Here was my response. He hasn’t replied yet but it is holiday time so we’ll see.

Keith,
 
Thanks for the thorough response. Your key points make perfect sense from an economic standpoint. Those who don’t understand economics (i.e. the public, most of the politicians in office, etc.) might argue that players are too highly paid, thus lowering their salaries is justified. That is, of course, false. There is a multitude of empirical evidence out there that shows that astutely constructed contracts are based on a player’s actual contribution to the teams win totals (and thus the amount of fans that show up/follow the games).

I also can’t argue that a player is generally at or near his decline phase once a team loses control of his services. Nor can I contend that historically the playoffs show a reasonable amount of representation from teams of various salary levels. Nevertheless, I still think there is a gap in your analysis.
 
Let’s use the Yankees as an example because it’s the most glaring case of my issues with the current system. Last year was the first year in quite awhile that Yankees didn’t make the postseason. One of the reasons they didn’t make it is because they attempted to rely on their young talent rather than go out and get some high priced FAs. Their young talent just doesn’t appear to be as good as billed (so far). Meanwhile, it’s been since the late 90s that Yankees have excelled through homegrown talent. They have thrived successful off of high priced FAs and their farm had been for the most part, barren.
 
Two years ago, the Rockies had everything come together for them at once. They’ve developed their young talent extremely well. Their playoff window may already be closed for the foreseeable future. The Rays have had the #1 pick since leeching was the preferred method of medical treatment. They have made some great trades and have had some excellent low cost FA signings. Even so, they’ll be projected to finish 3rd in that division next year.
 
So what am I getting at? Basing your success off of the draft and low cost FAs is far less predictable than signing the deserving high priced FAs. Teams will continually improve in developing their own talent, but on average, it will always be less successful than building a team with historically successful FAs. The nature of baseball is that only a percentage of young players turn out to be even major league average. Deserving high priced FAs will always be a better risk, based on averages, than young talent.
 
The Yankees may make some mistakes with long-term contracts. They can still sign the best available players the next year, and the year after that. They never need to develop their farm system – they can hit the redo switch each year. Developing a productive farm system is far more challenging than signing proven FAs. Teams like the Yankees will always be more competitive more easily than the smaller market teams.
 
While salary cap may not be the solution, I believe it should not be more difficult to make the playoffs for a small market team because they have to rely on a less precise method of success, developing young talent. I’m not looking at the data right now, but I would be willing to bet that teams with higher payrolls have more consistently made the playoffs since 1994 than the lower payroll teams.
 
Also, I believe the Oaklands of the world were able to take advantage of system that wasn’t in equilibrium. That really isn’t the case anymore, or it won’t be soon. As many more teams focus on their young talent, the only really differentiator in terms of consistent playoff appearances will be the teams that can supplement their young players with high priced FAs. That then gets back to the root of the problem.
 
Again, I’m not necessarily sold on the salary cap as the solution. As you pointed out, it has its own set of issues. One idea I haven’t researched yet but sounds like an interesting solution is realigning divisions based on market size. What do you think about that idea?