From Stan's Lips...

If you've wondered what the hell that Mr. Kasten has rambled about when he talks about the inefficiency of the free agent market, here's an excellent primer.

Now, because MLB has a non-free market setup for a huge population of the players, where their salaries are either determined by the team (if they have less than 3 years of service time) or by an arbitrator (if they have 3-5 years of service time), teams have a built in advantage with younger players where they can get strong returns for minimal costs. Thanks to research by Dave Studenmund on how teams spent last winter, we know that the average pre-arbitration player only makes about $500,000 per win, arbitration eligible players make about $2 million per win, and free agents make about $4 million per win. Obviously, having talented players under team control is a huge benefit, as their cost per win is eight times lower than comparable free agents.

This is why the smart teams mostly eschew free agency in roster construction, instead building through player development and trades. Unless you can turn a proftit with a payroll north of $150 million, you’re just not going to be able to build a competitive team using free agents as a core building block. The cost is just too prohibitive. With inflation, we should expect the cost per win this winter to be more in the $4.5 to $5 million range, driving salaries even further away from the ideal $2 to $2.5 million per win that teams should be aiming to spend.

What this post (and Kasten) are saying is that you pay more per win when you buy something on the free agent market. Simple and easy enough.

Developing your own players really is the key. As those numbers cited above show, a pre-arbitration player like Zimmerman offers about 8 times the "value" of a free agent. If he were a free agent, Zimmerman would be making $15-17 million a year, but he's not. He's making $500,000 instead. That's a lot of "value" and payroll flexibility that he opens up. Not having to spend money there, allows the Nats to buy wins elsewhere.

Free agency is best served to find role players to fill a short term hole or to get the final piece to the puzzle. It is, without a doubt, the least efficient way to add talent to an organization, and in many cases the cost more than offsets the value the player adds. We’ve certainly seen the Mariners run into this problem - their spending on mediocrities such as Richie Sexson, Jose Vidro, and Jarrod Washburn are eating up enough payroll space to keep them from being players for true all-star talents while not returning enough performance to make this team a legitimate contender.

This is why we advocate a roster building philosophy that focuses on paying premium dollars to premium players (Ichiro’s extension is a perfect example of this), ignoring the overpaid middle class, and surrounding your stars with young players who haven’t had their salaries determined by free agency. It simply doesn’t work to try to fill out a roster with good-but-not-great players in free agency.

I'd agree with this. I've ranted before about how I'd rather see the team spend $15 million on one player (a superstar-type) than 3 mediocrities at $5 million -- an approach seemingly favored by the Orioles every year. That's also why I'm on the Jones-or-bust approach to CF. Someone like Rowand or Hunter is squarely in the middle, even if they're going to be paid as if they were superstars. Go big, or go cheap. No in-between.