Monday, January 9

Moneyball and the "Occupy" movement

I recently finished reading Moneyball (I haven't gotten around to watching the movie yet). I'm not a baseball fan by any stretch of the imagination, but I really enjoyed this book. It is a David-and-Goliath story about how the nerdy-but-cheap Oakland A's used their knowledge of stats to outsmart the baseball establishment.

Reading Moneyball, I couldn't help but think about the "Occupy" movement. I empathize with the protestors to some extent — it's difficult to comprehend how the "one per cent" can make so much more money tha everyone else, especially when times are tough for many people right now.

But my economics background tempers this empathy. The economist in me says that the so-called one per cent earn as much as they do because they are very valuable to their companies. Companies want to maximize their profits, and CEOs help them do this. If a company could save money by paying their CEO less, they would. The reason they don't is because they'd get stuck with a less talented CEO, which would mean fewer profits for the company.

And these companies earn their profits not because they rob or cheat the 99 per cent, but because they provide something of value to society. Bill Gates is the second richest man in the world because society is better off for having Microsoft's products. Nobody is forced to pay $179 for Microsoft Word, for example. People trade their $179 for Microsoft Word because they are happier having Microsoft Word than having $179.

Moneyball challenges this thinking. My logic is predicated on the assumption that the free market acts efficiently. Moneyball argues that the Oakland A's were successful, even though they spent far less money than other teams, because other teams were acting inefficiently. Other baseball teams overpaid their players. Oakland was able to find players who were equally or more talented, but commanded a far lower salary.

Reading the book, I wondered if there is any chance that similar inefficiencies exist in the corporate world. Moneyball portrayed Major League Baseball as an old boys' network that rewards tradition and punishes innovation. It's not crystal clear to me what the Occuy movement's main message is, but perhaps it's an analagous one to Moneyball.

Perhaps CEOs are paid astronomically high salaries not because the CEOs bring their companies mounds of profit, but because corporate boards function like an old boys' network, rewarding executives who fit in with the traditions and thinking of the old boys' network. Perhaps, like the Oakland A's, many head offices on Wall Street could hire new executive teams that are far cheaper, and more effective, than existing head honchos.

Perhaps. But I'm not convinced. That is because of one key difference between professional baseball and the corporate world: There are 30 teams in Major League Baseball, but there are countless more in the corporate world — 2,317 on the New York Stock Exchange alone.

Moneyball is convincing; it's believeable that 29 baseball teams (minus the Oakland A's) could be operating inefficiently. But can the vast majority of thousands of companies be operating inefficiently? That's a little harder to swallow.