. Garb’s book would give an economist interested in working with these data an excellent introduction to the urban environment in Chicago in the late nineteenth century. I might make a few suggestions about stylistic issues in the book, but, frankly, the book is so well written that they would be mere suggestions. I found City of American Dreams to be a thoroughly engaging read, and I learned a great deal about Chicago from reading it. But, more importantly, Garb’s book left me feeling as though I now have a much better understanding of why owner occupied housing is such an import part of the American dream.

Fred Smith is an assistant professor of economics at Davidson College. His most recent paper (co-authored with Mark Foley) is “Consumer Discrimination in Professional Sports: New Evidence from Major League Baseball,” forthcoming in Applied Economics Letters.

Subject(s):Urban and Regional History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Americanization of the European Economy: A Compact Survey of American Economic Influence in Europe since the 1880s

Author(s):Schröter, Harm G. S
Reviewer(s):Brownlow, Graham

Published by EH.NET (January 2006)

Harm G. Schr?ter, Americanization of the European Economy: A Compact Survey of American Economic Influence in Europe since the 1880s. Dordrecht: Springer, 2005. xii + 268 pp. $99 (hardcover), ISBN: 1-4020-2884-9.

Reviewed for EH.NET by Graham Brownlow, Faculty of Business, Auckland University of Technology.

The development of what could be termed the “American way of economic culture” in Europe since the 1880s is the stated focus of Harm Schr?ter’s book. Schr?ter is Professor of History at the University of Bergen. The long-run focus of the economic history and the promise to consider the nexus between European cultural and economic development intrigued and excited this reviewer; unfortunately my expectations and hopes were far from met. Indeed after ploughing through this book, Schr?ter’s claim made in the preface (p. ix) that it was the product of ‘a number of years’ labors came as a great surprise to this reviewer. The standard of general presentation is extremely careless for an academic work, especially for one with such a high hardcover price. The inadequate standard of presentation leaves the distinct impression of a manuscript having been rushed to publication without adequate proofreading. There are far too many typos, spelling and grammatical errors to mention. Entire passages are put in italics for no good reason (p. 118) and at one point instead of the location of an AFL-CIO conference the reader is met in the text with a cryptic ‘[where?]’ (p. 196).

The basic thesis of the book is that three successive historical waves of Americanization have shaped Europe’s economic and cultural life. These waves are identified and each is assigned a part in the book. Part 1, which is only a single chapter, covers the first wave of Americanization that is claimed to have emerged between 1870 and 1945. Part 2, covered by chapters 2 through 4, discusses the ‘Golden Age’ as a process of Americanization and the next three chapters cover Americanization since the 1980s. In part 1, Americanization is viewed as involving a transfer of ‘economic institutions and culture’ across the Atlantic. In the period from 1870 to 1945 the process is equated with a Europe-wide phenomenon; in later chapters the diversity of different national experiences is recognized. In part 2, the implications of the Marshall Plan for Americanization are considered along with the cultural effects of the growth of mass consumption and production. In part 3, the focus is on the transfer of free market policies to Europe since the 1980s. The role of financial and labor markets in determining the pace of Americanization is also considered.

The book covers a wide range of issues, but its coverage is found wanting in a number of respects. Firstly, there are a wide range of topics where Schr?ter makes elementary errors regarding historical fact. To note just a few of the more glaring errors, F.A. Hayek was not a Friedmanite monetarist of the Chicago School variety (pp. 127-28) and his Road to Serfdom was first published in 1944 and not 1946 (p. 128). EQUIS is not an American business school standard (p. 149). EQUIS is in fact European in origin and is run by the European Foundation for Management Development (EFMD). The emergence of professional baseball began with the formation of the National league in 1876 and not at the start of the twentieth century (p. 186). As with the typographical errors, these errors of fact should have been spotted prior to publication.

Secondly, a number of major weaknesses in the historical and economic interpretation exist independently of Schr?ter’s many errors of historical fact. To start with, especially as Schr?ter uses it, the central concept of Americanization is imprecise. In addition to defining it as a transfer of culture and institutions, Schr?ter also defines it as variously a synonym for convergence of growth rates (p. 96), the pursuit of deregulation and privatization (p. 205) and national differences in per capita advertising expenditure (p. 120). While these uses are not necessarily inconsistent with one another, this reviewer would have preferred a single definition that could better lend itself to measurement. Schr?ter’s suggestion that such a more quantitative approach would be ‘misleading’ (p. 7) again does not convince this reviewer.

Thirdly, there are a number of extremely peculiar omissions in the discussion of Americanization. These omissions further reduce the credibility of the book. Strangely, despite in chapter 4 discussing the alleged role of marketing and advertising as academic disciplines in promoting Americanization, Schr?ter makes no reference to the growing literature on the causes and consequences of the post-1945 Americanization of the global economics profession (Coats, 1995). Schr?ter, moreover, despite claiming that small states are more susceptible to Americanization (p. 205), ignores mentioning the role of American investment in creating Ireland’s economic transformation in the last decade. Most economists would agree that the attraction of American inward investment has been central to the Celtic Tiger. For Schr?ter to omit even mentioning the paradigm case of American economic influence in recent European economic history, when he repeatedly discusses the very ‘unAmerican’ practices that exist within German retailing, strikes this reviewer as odd to say the least.

Perhaps this last omission arose because all too often Schr?ter is rather too fond of equating German and/or French with ‘European’ conditions. Different European countries get very different levels of discussion devoted to them; indeed some countries barely get a mention. The contents of the index illustrate this point. There are no references to Spain, Portugal or Poland in the index and few mentions to these countries in the text. This skewed geographical focus is all the more unfortunate as the book’s introduction promised the analysis would not just consider the major countries (p. 8). Moreover, those interested in UK economic history will be similarly disappointed, — while in certain parts of book British cultural and economic ‘exceptionalism’ is recognized (pp. 6, 205), it is never adequately explained. Nor is the relevant literature on the uniqueness of British economic performance even mentioned (Hutton, 1996). The UK’s status as a cultural and economic ‘middle way’ between continental Europe and America is an important topic that Schr?ter makes far too little of in this book.

This ambitious but ultimately unsatisfying book will struggle to find a target readership because of its weaknesses of style and substance. Overall this is not a book that can be satisfactorily recommended to undergraduate students of European economic history as they will inescapably repeat its errors of fact and economic understanding. Overall then, I’m sorry to report that Schr?ter’s book fails by a wide margin to deliver on its promised focus on European cultural and economic development. Economic historians seeking to consider the interplay between economy and culture are still better served by the works of authors such as Eric Jones and Peter Temin.

References:

Coats, A.W. (ed.), 1995. The Development of Economics in Western Europe since 1945. London, Routledge.

Hutton, Will, 1996. The State We’re In. London, Vintage.

Graham Brownlow is Senior Lecturer in Economics at Auckland University of Technology. His published research is mainly in the area of institutional economic history and Irish economic history. His most recent journal article (co-authored with Frank Geary) is entitled: “Puzzles in the Economic Institutions of Capitalism: Production Coordination, Contracting and Work Organisation in the Irish Linen Trade, 1750-1850,” Cambridge Journal of Economics, Vol. 29, No. 4 (2005), pp. 559-77.

Subject(s):Markets and Institutions
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Taking on the Yankees: Winning and Losing in the Business of Baseball, 1903-2003

Author(s):Fetter, Henry D.
Reviewer(s):Haupert, Michael J.

Published by EH.NET (May 2004)

Henry D. Fetter, Taking on the Yankees: Winning and Losing in the Business of Baseball, 1903-2003. New York: W.W. Norton, 2003. xi + 461 pp. $25.95 (cloth), ISBN: 0-393-05719-4.

Reviewed for EH.NET by Michael J. Haupert, Department of Economics, University of Wisconsin – La Crosse.

“If ever a paradox were true, it is that big league baseball is strictly a business to those who make money off those who think it is strictly a sport” (The Sporting News, August 29, 1964).

Henry Fetter, a Los Angeles based attorney, has written a financial history of the New York Yankees that covers the entire period of their existence. What it lacks in quantitative detail, it more than makes up for with its broad view of the topic. As the subtitle of his book suggests, Fetter extends his analysis beyond the New York Yankees, focusing on several other teams as well while he explores the changing trends in the financial management of Major League Baseball teams.

The good news for researchers interested in professional baseball is Fetter’s voluminous citations. The endnotes total 38 pages, and I found them useful as sources of related data for my own research. I count this as a definite plus. There are also 20 tables at the end of the book, though they are not particularly enlightening.

The bad news is the lack of primary data. All of the financial data included in the book come from secondary sources. Some of them are more reliable (U.S. House of Representatives Hearings before the Subcommittee on the Study of Monopoly Power) than others (newspaper accounts quoting a biased owner or player) and thus should be used cautiously. As an example of the latter, Fetter reports that the Yankees spent unprecedented sums to acquire players, and “reportedly spent a major-league-leading $60,000 on acquiring players” in 1915 (p. 32). As his source for this data, he cites the presumably reliable Sporting News. However, a quick check of Yankee financial records shows that they actually spent $87,700 that year to acquire players. While this may well have been a major league record, it did not stay one for long. The Yankees themselves would go on to spend more than that on players in thirteen of the next twenty-seven years, including more than $90,000 the next year, and $161,000 in 1919, $100,000 of which constituted the famous purchase of Babe Ruth.

To his credit, Fetter does occasionally mention that his sources are not necessarily reliable. While this is a disappointment to an economic historian, the paucity of such data sets makes secondary sources for this type of research necessary. Indeed, I am aware of only one set of primary financial records for a professional baseball team — the aforementioned Yankee financial records, and then only for a limited period of time. The point is, secondary data sources are not reliable, and counting on them can lead to misinterpretations.

Aside from the data issue, I have no complaints with this book. It is well written, an easy and entertaining read, and features several reasonable hypotheses raised by Fetter in his attempts to explain why the New York Yankees have been so dominant on the field during their history. Since their first World Series appearance in 1921, they have appeared in the series thirty-nine times, emerging as the champion in twenty-six of those encounters. The next three teams combined have only twenty-six World Series titles. And the second winningest franchise in league history has won only nine championships.

Fetter attributes this on-field success to a then-innovative managerial strategy employed by the Yankees owners, Colonel Jacob Ruppert and the euphuistically named Colonel Tillinghast L’Hommedieu Huston, who bought the team in 1914. Ruppert and Huston, successful businessmen before they purchased the team, instituted a pyramidal front office structure that proved successful, and would ultimately be copied by other franchises. At the time, however, it was in contrast to the other franchises, which tended to be run almost single-handedly by their owners. As Fetter argues, the Yankee way proved to be the winning way, and was ultimately copied, though not perfected to the same degree that the Yankees were able to do it. Of course, what is not as clearly pointed out is how being located in the largest metropolitan market in the country certainly helped. The Yankees’ new owners introduced a management style that “successfully managed the delicate task of reconciling fandom with business acumen in operating their team” (p. 31), a statement not many would attribute to today’s teams.

Fetter does a nice job weaving the parts of his story together, separating the book into four parts, divided roughly by geography. In the first part, he focuses on the city of New York, discussing the rise of the Yankees and the decline of the Giants franchise as a function of their different financial approaches to the game.

Part two investigates the farm system, as devised by Branch Rickey of the St. Louis Cardinals, and whether the system of acquiring, evaluating and training labor was efficient. Part three moves back to New York, this time centering on Brooklyn and the shift of professional baseball franchises that began in the 1950s. The primary focus of these chapters is on the decision and negotiations that led to the move of the Brooklyn franchise to Los Angeles in 1958. The final section focuses on the modern era of professional baseball, touching on the changes wrought by television and free agency and their overall impact on the stability of the game.

Fetter takes the reader on a behind-the-scenes journey through the history of major league baseball. The discussions range from the impact of the revision of blue laws on baseball revenue to New York politics to league front office battles and cable television contracts. En route, he tackles some straw men, e.g. that baseball was a gentlemanly sport, not a business, and that free agency destroyed competitive balance (when that proved untrue, owners and their media shills changed their tune to “big market” payrolls destroyed competitive balance). As Fetter argues, and is supported by numerous studies, major league baseball has never been more competitive than it has been over the past decade.

For the economist who is also a baseball fan, Fetter does a nice job of covering the economic aspects of the game while mixing in just enough on-field action to keep things interesting. For the historian or baseball fan who is not an economist, the economics lessons offered in this history are not overbearing. In fact, little of what Fetter discovers should surprise an economist. That is not to say it wasn’t worth writing, only that much of what he relates substantiates basic economic theories. For example, he argues that even before free agency, the best players tended to migrate to the biggest and most profitable markets. His example of the sale of Babe Ruth to the Yankees is only the most obvious example of the Coase Theorem in action.

He has however, apparently not seen some of the recent research on the Yankees, though he thoroughly canvassed the New York and national sports press. He missed a couple of recent publications that would have been useful, though possibly not yet available as he was writing his book, including Neil Sullivan’s political and economic history of the construction of Yankee Stadium — Diamond in the Bronx (Oxford 2001) and Jim Reisler’s Before They Were the Bombers (McFarland 2002), a history of the pre-Colonel Yankee era. More puzzling is his oversight of the excellent two-volume business history of MLB penned by Robert Burk in 1994 (Never Just a Game) and 2001 (Much More than a Game) — both by UNC Press. Most disappointing, as mentioned earlier, is the lack of primary data sources.

Occasionally Fetter offers up some statistical evidence with no indication of its origin. This is frustrating, because data such as team payrolls and revenues are not readily available for the period before 1976. Other frustrating claims are those such as “During the 1902 season … player salaries spiraled ever upward as the rival leagues competed for talent” (p. 5). While this is intuitively obvious, Fetter neither offers evidence nor cites sources for his claim. For the most part, however, he is good about noting his sources.

As his story progresses through history Fetter takes up more modern developments in the game. He addresses the problem of corporate ownership by arguing its philosophy was the wrong way to run a ball team. He uses the Yankees, owned by CBS during much of the 1960s, as an example. The CBS ownership corresponded to the demise of the on-field success of the team. The Yankees went twelve years without a World Series appearance, their longest dry spell since 1909. Indeed, the financial performance during this period was little better, as CBS paid a reported $13.2 million for the team in 1964, and sold it to George Steinbrenner in 1973 for $8.8 million. It is worth noting that Forbes recently estimated the value of the Yankees at $849 million.

A testament to the quality of Fetter’s research is the number of economists he quotes throughout. I stopped counting once the number reached double digits, but was verily impressed to find economic historians J.R.T. Hughes and Alfred Chandler among their number. Despite my quibbles about sources, he clearly read some of the most relevant literature.

He ends an otherwise fine work by waxing rhapsodic about the game of baseball, falling dangerously close to undermining what he successfully argues throughout the book: that baseball is first and foremost a business — and as the Yankees have shown, it is a business which can be very profitable if run the right way — the Yankee way. Much to this Cub fan’s chagrin, the Cubs seem to be the antithesis to the Fetter hypothesis about what makes a successful baseball team.

Fetter provides a useful framework for anyone interested in the business of baseball, while leaving lots of room for future researchers to fill in the details. A lot of what he hypothesizes remains for rigorous testing. For example, he makes a compelling argument that the farm system was not an efficient method of procuring and training talent, but offers no statistical evidence to bolster his claim. His anecdotal evidence is interesting, but he leaves to others the job of gathering the evidence — available from primary sources — on the movement of players through the farm systems, their eventual destination at the major league level, and the success (or lack thereof) of the teams developing them. I am aware of one such study in progress, and have recommended the authors take a look at Fetter’s book.

Another intriguing example is his claim that “the colonels’ independent wealth also made it possible to reinvest the team’s profits into baseball operations, which provided the means for continued success” (p. 30). How do we know how it compares to other teams? It is an intriguing possibility, but the support of this claim is left to diligent future research. Indeed, the paucity of team financial data may preclude our ever knowing this for certain, but without at least trying to make a comparison, Fetter’s claim falls short.

My frustrations with the lack of primary data available to Fetter should not be taken as an indictment of his work. The data are scarce, or nonexistent, and he is not to be blamed for that. What he lacks in primary data, he makes up for in scope of coverage. Fetter provides an excellent read, serves as a great resource for other scholars, weaves a good story, and raises some intriguing questions, some of which can be answered by future researchers. I highly recommend this book to anyone who is a Yankee fan, a baseball fan, or has an interest in the business of baseball.

Mike Haupert is currently working on a financial history of the New York Yankees covering the period from 1914-1940, and a history of the professional baseball labor market.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Much More than a Game: Players, Owners, and American Baseball since 1921

Author(s):Burk, Robert F.
Reviewer(s):Haupert, Michael

Published by EH.NET (January 2002)

Robert F. Burk, Much More than a Game: Players, Owners, and American

Baseball since 1921. Chapel Hill, NC: University of North Carolina Press,

2001. xi + 372 pp. $45 (cloth), ISBN: 0-8078-2592-1; $19.95 (paperback), ISBN:

0-8078-4908-1.

Reviewed for EH.NET by Michael Haupert, Department of Economics, University of

Wisconsin- La Crosse.

During the Second World War federal legislation was introduced to mandate

that a minimum of ten percent of major league baseball players be amputees.

During the 1920s and 30s, when black players were barred from playing with

white players and thus formed their own leagues, they enjoyed greater freedom

of mobility and bargaining leverage than did white players. Over the past

three quarters of a century the average major league baseball player has gone

from earning approximately ninety percent of the average U.S. salary to

earning eighty times the average U.S. salary. This is just a smattering of the

type of information I was able to glean from reading Robert Burk’s history of

baseball labor relations.

Much More than a Game is the sequel to Burk’s similarly titled Never

Just a Game, a business history of professional baseball up to 1920. This

work completes the story through the 2000 baseball season. It is an excellent

overview of the often rocky and seldom dull relationship between professional

baseball players and owners. Burk takes us behind the scenes and into the

front office of major league baseball. The book is exhaustively researched

from numerous primary sources, all of which are noted in an extensive

bibliography, which should prove to be very useful to anyone interested in

pursuing research in the area of baseball business history.

Burk relies more on anecdote than detailed analysis, but offers an interesting

and engaging history nonetheless. One thing that is frustrating is the

vagueness of the footnotes. There is no clear indication of the source of some

of the detailed financial information that is presented. Footnotes are

reserved for the end of paragraphs, often referencing several sources. In some

cases, all of the sources are secondary, which often led me to wonder about

the reliability of the information.

This is but a small complaint however. Overall, Burk does a nice job of

outlining the historical origins of contemporary problems. Competitive

imbalance, one of the favorite whipping boys of the current ownership and

commissioner, is actually an old problem. However in the early days of

competitive imbalance, it was the players who paid the price. During the “low

salary era” (pre-1976) it was important for a player to be with a

first-division club for its post-season bonus pay potential. Given the

competitive imbalance, such supplementary income was not available for the

vast majority.

The animosity that colors player-owner negotiations today evolves out of

similar antagonistic relationships that have always existed, though as Burk

notes, it was the owners who held the upper hand originally. Given the history

of blatant exploitation and unethical behavior by the owners, it is little

wonder that the current players approach the bargaining table with a

no-holds-barred attitude. In fact, the more I read, the more I found myself

cheering for the players in their current efforts. I couldn’t help but think

that it might take another half century of player gains before they even the

score in the labor relations game.

Burk relates plenty of anecdotes about negotiating ploys and outright lying.

Shrouded in paternalistic jingo, the owners robbed and cheated the players

blind. They used salary cuts, demotions and blacklisting to keep player costs

under control. Among the seamier bits of chicanery owners employed was a form

of money laundering designed to short change the amount they had agreed to

provide to the players pension fund. Other examples of penurious behavior

included the owner who traded a player for a 25-pound turkey and another who

sold his own son-in-law to pay off a bank debt.

Each chapter covers roughly one decade from 1921 to 2000. The book is

especially strong in what Burk calls the inflationary era (post-1965). This

corresponds to the period when Marvin Miller took over as head of the baseball

players association, ultimately to be succeeded by Donald Fehr. In the past

thirty-five years the players have made steady, spectacular gains, leading to

an increase in average annual salaries from $16,000 to over two million

dollars. To put this in perspective, the previous half-century had seen the

average salary increase by barely $10,000. He also addresses the minor leagues

and Negro leagues, though this coverage is spotty and not as comprehensive. It

serves more as a comparison than anything else.

As I read about the historical evolution of the baseball business, I realized

that not much has really changed in the past eighty years. As early as the

1920s owners complained of the disparity between large and small market clubs.

Then as now, the owners attempted to transfer the burden of solving this

problem onto the players. In 1924 the result was a ban on incentive clauses in

player contracts as a way to prevent the wealthier clubs from putting pay

increase pressure on poorer clubs. Today, owners are attempting to implement a

salary cap. In the 1920s the gripes from owners centered on the high cost of

acquiring talent from the minor leagues. Ultimately, this led to a draft

system for acquiring players from minor league teams, and eventually was

replaced by near total vertical integration of the professional baseball

industry by the sixteen major league teams. Similar complaints are made today

about the cost of player salaries. Chief among them is the idea that large

market clubs, such as the New York Yankees, can afford to purchase all of the

best players. This complaint is hardly new. As far back as 1926 the Yankee

roster consisted of only one player (Lou Gehrig) who had not been acquired

through purchase or trade from another major league organization. Before free

agency, big market clubs held the advantage over small market clubs in player

acquisitions because they could pay higher bonuses to attract unsigned talent

and because they could afford to purchase talent directly from poorer clubs.

The only difference now is that the players, instead of the owners, receive

the cash for such transactions.

Burk concludes with some predictions for the fate of baseball in the new

century including the globalization of the sport to include international

drafts, foreign farm clubs, and perhaps even international competition on the

field. In the end, he wishes for labor peace between the players and the

owners, and hopes that for the good of the game the two sides will enter a new

era of cooperation instead of confrontation. Given the history that he so

thoroughly outlines however, this may be asking too much.

Mike Haupert is Professor of Economics at the University of Wisconsin – La

Crosse and Editor of the Newsletter of the Cliometric Society. He is

currently working on a number of baseball-related topics, including a

financial history of the New York Yankees.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Monopsony in American Labor Markets

William M. Boal, Drake University and Michael R. Ransom, Brigham Young University

What is Labor Monopsony?

The term “monopsony,” first used in print by Joan Robinson (1969, p. 215), means a single buyer in a market. Like a monopolist (a single seller), a monopsonist has power over price through control of quantity. In particular, a monopolist can push the market price of a good down by reducing the quantity it purchases. The tradeoff between price paid and quantity purchased is the supply curve that the monopsonist confronts. A competitive buyer, by contrast, confronts no such tradeoff — it must accept a price determined by the market. A monopsonized market will therefore be characterized by a smaller quantity traded and a lower price than a competitive market with the same demand and other costs of production.

Monopsony power, like monopoly power, results in economic inefficiency. This is because the monopsonist avoids purchasing the last few units of a good whose value to the monopsonist is greater than their marginal cost, in order to hold down the price paid for prior units. In principle, inefficiency from monopsony can be mitigated by a well- placed legal price floor, which removes the monopsonist’s power over price and eliminates its incentive to restrict the quantity it purchases. A modest price floor forces the monopsonist to take price as given and increase its purchases toward the level of competitive buyers. However, if the price floor is too high, the monopsonist will reduce its purchases — just as competitive buyers would do in response to a price floor — and inefficiency recurs.

In labor markets, “buyers” are employers, “sellers” are individual workers, the “good” is time and effort, and the “price” is the going wage or salary level. An employer who enjoys monopsony power holds down the wage by limiting the number of workers it hires. At the resulting inefficient level of employment, the value of the last worker’s contribution to output is greater than the wage she or he receives. This gap was termed the “rate of exploitation” by Pigou (1924, p. 754). It can be shown mathematically that a monopsonist employer will choose a rate of exploitation (expressed as a percent of the wage actually paid) equal to the reciprocal of the elasticity of labor supply (the percent of the workforce lost if wages are cut by one percent). Competitive employers face an infinite elasticity of labor supply — if they cut wages they lose their entire workforce, at least in the long run — and consequently are unable to exploit their workers. Competition thus forces the rate of exploitation to zero. Monopsonist employers by definition face a finite labor supply elasticity. For example, if a monopsonist faces a supply elasticity of five, then five percent of the workforce would be lost if wages were cut one percent, and it can be shown that the monopsonist will choose a rate of exploitation equal to one-fifth or twenty percent. Inefficiency and “exploitation” from labor monopsony can be mitigated by a well-placed minimum wage enforced by the government or perhaps by a labor union. Thus the monopsony model can provide justification for minimum wage laws and unionism because such measures raise pay, increase employment, and improve economic efficiency simultaneously!

Elaborations of the Monopsony Model

Cases of isolated labor markets with only one employer are surely rare, so the model must be elaborated to fit the real world. One elaboration is oligopsony. In oligopsony models, employers hold power over wages if they are few in number. This power might derive from collusion if employers cooperate in setting wages. Or it might derive from inflexibility of their respective workforces. The latter situation, called the Cournot model, implies that an individual employer that cuts wages cannot lose all its employees to its rivals, because those rivals cannot absorb additional employees quickly. Consequently, each individual employer enjoys some power over wages. Both collusion and the Cournot model imply that the greater the concentration of employment in a small number of employers, the lower the wage and the higher the rate of exploitation, holding determinants of labor demand and labor supply constant.

Another elaboration is employer differentiation. If employers differ by location or by working conditions, workers may not treat them as “perfect substitutes.” An employer that cuts wages might lose some workers but not all. Thus an individual employer enjoys power over wages to the extent that its rivals are far away or offer very different jobs. Recent elaborations of the differentiation concept focus on the process by which workers are hired. Models of moving costs emphasize that workers, once hired, may require a substantial wage increase to switch firms. This gives an employer power over wages for its existing workers, but not for new hires. Models of job search emphasize that workers need time to find better jobs. Thus an employer need not match the wages of other employers. However, to maintain a large workforce, an employer must pay better-than-average wages to reduce quits. Note that both moving costs models and job search models imply that workers are more mobile in the long run than in the short run. As Hicks (1932, p. 83) noted, monopsony power depends inversely on “the ease with which [workers] can move, and on the extent to which they and their employers consider the future, or look only to the moment.”

Athletes

A striking example of monopsony in an American labor market is professional baseball. Until 1976, the “reserve clause” in player contracts bound each player to a single team, an extreme form of collusion. As a result, teams did not compete for players. Estimates by Scully (1974) and others indicate that rate of monopsonistic exploitation was very high during this era — players were paid less than half of the value of their contribution to output, and possibly as little as one-seventh. After the reserve clause was eliminated in 1976, players with at least six years’ experience became free to negotiate with other teams. Salaries subsequently soared. By 1989, the rate of exploitation was estimated to have fallen close to zero (Zimbalist, 1992).

The early history of baseball, when rival leagues occasionally appeared, yields similar estimates of monopsony exploitation. Rival leagues undercut the reserve clause, which could only be enforced among teams in the same league. Thus the appearances of the American Association in 1882, the American League in 1901, and the Federal League in 1913 each prompted rapid increases in player salaries. But when the rival league was bought out or merged into the dominant league, salaries always dropped sharply — usually by about a half (Kahn, 2000). This history suggests that, in the absence of rival leagues, early professional baseball players were paid no more than half of the value of their contribution to output.

While no serious rivals to Major League Baseball have appeared since the early twentieth century, rival leagues have frequently appeared in other professional sports. For example, the American Basketball Association challenged the National Basketball Association from 1967 to 1976, the World Hockey Association challenged the National Hockey League from 1971 to 1979, and the United States Football League challenged the National Football League from 1982 to 1985. The appearance of each of these rivals seems to have caused player salaries to increase substantially in their respective sports (Kahn, 2000).

An even more striking example of monopsony is the market for college athletes. These players are clearly employees in all but name, but the National Collegiate Athletic Association strictly limits the amounts that athletes at member colleges and universities can receive. The value of the output of top college football players has been estimated at about $500,000 (Brown, 1993), many times more than such athletes are “paid.”

Teachers and Nurses

For the last few decades, researchers have investigated whether the markets for American school teachers and nurses are characterized by monopsony. Both professions may face a limited number of potential employers in any given geographical region. For teachers, employers are school districts, which are separated by political boundaries. For nurses, the dominant employers are hospitals, which are dispersed geographically except in large metropolitan areas. Moreover, teachers and nurses are (still) predominantly married women, who may find it difficult to move to a new geographic area if their husbands are employed. Researchers have considered both oligopsony and differentiation.

Early investigations measured the relationship between employer concentration and wages. A negative relationship, holding everything else constant, would suggest oligopsony. Several early studies — for example, Luizer and Thornton (1986) for teachers and Link and Landon (1976) for nurses — did in fact find negative relationships. Yet it is unclear whether everything else was held constant in these studies. Highly concentrated markets with small numbers of employers for teachers or nurses tend to be rural areas and small cities. Less concentrated markets with many alternative employers tend to be large cities. But pay for most other occupations — even less specialized ones with many potential employers — is lower in rural areas and small cities, so it is not clear that monopsony is to blame. Indeed, studies by Adamache and Sloan (1982), Boal and Ransom (1999), Hirsch and Schumacher (1995), and others have shown that employer concentration has little effect on the wages of teachers and nurses after controlling for city size or the general wage level.

A more recent investigation by Sullivan (1989) focused on differentiation among employers of nurses. Using data on hospitals, Sullivan estimated that if a hospital cut wages by one percent, it would lose only about 1.3 percent of its nurses immediately. This suggests that hospitals enjoy substantial power over wages. However, Sullivan also showed that a hospital would lose four percent of its nurses within three years and presumably even more in the long run. Sullivan’s estimates imply that if the hospital “considers the future,” it is unlikely to lower wages much more than about 10 percent below the contribution of the marginal nurse to hospital revenue.

Another recent study by Boal (2001) estimated the effects of legal minimum salaries on employment of teachers in two states. That study found that increases in legal minimum salaries tended to decrease employment, suggesting that the market for teachers was more competitive than monopsonistic.

University Professors

Several researchers have suggested that moving costs give a university monopsony power over its existing workforce because professors face moving costs. This is because professors have highly specialized skills and their potential employers (universities) are widely dispersed geographically. Now the market for newly-hired professors is surely competitive, because new hires must pay moving costs no matter who hires them. But the market for existing professors is monopsonized because professors, once hired, may require a substantial wage increase to switch universities. Moreover, since pay is usually adjusted over time for performance, universities cannot promise future salary increases at the time of original hire, as school districts do. Assuming some professors have higher moving costs than others, a modest cut in wages for existing professors will not cause them all to leave.

The model of moving costs predicts a negative relationship between wages and seniority (time spent at the same university). Ransom (1993) measured this relationship, after controlling for total teaching experience, education level, and other factors influencing professors’ productivity. He did find a negative relationship — the penalty for senior professors appeared to be roughly 5 to 15 percent. However, formal models of moving costs imply that newly-hired professors are paid more than the competitive salary level (in anticipation of later exploitation — see Black and Loewenstein, 1991) so not all of this penalty is exploitation.

Miners in Company Towns

Textbooks often cite company towns as classic examples of monopsony, especially towns in the late nineteenth and early twentieth centuries when transportation was expensive. A company town is a small town located in a remote area with only one employer. Company towns were most common in mining, where the town’s location was dictated by mineral deposits. Often the employer owned all the housing and operated all stores and other services in the town. This arrangement might seem to give the employer “control” over its workforce and monopsony power through severe differentiation of employers. However, Fishback (1992) has argued that this arrangement actually reduced living costs for employees by eliminating market imperfections in housing and retail markets. High turnover rates in company towns also cast doubt on the view that workers were “locked in” to their employers (see Boal, 1995).

Company towns were especially widespread in Appalachian coal mining in the early twentieth century. In West Virginia, for example, 79 percent of coal miners lived in company-owned housing in the early 1920s. Nevertheless, Boal (1995) showed that coal mining companies were not very differentiated and enjoyed little power over wages, at least in the long run. A one-percent cut in wages would cause at least two percent of the workforce to be lost the same year, and most of it to be lost in the long run. Thus coal miners seemed to “move with ease.” Assuming employers “considered the future” with discount rates of no more than 10 percent, they would push wages down only about 5 percent, according to his estimates.

Early Textile Mill Workers

Several researchers have investigated whether America’s first factories — New England textile mills — enjoyed monopsony power. Some researchers believe that as these factories grew in size, they were forced to raise wages in order to attract workers from farther away, at least in the early nineteenth century (Lebergott, 1960). Other researchers find no relationship between firm size and wage, but find evidence of collusion by employers in setting wages (Ware, 1966).

Still other researchers have tried to measure the rate of exploitation by comparing the value of the last mill worker’s contribution to output with her wage (most mill workers were women). Implied rates of exploitation range from 9% to over 100% for particular mills in particular years. However, most estimates of the last mill worker’s contribution to output are extremely imprecise, so most calculated rates of exploitation are not significantly different from zero (Vedder, Gallaway, and Klingaman, 1978). Moreover, the largest estimates are for the middle nineteenth century, not the early nineteenth century (Zevin, 1975).

Low-wage Workers

All monopsony models suggest that a modest increase in legal minimum wages should increase employment. In the United States, minimum wages affect only young and unskilled workers. Most studies of the effects of legal minimum wages in the 1970s and early 1980s found small decreases in employment for young unskilled workers, as predicted by the competitive model. However, later studies found almost no effect on employment (see Wellington, 1991) and a few studies found increases in employment as predicted by the monopsony model (see Card and Krueger, 1995). However, these latter studies are controversial (see exchange between Neumark and Wascher, 2000, and Card and Krueger, 2000) and have not convinced the majority of labor economists (see Whaples, 1996). In any case, the rate of exploitation, if positive, is probably small.

The Labor Market in General

Search models suggest that all employers enjoy some monopsony power because workers require time to find better jobs. Formal mathematical models of search, like those of Burdett and Mortensen (1989), imply monopsony power even in the long run and predict that larger firms must pay higher wages. This prediction explains the well-known “firm size-wage effect” — on average, if firm A employs one percent more workers than firm B, it pays 0.01% to 0.03% higher wages for the same kind of workers doing the same kind of jobs (Brown and Medoff, 1989, pp. 1304-1305). Assuming the “firm size-wage effect” is due to monopsony power, firms are pushing wages down by one to three percent below the value of the contribution of the last worker to output.

On the other hand, search models also predict that most firms and jobs pay high wages and only a few pay low wages. This prediction does not fit the facts, even controlling for skill differences across workers. Efforts to fit the model of Burdett and Mortensen (1989) to actual data have been frustrated by this problem. The best such estimates to date suggest that on average wages are pushed down 13 to 15 percent due to search (van den Berg and Ridder, 1993), but these estimates are surely very rough.

Summary

The simple monopsony model provides an alternative explanation to the standard competitive model of how wages are determined. It predicts that employers will hold wages down below the value of the last worker’s contribution to output (“exploitation”) by limiting the number of workers they hire. But it is too simple to fit real American labor markets, so elaborations such as oligopsony or differentiation of employers are needed.

Estimates of monopsony exploitation to date in American labor markets have yielded surprising results (see Table 1 for a rough summary). Monopsony does not appear to have been important in company mining towns, a standard textbook example, or in markets for teachers and nurses, early suspects. In fact, the largest plausible estimates of monopsony exploitation to date are not for blue-collar workers but rather for professional athletes and possibly college professors.

Table 1
Estimated Rates of Monopsonistic Exploitation in American Labor Markets

Labor market Estimated rate of monopsonistic exploitation* Source
Baseball players subject to reserve clause 100% to 600% Scully (1974), Kahn (2000)
Baseball players not subject to reserve clause Close to zero Zimbalist (1992)
Teachers and nurses Close to zero Boal and Ransom (2000),
Hirsch and Schumacher (1995)
University professors Less than 5-15% Ransom (1993)
Coal miners in early twentieth century Less than 5% Boal (1995)
Textile mill workers in the nineteenth century Some likely, but no consensus on magnitude Vedder, Gallaway, and Klingaman (1978), Zevin (1975)
Low-wage workers No consensus
Labor market in general 1% to 3% Brown and Medoff (1989)

References and Further Reading

Adamache, Killard W., and Frank A. Sloan. “Unions and Hospitals: Some Unresolved Issues.” Journal of Health Economics 1, no. 1 (1982): 81-108.

van den Berg, Gerard J. and Geert Ridder. “An Empirical Equilibrium Search Model of the Labour Market.” Vrije Universiteit, Amsterdam, Faculty of Economics and Econometrics Research Memorandum 1993-39, July 1993.

Black, Dan A. and Mark A. Loewenstein. “Self-Enforcing Labor Contracts with Costly Mobility: The Subgame Perfect Solution to the Chairman’s Problem.” Research in Labor Economics 12 (1991): 63-83.

Boal, William M. “The Effect of Minimum Salaries on Employment of Teachers.” Unpublished paper, Drake University, 2001.

Boal, William M., and Michael R. Ransom. “Missouri Teachers.” Unpublished paper, Brigham Young University, 2000.

Boal, William M., and Michael R. Ransom. “Monopsony in the Labor Market.” Journal of Economic Literature 35, no. 1 (1997): 86-112.

Brown, Charles, and James Medoff. “The Employer-Size Wage Effect.” Journal of Political Economy 97, no. 5 (1989): 1027-1059.

Brown, Robert W. “An Estimate of the Rent Generated by a Premium College Football Player.” Economic Inquiry 31, no. 4 (1993): 671-684.

Burdett, Kenneth, and Dale T. Mortensen. “Equilibrium Wage Differentials and Firm Size.” Northwestern Center for Mathematical Studies in Economics and Management Science Working Paper 860, 1989.

Card, David E., and Alan B. Krueger. Myth and Measurement: The New Economics of the Minimum Wage. Princeton, New Jersey: Princeton University Press, 1995.

Card, David E., and Alan B. Krueger. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply.” American Economic Review 90, no. 5 (2000): 1397-1420.

Fishback, Price V. “The Economics of Company Housing: Historical Perspectives from the Coal Fields.” Journal of Law, Economics, and Organization 8, no. 2 (1992): 346- 365.

Hicks, John R. The Theory of Wages. London: Macmillan, 1932.

Hirsch, Barry T., and Edward Schumacher. “Monopsony Power and Relative Wages in the Labor Market for Nurses.” Journal of Health Economics 14, no. 4 (1995): 443-476.

Kahn, Lawrence M. “The Sports Business as a Labor Market Laboratory.” Journal of Economic Perspectives 14, no. 3 (2000): 75-94.

Lebergott, Stanley. “Wage Trends, 1800-1900.” Studies in Income and Wealth 24 (1960): 449-498.

Link, Charles R., and John H. Landon. “Market Structure, Nonpecuniary Factors and Professional Salaries: Registered Nurses.” Journal of Economics and Business 28, no. 2 (1976): 151-155.

Luizer, James and Robert Thornton. “Concentration in the Labor Market for Public School Teachers.” Industrial and Labor Relations Review 39, no. 4 (1986): 573-84.

Neumark, David and William Wascher. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment.” American Economic Review 90, no. 5 (2000): 1362-1396.

Pigou, Arthur Cecil. The Economics of Welfare, second edition. London: Macmillan, 1924.

Ransom, Michael R. “Seniority and Monopsony in the Academic Labor Market.” American Economic Review 83, no. 1 (1993): 221-231.

Robinson, Joan. The Economics of Imperfect Competition, second edition. London: Macmillan, 1969.

Scully, Gerald W. “Pay and Performance in Major League Baseball.” American Economic Review 64, no. 6 (1974): 915-930.

Sullivan, Daniel. “Monopsony Power in the Market for Nurses.” Journal of Law and Economics 32, no. 2 part 2 (1989): S135-S178.

Vedder Richard K, Lowell E. Gallaway, and David Klingaman, “Discrimination and Exploitation in Antebellum American Cotton Textile Manufacturing.” Research in Economic History 3 (1978): 217-262.

Ware, Caroline. The Early New England Cotton Manufacturers: A Study of Industrial Beginnings. New York: Russell & Russell, 1966.

Wellington, Alison J., “The Effects of the Minimum Wage on the Employment Status of Youths: An Update,” Journal of Human Resources 26, no. 1 (1991): 27-46.

Whaples, Robert. “Is There Consensus among American Labor Economists? Survey Results on Forty Propositions.” Journal of Labor Research 17, no. 4 (1996): 725-34..

Zevin, Robert B. The Growth of Manufacturing in Early Nineteenth Century New England. New York: Arno Press, 1975.

Zimbalist, Andrew. “Salaries and Performance: Beyond the Scully Model.” In Diamonds Are Forever: The Business of Baseball, edited by Paul M. Sommers, 109-133. Washington DC: Brookings Institution, 1992.

Citation: Boal, William and Michael Ransom. “Monopsony in American Labor Markets”. EH.Net Encyclopedia, edited by Robert Whaples. January 23, 2002. URL http://eh.net/encyclopedia/monopsony-in-american-labor-markets/

The Rise of the National Basketball Association

Author(s):Surdam, David George
Reviewer(s):McFall, Todd A.

Published by EH.Net (April 2013)

David George Surdam, The Rise of the National Basketball Association. Urbana, IL: University of Illinois Press, 2012. vii + 247 pp. $25 (paperback), ISBN: 978-0-252-07866-8

Reviewed for EH.Net by Todd A. McFall, Department of Economics, Wake Forest University.

The bulk of my growing up occurred in the 1980s in Indiana, a time and place in which basketball was king. Looking back, it?s easy to see why. I?m not exaggerating when I say that Indiana University coach Bob Knight could have staged a coup and become governor of the state, and not many of us would have thought twice about it. This was the era when he was at the height of his powers as a college basketball coach (NCAA championships in 1981 and 1987 and an Olympic gold medal in 1984). Every good hero needs a rival, though, and Knight had one in Purdue University coach Gene Keady, a man who acted somewhat classier and always gave the favored sons in Bloomington a run for their money but fell short in the bright lights of March Madness.

The state?s famous single-class high school tournament hadn?t yet been traded for spiritual pennies on the dollar for the multi-class system that?s used now, so in those years the ?three-peat? team from Marion High School and Bedford?s Damon Bailey were taking Hoosier Hysteria to another level. Even Hollywood got in on the action when it released the movie ?Hoosiers? in 1986 in order for the world to know the story of the 1954 Milan Indians, the last small, agrarian high school to win the tournament.

Finally, at the world-class level, we had the self-proclaimed Hick from French Lick, Larry Joe Bird, the three-time NBA MVP and league savior who, along with Magic Johnson and Michael Jordan revived the league from its embarrassing state in the late 1970s.

So, it was with great interest as a basketball fan and an economist that I read The Rise of the National Basketball Association, by David Surdam (Department of Economics, University of Northern Iowa). I was born in Fort Wayne, an industrial city in the Northeast portion of the state that was one of the original cities to host an NBA team. (The team moved to Detroit once the league started to outgrow its original britches.) The story of the NBA is a story about where I?m from and many of the cultural touchstones about the game I love.

And that?s audience for whom the book is written. If you?re a fan of the NBA ? and I mean a real fan of the league and its history ? Surdam?s book won?t disappoint. He?s researched well the men who struck out together to take advantage of the growing popularity of basketball in the post-World War II era, a time in which incomes were expanding and cities were becoming more important to the American economy.

Surdam is at his best when he?s discussing the two men at the center of the league?s founding ? Maurice Podoloff, the league?s first commissioner, and the incredibly named Ned Irish, the owner of the New York Knickerbockers and Madison Square Garden. Irish?s scheming and dreaming of creating a league worthy of our attention is palpable in the early chapters of the book, which starts at the founding years of the league (1946-1949) and continues to the mid-1960s, when the NBA became ?major league.? Irish and his founding members were so desperate for a chance to get a legitimate professional league started that they allowed franchises to start in places like Anderson, Indiana, Sheboygan, Wisconsin, and Waterloo, Iowa (presumably to aid in ease of sportswriting). It shouldn?t be surprising that these franchises folded or were forced out ? the Fort Wayne franchise was moved in the mid-1950s ? once the league started to become a financial force. Not surprisingly, Irish is in the middle of the scheming and dreaming to move to greener pastures during the early era.

But the move from the sticks to the big time wasn?t without incident, and Surdam is there to tell of the growing pains. My favorite anecdote occurred somewhere near what had to be Angola, Indiana, a town about 40 miles north of Fort Wayne. Before flying became the preferred mode of transportation between cities, players often took trains from city to city, and Fort Wayne, for some reason, never had a depot for a passenger train. Knicks official Marty Glickman recalled that players traveling to Fort Wayne had to detrain in Angola, walk for a half-mile to a blinking yellow light, and find the Green Parrot Caf?, where stones were tossed to a window to awaken the proprietor, a ?frosty-haired woman? who would summon cars to take the players into Fort Wayne. You can?t make this stuff up!

The author?s strongest contribution to the sports economics literature is his discussion of the serious aspects of creating and sustaining a league. In order for a professional sports league to be successful, the league has to acquire the best players, bargain with them in order to establish a league with an appropriate level of competitive balance, and aid in creating contests that are viewed as legitimate and exciting. To meet these goals, Surdam recounts the signing of George Mikan, the game?s first superstar, by the Chicago franchise (the American Gears), and eventually the Minneapolis Lakers. Surdam also tells of the role that Irish and Podoloff played in establishing rules-of-the-road for the league. He recounts very well the league?s critical decisions over the sharing of gate receipts, the signing of players, and fees to join the league ? recalled and supported with numerous tables of figures that relate ticket prices to the sizes of the cities where franchises were located. Most interesting is Irish?s devious use his Madison Square Garden, which he opened for franchises from cities he deemed worthy of the NBA (larger gate receipts for those teams) and closed for franchises of lower stature. (Those teams played in the 69th Street Armory.) Finally, Surdam also discusses some difficult decisions the league had to make in order for it to remain legitimate in fans? eyes. The Indianapolis Olympians, a player-owned franchise, had to be dismembered because some of its players were implicated in the point-shaving scandal that rocked college basketball in the early 1950s. Olympian players and former University of Kentucky stars and Olympic heroes like Ralph Beard and Alex Groza were implicated in the scandal and had their ownership status revoked, a move that destroyed the popular franchise and professional basketball in Indianapolis until the creation of the Pacers of the American Basketball Association.

Of course, no telling of the NBA story is complete without mentioning the adoption of the 24-second shot clock, perhaps the greatest rule implementation in the history of professional sports. The shot clock forced teams to MOVE rather than sit on the ball (almost literally) so that opposing teams? stars could not inflict damage on the offensive end of the court. The rule took the NBA away from a league that looked like rugby toward the league of Bob Cousy, Jerry West, and Bill Russell. Unfortunately, Surdam doesn?t treat this development with the level of scrutiny I think it deserves, and this is indicative of the biggest disappointment of the book ? the author just doesn?t talk much about basketball, and I think there?s room for it in a book like this. So, he mentions in passing the adoption of the shot clock and then chooses not to discuss the on-court implications of the rule. Throughout the book, Surdam supports (thankfully) his discussion with numbers, and maybe he feels the numbers aren?t compelling in the case of the shot clock. If so, that?s too bad, because the anecdotal evidence sure is, as the only evidence Surdam needs to cite is the rise of Cousy, Russell, and the Boston Celtics, the team that employed the fast break to its most lethal use. (Let?s be clear, though, there are plenty of other data sources to support such a discussion.) Also, he mentions very briefly the famous players? strike before the 1964 All-Star game, a decision that for many league historians was a critical inflection point for players? compensation. For better for worse, the author asks us to connect those dots ourselves, and if you don?t know the sport well, you might not know those dots exist.?

In closing, Surdam has written a book in which the reader gets a sense of all the important decisions (and scheming) made to take the NBA to the point at which it became a rival to Major League Baseball and the National Football League. Surdam tells well the story of the founders creating a league in which uncertainty and excitement were part of every contest and every contest was viewed as being a legitimate struggle between the agents who were competing against one another. But if one is looking for a discussion of the on-court implications about the NBA?s early days, you?ll find the book to be light in that regard.
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Todd McFall is the author of articles that study the economics of professional golf and the organization of sports leagues. His research has been published in the Journal of Economic Education, Applied Economics Letters, and the Journal of Sports Economics.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (April 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Business History
Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII