So went the argument in support of baseball's reserve clause, which was in place until 1975. Without the reserve clause, players would be able to freely negotiate with any team after their contracts expired. The owners argued that this would lead to ruthless bidding wars and eventually make the costs of running a baseball team so high that the league would go bankrupt. Even many players bought into this argument.The committee had been meeting for the last two years. Each time the players proposed an alternative to the reserve clause, the owners rejected it. “If you want to change one comma,” Miller said, describing the owners’ position, “Yankee Stadium will fall.”
That the system remained in place for so long reflected a widespread misunderstanding of economics. In free markets, the forces of supply and demand ensure that prices reach optimal levels. Ballplayers have quantifiable values, based on how many additional wins their contributions are expected to bring, and in turn how much additional revenue these wins will generate. If the Yankees thought Alex Rodriguez's contributions wouldn't earn them more than $32 million a year in additional revenue, why would they give him such a big contract? Why would teams systematically commit to payrolls that they couldn't cover based on their expected income?
If players collectively demanded $10 billion a year, owners aren't going to pay it, because the league only generates about $6 billion a year (and has many other expenses besides player salaries). No amount of vicious bidding could support such demands. But the free market has driven player salaries up exponentially in the past three decades, and the league is still alive and well. The only difference is that a greater share of the profit is now in the hands of the players instead of the owners.
Sometimes, revenue can be unpredictable. Many teams in all sports are lamenting the long-term contracts they've signed ahead of the current recession, and some are losing money in the short term. But, like in any business, any team or any league that loses money year after year will eventually go bankrupt. Teams will not consistently make wild, unsustainable bids for players and drive themselves into oblivion.
I've written previously about this book, analyzing how it's so difficult for athletes to bargain collectively.