As Phil and others around the econ blogs have noted, Gerald Scully has passed away. He is known to us primarily as a pioneer in sports economics, but as John Goodman notes, he made significant contributions to a number of fields. His work in public economics is particularly insightful. Indeed, Google Scholar lists his 1988 JPE paper, "The Institutional Framework and Economic Development" at the top, with 406 citations, besting his 1974 AER classic, "Pay and Performance in Major League Baseball," at 302. But it is the latter paper that is worth celebrating here. Although rudimentary in its method by today's standard, it was an eye-opening analysis with a staggering conclusion: that major league baseball players of that era were paid a small fraction of their marginal revenue product, on the order of 1/5 or less.
My colleague Bill Dougan once told me that he regarded "Pay and Performance" as one of the best pieces of economic scholarship in the last quarter-century, something that I repeat to my students in sports economics classes to this day. Note that we are speaking of economic scholarship, and not just scholarship in the economics of sports. Scully's 1974 paper is evidence that the study of economics in the context of sport can be important, and make a significant contribution to the discipline as a whole.
What made "Pay and Performance" special, you ask? First, it was innovative. It was an early example of employing data from sport to test economic theory, in this case the theory of monopsony. The paper was also very clever. Scully observed that the reserve clause created conditions of monopsony in the baseball players' labor market. Economic theory states that monopsony depresses wages below marginal revenue product, but if so, how much? Scully came up with a simple method to estimate the MRP of pitchers and hitters, and compared this estimate with their wages. Wages were well below Scully's estimate of MRP.
The magnitude of the exploitation generated by the reserve clause -- 80% or so -- is a jaw-dropping figure. This result, combined with the imagination and execution of the analysis, warranted the article's publication in the American Economic Review. But it is what happened next that fortuitously turned Scully's paper into an example of the kind of scholarship that all economists should seek to emulate. Scully's article was published in 1974, the year that Marvin Miller's efforts began to shake the foundation upon which the reserve system was built. The development of free agency in baseball meant that Scully's estimate would be put to the test, because a monopsony labor market would be replaced with competitive bidding for those players. As Rodney Fort subsequently showed, salaries soared for the "first family of free agents", in many cases increasing by a factor of four or more, as Scully's estimates implied.
Sports history had thus subjected Scully's model to a stern test, which it passed with flying colors. It is not common for economic theory and evidence to produce an estimated effect that is so clear and so large as was Scully's (for example, we are still arguing about the size of fiscal multipliers seventy-odd years after Keynes). It is even less common for such an estimate to be tested by events so promptly and directly, and in addition to have these events support the author's work so convincingly.
"Pay and Performance in Major League Baseball" will long be remembered for these reasons. So tonight I will raise a glass and toast the seminal contributions and insights of Gerald Scully. Here's to you, Jerry.