Ev Ehrlich's Everyday Economics

Texas Over San Francisco. And more.

Two things today.  The first is comments from last week’s discussion of Malcolm Gladwell’s article in the New Yorker.  Go figure.  You can say all sorts of stuff and people read it and shrug, but start talking about Malcolm Gladwell – or Robert Frank – and the phones start lighting up.  My point is not to keep this issue alive – I’m happy to, of course, but why bother you with it? – but to give people of good faith and reason an honest response.

Then we can move on to item two – the World Series.  Anybody who would rather read an extended discussion of scale building in the service industries than speculation about who’s going to win the World Series is invited to…well, we start with the mailbag.

Someone named CJ Alexander writes:

I wish CEO pay would stop getting lumped in with “Talent” like that of athletes and entertainers. Absurd CEO pay is largely an American phenomenon perpetuated and protected by rank cronyism rather than market forces.

There is a comedian in Seattle named CJ Alexander, and I am hoping this is from him.  A comedian is reading my stuff and making coherent comments?  How much better can it get?    

CJ, best to your namesake, C. J. Wilson, who’ll be throwing Game Three for the Rangers..oh, I’m getting ahead of myself.  And I’m impressed that we’re at a point where we wish our CEOs had the abilities of, say, athletes such as Tim Linceum and Cliff Lee.  But CEOs are paid a great deal in large part because a great deal is bet on them, and because their opportunities to create (or destroy) shareholder value grow exponentially as the economy becomes more complex and contested.

What do CEOs do?  The first one I worked for was Mike Blumenthal, an interesting if high-handed guy, and he once told me the CEO had two jobs – to provide a vision for the company and to make sure the resources were there to execute it.  I would add, as a corollary perhaps (but not Ehrlich’s Corollary, please), that the CEO has to explain the vision and the strategy to achieve it to both internal and external stakeholders.  This sounds like story telling, and it is, but it is the frame that allows the organization’s progress to be measured.

So I think there’s an objective, economic reason why CEO pay is so high, particularly in the U.S., where equity markets are deeper, more volatile, and where the market for corporate control more competitive.  If I wanted stability, I’d go be a CEO in Europe or Japan, where the forces acting on you are different.  Do cronyism and back-scratching play a role?  Yup.  But there’s a Darwinian thing to them – the stockholders that allow them end up the losers for it.

Jesse Fahnestock writes:

Ehrlich’s Rule about the fundamentals of human behavior being the same at large sale is really the Economist’s rule, and could be fairly restated as “Cultural factors Are Not Really Relevant.”  I think it would be worth looking at those factors on their own terms as well.

Man, here I am, pushing 60, still talking about Gramsci!  (as opposed to Gramscii, which is a programming language)!

I think I’m reminding people that economic rules are important, too.  But I think we might be conflating two different arguments.  The economist’s rule, as economists are taught it, is that the commonality of the human race is their homo economicus instinct – to maximize, optimize, calculate, and act with economic rationality (transitivity, consistency, and so on).  That’s so far-fetched that they’re now giving Nobel prizes to the people who show that people act differently.  If you think that view of humanity substitutes for the reality of human longing for relatedness and, ultimately self-actualization and fulfillment, you’re off by a wide mark.

But there’s a second level, in which different societies have different economic rules or conditions, and those rules have more pervasive effects than we let on.  I’m finessing trump here, a little, because you can argue that those rules – a consensus-driven corporate control culture in Japan, a co-determined one in continental Europe, a fiercely competitive one in the U.S. – in turn reflect underlying culture and some historical legacy.  Culture counts, to be sure.  But my point in writing the piece was that those who see pay and the distribution of income from a cultural or anthropological perspective ought to consider economics.

Then someone named MQ says:

Robert Frank made this point many years ago – the whole economic theory of “winner take all” is precisely about technologically enabled economies of scale in service provision.

Well, yes and no.  Here’s a good statement by Frank that shows that MQ – my old buddy Mollie Quasebarth?  The Modern Jazz Quarter dropping their middle name? – has a point: 

Winner-take-all has long been a feature of markets in entertainment and sports. But in recent years, many other fields have adopted the winner-take-all payoff structure. There are two reasons for its proliferation: developments in communications, manufacturing technology, and transportation costs that have enabled the most talented performers to serve ever broader markets, which has increased the value of their services; and changes in implicit and explicit rules that have led to much more open competition for top performers, which has made it more likely that they will be paid their economic "value" as determined by the marketplace.   

That’s pretty close to economies of scale, so MQ’s right.  And, in fact, I chose this cite (from a book review, not the book itself) because it makes the second point I made last week – that “changes in the …rules” have allowed more open competition for top performers – that’s another way of saying that Marvin Miller and a unified, multipolar, national market for baseball both were needed to get salaries to rise.

But I think there’s a disconnect in Frank.  I view services scale building as the driver of these rising salaries, but I don’t see Frank’s objection, which I might paraphrase, is 1) “this is bad for the income distribution” and 2) “kids see ARod or Lebron James make this money and waste their time trying to be them.”  These are important issues, but I’m still going to treat them cavalierly – 1) this is a less troubling aspect of the income distribution than many others, and 2) if they’re wasting their time, it’s because they’re rational and have few alternatives.

Let me let it stop there.  Frank and I area pretty close and we’re both distant from Gladwell.  MQ, good point.

Simon writes:

Your “Rule” has no basis in empirical evidence.

True dat, Simon.  Maybe I should have called it my Hypothesis, or better yet, Ehrlich’s Razor – it worked for Occam.  Empirical evidence is a pretty high standard, but at least you can derive, for example, Hotelling’s Rule or Tinbergen’s Rule, even if they aren’t obeyed in life.

Finally, Minot – I presume not the town in South Dakota – points out:

Henry Ford passed in 1947 so Ford was not run by an anti-Semite when it made IPO via Goldman.  You are the right track.

Yes, but I stayed on the train one generation too late.  My apologies to the late Henry Ford II for the confusion – no, wait, he’s dead, too.  And he wasn’t an anti-Semite, but he did give us the Edsel.

I wish CEO pay would stop getting lumped in with that of “Talent” like athletes and entertainers. Absurd escalation of CEO pay is largely an Ameican phenomenon, perpetrated and protected by rank cronyism rather than market forces. Except in very rare outlier cases, it has little or nothing to do with performance.

Stepping back and looking at the respective bottom-line contributions of each makes the difference pretty obvious. The “talent” is both the production labor as well as the work product itself; the CEO is a manager of those things. In consumer terms, the it’s the difference between “thing we pay for and care about” versus “bureaucratic overhead.”

And now, the World Series.

Here’s a comment made by Dave Shenin in today’s Washington Post about Cliff Lee, who has a lifetime post-season record of 7-0 and an ERA of 1.26;

among pitchers who have made at least five post-season starts, only Sandy Koufax (0.95) and Christy Mathewson (1.06) have lower ERAs.

Wow, that’s a lot to handle at breakfast.  But first, you have to love the idea that we’re comparing Lee to a guy who not only pitched a hundred years ago, but died almost a hundred years ago.  (Well, 85 – I’m being literary.)  Mathewson, The Big Six, put on the greatest week of pitching ever, (sorry, Johnny Vander Meer), when he pitched three shutouts in one World Series – in 1905.  In fact, Matty’s incredible effort – three shutouts in six days, 14 hits allowed in 27 innings, 13 Ks – saved the World Series as we know it. 

That’s true because…The first Series was in 1903, and the upstart Boston Americans (perhaps the Red Sox should think about changing their name back) stunned the world by beating the Pittsburgh Pirates (who featured Honus Wagner, the Flying Dutchman, best position player of his day) only two years into the upstart American League’s existence.  It was Namath and the Jets, just as astonishing, 66 years before. 

So in 1904, when John McGraw’s Giants won the senior circuit’s pennant, they announced it was beneath them to play Boston, which had won the American League pennant again.  So there was no World Series, owing entirely to McGraw’s arrogance.  It was the only Series that didn’t happen come hell, high water, war, Depression, and everything else until Bud Selig and a few other radicals decided that baseball could not exist without a salary cap – let me repeat that – would cease to exist without a salary cap – unless they broke the players’ union and cancelled the World Series so, motivated by their desire to save baseball, they let the Series go down.

Selig to date has never admitted he was wrong, but John McGraw won his pennant again in 1905 and ­–as a bigger man than they -- agreed to play the Philadelphia-Kansas City-Oakland-Santa Clara?/Las Vegas? Athletics.  It was a transcendental match-up – every game was a shutout and Mathewson pitched three of them.  “Iron Man” McGinnity, Chief Bender, and Eddie Plank also pitched in that Series – all four (with Matty) are in the hall of Fame.  The public was galvanized – think Ripken and McGuire after the 1994 debacle – and the Series as an institution was saved.  Mathewson.  McGinnity.  Bender.  Plank.  There were Giants in the Earth in those days, boys and girls, and Athletics, too.  When you see that little elephant patch on the uniform of the Oakland A’s, remember that Bender and Plank and God’s own abandoned child, Rube Waddell, wore it 100-plus years ago, just like Cahill and Ziegler and Breslow do today.  That’s got to count for something.

But there’s another aspect to the comparison of Lee to Matty and Koufax, and that’s this – how dare they?  There are all sorts of baseball fans who read that comparison and say, hold on a second.  Lee’s pitching against wild card teams, in three rounds of playoffs, how can you compare him to guys like Matty and Sandy, who only pitched in the Series?

I admit to reacting that way a bit, but reality has to intercede.  First, there were 16 Clubs in their day, and thirty today, so the idea that the teams aren’t as good is, by that standard, only half true.  But more importantly, Matty played in the apartheid league (to his credit, I think Bud’s apologized for that one), and Sandy – in the Series – against an American League that was slow to integrate (Elston Howard and whom?).  Neither played against a field that was international in scope – no Ichiros, few Pujolses.  And, more importantly, today’s ballplayer trains all year, knows the technique of playing far better than their predecessors of past eras (watch how many guys in newsreels are hitting off their front foot), and in a league in which the strategy of playing has evolved dramatically – bullpens, platooning, statistics, and so on.

Please – are you going to tell me that Ty Cobb was really a better ballplayer than Ricky Henderson?  That a guy with Ricky’s (as he’d call himself) ability wouldn’t have eaten up baseball 100 years ago?   Babe Ruth, great, great player, changed baseball.  Would he hit 60 home runs against 6-inning starters are specialized relievers throwing the slider and the cutter?  Get real.  You are watching the best baseball that was ever played, right now.

Was I writing about the World Series?  Oh yeah.  In the last ten years, there have been 13 different Clubs going – that’s almost half of baseball’s 30 Clubs that have been to the World Series in the past ten years.  Texas and San Francisco both emerged from the middle of the baseball pack, dethroned the sitting champs, and are quirky Clubs.  San Francisco has good pitching, a bullpen capable of greatness, and a great line-up of other (foolish) peoples’ cast-offs – Burrell from Philly and Tampa, Ross from Florida, Huff from lots of places, but Texas might have the ultimate cast-off – their catcher, Bengie Molina, whom they obtained from  San Francisco itself – man, I wouldn’t want to play a Club that had a guy who was, up to memorial Day, my catcher! A catcher is the guy who knows everything!  He’s got the keys to the kingdom, the formula for Coca-Cola!  Texas also has 1,2,3, here comes Mr. Lee, the underappreciated , free-swinging Vlady Guerrero, who now has the chance to put a capstone on a great career, and the amazing player, person, and narrative of Josh Hamilton, who lost years to dope and drink and reclaimed himself with faith, the real Roy Hobbs – the film version, mind you, not the book.   

So here it is:  Texas wins in 7.  Lee is the real deal, and while he’s up against one of my favorite players, Tim Lincecum, The Freak, who resembles the knitcapped punk on The Simpsons and has an incredibly delivery to the plate, he’s going to win twice, and the Texas line-up is good enough to find two more wins, Matt Cain, the Giants’ number two, and Brian Wilson, their overpowering and ironic closer, notwithstanding.  And my theory of the Series is that “good” teams beat “hot” teams, although you’ve got to be a little of both to be there.  Philly over Tampa in 2008, Sox over Rockies in 2007, Cardinals over Tigers in 2005.  (Exception: Florida over New York, 2003.) 

Either way, it’s the best week in sports.  Hey, how’d LeBron do last night?   Really?  Wake me in April.