The New Economics of the NBA: Part 1

Thomas Arnold, Hoopism fan and Economics student at William & Mary, has written a great article about the new player/team dynamic from an economic stand point. We really enjoyed it and hope you do to. The article is in two parts, be sure to check back for part two next week. You can follow Tom on Twitter @tomrannosaurus.

Part 1: Money, Endorsements and a Shot at the Title

These are novel times in the world of NBA front offices. The relationship between teams and their players is changing quickly. To every fan watching their star players being shipped off or leaving for greener (sunnier?) pastures, the question is: why are these changes occurring now? The answer is a perfect combination of poor economic reasoning by the NBA (and unintended consequences, more about that in Part 2) and a change in conditions for players.

First, the issue of today’s NBA athlete. Much (far too much) has been said about LeBron James’s decision to take his talents to South Beach, but here I go anyways. The best and brightest talking heads have noted that gods of basketball such as Michael Jordan, Charles Barkley, Magic Johnson, Larry Bird et al. would never, never, leave their respective towns for a different team. These talking heads go so far as to say that LeBron is not as competitive as any of these previous players because these greats never acted in cahoots with one another to play for the same team. This is utter nonsense. Each of the players mentioned did the same thing–under the prevailing NBA rules of their day. When the time came for their free agency, they maximized their utility. Utility, in the economic sense, is essentially a measure of satisfaction or happiness.

Let’s use Jordan as an example, Jordan by any measure, valued winning above all else. He was purportedly offered $33 million for a one year contract by the Knicks for the 1997-1998 season, but he took $30 million to stay with the Bulls. Simple economics would suggest a player would play for the team that would give them the bigger payday. Of course, in sports, we also want to believe our icons; our heroes would play for pennies for the team they ‘love.’ The truth lies somewhere between the two. Jordan knew that his title chances were at least equal with the Bulls as they would have been with the Knicks, and that the $3 million extra that the Knicks were willing to give was not enough to compensate for the hit his image would have taken— a hit that surely would have hurt his side deal income potential more significantly than $3 million bucks. Jordan, in this instance, maximized his utility by staying with the Bulls for the “paltry sum” of $30 million. Jordan won the championship that year, no doubt erasing any miniscule doubt that he should have moved to New York.

Which brings us back to LeBron. Why did LeBron James leave Cleveland? Because he was, in purely economic terms, maximizing his utility. For LeBron, the situation was the complete reverse of Jordan in 1997. The “Bird exception” meant Cleveland could offer LeBron more than any other franchise in the NBA: $128 million over six years. But when Miami offered a six-year deal worth at most $110 million, LeBron walked on Cleveland and signed to play for Miami, even though he’d be making less up front. While LeBron did not maximize his base income, he did maximize his utility. How? He valued a title—and all the rewards that would accompany it– over cash in hand, perhaps more publicly than any previous player.

Clevelanders have thrown every insult at LeBron that they could, but they cannot call him selfish. LeBron left $18 million dollars on the table in Cleveland, twice as much as Jordan left, per year, to stay on with the Bulls. So, why did LeBron leave when Jordan stayed? The title. LeBron has no titles in his first seven years. Jordan won the title in his 7th year, but perhaps more importantly, the Bulls had a clear path to championships in his 7th season and beyond. LeBron left Cleveland because they were not going to win a championship, even with the massive talents of LeBron. He alone could not bring home the crown, and Cleveland could not offer enough money to compensate. For every player there is a monetary value for this reality, the lack of title hope in because of the salary cap, Bird exception not withstanding. He took a risk that his image could survive the move and that his external income wouldn’t be too impacted, but more importantly he gambled that to get the illusive NBA championship, he had to move to a team that had more pieces than Cleveland would ever be able to offer. The title offers James greater utility than millions in lost endorsements and salary income, and that choice should be commended. Like Jordan’s decision to stay with the Bulls, if LeBron wins the championship in Miami, no one (except maybe for the Cavaliers’ owner and hardcore Cleveland fans) will deny he made the right move.