NFL Free Agency and the Market Process
Today is the official start of NFL free agency, when teams begin filling their rosters with new players for the upcoming season. This, along with the NFL draft, is one of the biggest days for pro football’s “business season” which is followed as closely by most NFL fans as the games themselves. This time of the year, however, is not only a great subject for discussion at your favorite sports bar, it is a great illustration of economics in action.
For example, free agency is a perfect example of how prices are formed on the market.
In Human Action, Mises begins his section of Valuation and Appraisement with the following:
The ultimate source of the determination of prices is the value judgments of the consumers. Prices are the outcome of the valuation preferring a to b. They are social phenomena as they are brought about by the interplay of the valuations of all individuals anticipating in the operation of the market. Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of the market prices.
The truth of Mises’s words come to life during NFL free agency where 32 teams are consumers, and what they are buying are the rights to professional athletes.
Each team must decide the value they place on the players available. Since teams have the ability to trade players with other teams, additional valuations must be made about players on other teams, as well as how each franchise values their own draft picks this offseason. Further, particularly since teams face both restrictions of roster size and a salary cap, opportunity costs must be considered.
We can illustrate this by analyzing one move made earlier this week, when the New York Giants signed wide receiver Brandon Marshall. Since Marshall was released by the New York Jets, he was able to sign with teams prior to the official start of free agency. According to reports, Marshall’s deal with the Giants is a two-year deal worth $12 million.
Ignoring the fine print of the contract (most contracts end up paying out less than their full nominal value), the deal tells us several things. For one, the Giants value Brandon Marshall more than they value $12 million — including all other players that could have been signed with that money. Since the Giants, earlier during this free agency released another veteran receiver, Victor Cruz, we know they valued Brandon Marshall’s contract more than they valued Victor Cruz’s contract.
Of course these valuations are entirely based on the individuals who are making the decisions in the moment. Brandon Marshall may have been anxious to sign with the Giants because he enjoyed playing in the New York area for the Jets the last few seasons. Or perhaps he wanted to play for a Super Bowl winning quarterback. Perhaps he didn’t expect to make more than $12 million (though he claims he had higher offers already on the table). Another player may have an entirely different set of preferences.
Similarly, how the Detroit Lions value a player may be entirely different than how the Cincinnati Bengals or the New Orleans Saints do. And the Bengals and Saint’s valuation may be made for entirely different reasons.
Teams may be concerned about a scheme fit, with some players working better for some coaches than others. Perhaps a team is in “rebuilding mode” and is less interested in veteran players than a championship contender (the former revealing a higher time preference than the latter).
Some teams may have a knowledge advantage over others. Sometimes a front office decides to let a player they’ve had on their roster for four years walk, because their experience has left them to doubt a player’s work ethic. It is not uncommon to see a player have a breakout season in their last year on contract, collect a large payday, and never again perform at a high level.
Sometimes players end up making more money than sports analysts expected — such as when the Carolina Panthers gave defensive end Charles Johnson a $72 million dollar contract in 2011 (which actually worked out pretty well for Carolina, in spite of the opinions of pundits). Often veteran players are shocked to find the market doesn’t think quite as highly of them as they do themselves. Sometimes such veterans, particularly those coming off injuries or down years, will take one year “prove it” deals to show the market what they are missing.
This is all entrepreneurship in action, with each team and player having to make crucial judgment decisions in the face of great uncertainty. The interaction of these entrepreneurs bidding against each other is what leads to the formation of very real prices for athletes
Sometimes teams are successful, signing a contract that appreciates in value — such as when the Pittsburgh Steelers signed an extension with Antonio Brown in 2012 averaging $8 million a year (making him around the 18th highest paid receiver in the league), only for him to perform as perhaps the best player at his position in the NFL. Alternatively, in 2009 the Washington Redskins made Albert Haynesworth the highest paid defensive player in NFL history, only for him to contribute little in the two years he spent with the team. Unfortunately this is precisely the sort of malinvestment that has long plagued the franchise.
As Mises wrote, “Economics is not specifically about business; it deals with all market phenomena and with all their aspects."
As such, any serious analysis of the NFL is incomplete without a sound understanding of basic economics. Now if only Americans took the subject as seriously as they do football, perhaps socialism would go the way of the XFL in the dustbin of history.
No comments:
Post a Comment