Gambling is a favourite target of the those who wish to improve society by banning those activities which they disapprove of. Any efforts to regulate the activities of others should at the very least be based upon objective opinions, that are themselves based upon even more objective facts. The following case-study provides both. Exerpts from this text have recently (d.o.w. 2006-10-4) been published in both the Financial Post and the London Financial Times in articles that also draw from Gambling and Speculation (Cambridge UP), co-authored by Reuven Brenner and Gabrielle A. Brenner.
with Ira Terk
"No wine, no wisdom. Too much wine – the same," wrote Pascal centuries ago. The same holds equally true for gambling, online gambling in particular. Forgetting this adage, the US Senate passed yesterday a bill making it illegal for banks and credit card companies to make payments to online gambling sites (horse racing and state lotteries being exempt), effectively prohibiting playing. It will turn out to be a costly mistake politically and economically.
Throughout history, starting from Biblical times, many groups invented accusations against the industry, most of which turn out to be self-serving, though either cleverly disguised by veils of language, or that, over time, people came to misunderstand what the original condemnations implied. For the few legitimate concerns, such as access to either young people or potential "addiction," there are technical, software solutions, that companies will either adopt voluntarily, or can be imposed by regulation. Many of the other concerns are opinions, with no basis in fact, while business issues such as money flowing out of the country, can be mitigated by properly regulating the industry. People are entitled, of course, to their opinions. But they are not entitled to the facts. So here they are.
For centuries, opposition to gambling has been linked to deeply held beliefs that visibly admitting for "probability," "risk" and "chance" to play significant roles in society, and let industries develop around them, would have serious detrimental consequences. These beliefs all have roots from times, hundreds of years ago, when they made sense. When populations are small and immobile, the law of large numbers does not operate – by definition. The only insurance one can have against fire, illness, floods or other misfortunes is the family, the tribe, religion, all enforcing implicit insurance based on such ties. As population and its mobility grow, the traditional institutions and beliefs weaken, but they do not disappear. Over time, such beliefs, whose origins become lost in the mist of time, become associated with virtue and moral behavior. One could argue about them, but there is no point. If the majority of US citizens, in the simple Swiss-type referendum sense, take a moral stand concerning online gaming, so be it.
The purpose of this article is not to argue with people’s moral beliefs, but discuss facts. If erroneous information is the root of such beliefs, they will find the facts presented here enlightening. What happens now in Washington DC has little to do with genuinely held beliefs, but more with false arguments circulated by parties threatened by this new industry. Self-interested lobbying against gambling, under various disguises, is not a recent innovation.
In 1388, Richard II secured the passage of a statute requiring people to buy items necessary for the martial arts, and stop spending money on "football, casting stone, and other such importune games." About a century and a half later, Henry VIII passed a law condemning gambling on the grounds that it diminished military ability, since people used their spare time for gaming rather than archery. Both laws were enacted in response to petitions from the bowyers, fletchers, stringers, and arrowhead makers - the military lobby of the times.
The Puritans who settled in the area that is now Massachusetts condemned gambling because they opposed "'idleness." The Massachusetts Bay Colony in its first year of existence outlawed not only the possession of cards, dice, and gaming tables, even in private homes, but dancing, singing and all 'unnecessary' walking on Sundays too. The Blue Laws of Connecticut, 1650, denounced game playing because it caused too much time to be spent "unfruitfully." Only in 1737 did the Massachusetts legislators amend the anti-gambling laws by noting that lawful games and exercises are innocent and moderate recreations.
In fact, all the new leisure industries were attacked throughout the eighteenth, nineteenth and our century. The eighteenth century saw intensified attacks against blood sports. Opposition to cock-fighting and bull baiting reached a peak with a series of local acts against these sports. Yet, whereas these activities were under attack, fox hunting was not. And what do we have today? Betting on horses is legal, offline and online – but playing poker online is subject to vicious attacks. The more we think we change, the more we stay the same.
The priesthood condemned railways, which enabled excursions, the use of bicycles, and music halls too. Eventually, though, by 1890, the churches, trying to recruit and hold members, approved outdoor games and dancing, and within the chapels they innovated, offering better music, and also sewing classes, bazaars, drama, and cricket and football clubs. By the twentieth century, some religious institutions came full circle, sponsoring bingo games – once a sin - and lobbied governments to give them exclusivity on this pastime. The Reverend Francis Talbot, a Catholic priest wrote that "I cannot grow frenzied with the puritanical precisionists who rate the bourgeois pastime of bingo as a major sin ... Played under proper auspices … the worst harm that bingo causes is a sore throat. Church bingo parties are a healthy substitute for gossip teas, lovesick movies and liberal-minded lectures."
By this time, though, new interests emerged attacking the gambling industry. In the 1920s the New Jersey Chamber of Commerce opposed gambling on two grounds. First of all, the chamber said, retailers and established sources of entertainment such as movie theaters lose business during the racing season. Also, it claimed, petty crimes 'increase enormously.' Whereas the second complaint is understandable, closer examination reveals that it is linked with tourism rather than gambling: large, transitory crowds provide an easy prey, and the criminals themselves can more easily disappear in the crowd. The first attack is to be expected – and should be discounted: people may preach for competition in principle, but companies do not like it in practice. And new ways of spending one’s leisure time is always a threat to traditional ways – as we see today with people’s shift toward spending time on the Net, and less on newspapers.
In Florida, opponents of the liberalization of gambling laws included Disney World and even pari-mutual betting operations. With casinos commissioning Cirque du Soleil family friendly entertainment, Disney’s opposition is not that surprising, never mind under what arguments they advocated their position.
There are those among these crusaders, who consider the gambling industry a drag on a nation’s cultural aspirations. A bit of homework would reveal to them that their opinions are unfounded too, and gambling actually financed culture over the centuries. Opera and ballet, arguably the pinnacle of Western art, flourished – when it was financed by casinos. The biggest and best opera houses of Italy, from St Carlo in Naples to La Scala, were private and profitable. The profits came from the casinos attached, where roulette was the favorite game. The profits from the table paid for R&D – the commission of new ballets and new operas. A remnant of the arrangement survived in Monte Carlo. The interested reader may look up Stendahl’s biography of Rossini, the famous Italian opera composer, and find the minute details of his contract with the St Carlo opera house, spelling out his share of the takes from the gambling tables. Actually, Las Vegas, in response to consumers’ demands, has been updating the last few decades variations on this financial and entertainment combination. Vegas has gone from cabaret acts to Cirque de Soleil, Andrew Lloyd Webber and other Broadway shows, top celebrity acts from music to magicians, and adding Steve Wynn’s impressionist collection as a cherry on top – probably to the dismay of crusaders.
There are those that would say, "Yes, but online gaming keeps people at home." Well, what have big screen plasma and state of the art home surround systems done to movie theaters? Should that be banned too? Besides, online gaming companies have already begun sponsoring all types of off-line media, even in this gray environment, from music and film to street festivals.
Opposition to legalized pari-mutual gambling in Texas came from religious groups and neighboring states that already allow such betting. Obviously, these states' opposition was not due to concern on the adverse effects of betting, but rather to the fear that a new Texas lottery would provide competition to their own, and diminish revenues – a point we shall come back to later. New South Wales, Victoria and Queensland in Australia forbade the Post Office to handle lottery tickets in order to impede Tasmania's efforts to sell its lottery tickets on similar grounds.
In the United States, state governments have run lotteries since 1964, when New Hampshire started a sweepstakes. Since then most states have followed suit, using - what was once said to be a great social evil to raise money - for "noble" causes such as education and services for senior citizens. But the state lotteries have created new interest groups opposing competition in the gambling industry: the bureaucrats who run the lottery operations and the politicians who spend the money they raise. Although the states began to consider legalizing other forms of gambling, they do not compete directly with the states' lotteries since they are not allowed to offer large prizes (in Las Vegas, where the Casinos offer large prizes, there is no state lottery).
As a matter of fact, we believe there are significant opportunities for state governments to expand on a more open and democratized environment for gaming by offering products akin to the U.K. Premium Savings Bonds, one of the popular savings instruments in the UK. These bonds offer lower interest rates than ordinary government bonds, and give instead the right to participate in regular lottery drawings with relatively large prizes.
A look at past patterns for those contemplating prohibition of online gambling would be illuminating. Where and when gambling was prohibited, criminal elements took control of the industry – exactly as it happened during Prohibition during the 1930s. Just as poisoned liquor took its toll in death rates, jumping to 4,154 in 1925, compared to 1,064 in 1920, so can one expect harmful consequences from underground gambling, though perhaps not many deaths. Prohibitionists thought that outlawing alcohol would help the young, preventing them from drinking. Yet, between 1916 and 1923, the average age of people dying from alcoholism fell by six months, when other indices showed improvement in the health of young people. Prohibitionists also hoped that lack of legal alcohol would eliminate corruption. The opposite happened: bootleggers and crime bosses bribed policemen, politicians and members of the Bureau of Prohibition. The Commissioner of Prohibition, Henry Anderson, concluded that unsuccessful enforcement created a general disregard for all laws and had long term, harmful consequences.
It was the repeal of Prohibition that brought about a dramatic reduction in crime, organized crime and corruption, and also allowed alcoholics to get treatment rather than prison terms. It should not be surprising that when the industry was "re-legalized," the previous criminal elements stayed involved for a while. They are the only ones who know the business – a kind of history repeating itself after communism fell. Under communism when all trade was outlawed, those engaging in it were labeled "criminals," their only crime being selling homemade salami. Not surprisingly these underground "entrepreneurs" became the legal ones once communism fell. They continued to rely on "private enforcement" of contracts, since it took time for post-communist countries to design new laws, and have impartial courts and police to enforce them.
Before elaborating on ways in which online gambling can be properly regulated and managed so as to mitigate its present harmful side effects, let us now briefly discuss "addiction."
Forget, for the moment, about the problems defining "gambling addiction": as with pornography, one knows it when one sees it. We have looked at various numbers associated with these problems, but frankly hesitate to call any of them "facts" due to the dubious methods used to calculate them. One thing becomes apparent: the number of players afflicted by gambling addiction seems to be no more, even substantially less than those associated with alcohol and drug abuse or even bulimia.
There is no doubt that there is a minuscule percentage of people addicted to gambling, just as there are alcoholics, the diet obsessed suffering from anorexia, sex addicts, and workaholics. The question is this: Whereas the alcoholic beverage industry; the food industry (with precise labeling about calories and ingredients), and the diet industry are all subject to regulation, why has gambling been singled out over centuries for special condemnation? Why does "addiction" play such a role in the argument?
In addition to answers already given above, there is another one. The media, by putting the unusual – and thus rare - stories of addicted gamblers on front pages, bias perceptions. People know of life imitating art from Dostoyevsky’s classic novel, titled The Gambler, about a weak man who promises himself every evening to abandon his addiction, but cannot. Few know that Dostoyevsky himself was passionate about gambling, and worked feverishly to pay for his passion. He wrote his best novels – Crime and Punishment, The Idiot, the Possessed and The Gambler during the time he gambled. He married his stenographer, Anna Snitkina, in 1867, who took control of the finances. Then he had a happy marriage, children and by 1871 he stopped gambling. It was also the end of his creative period. Whereas there have been plenty of movie adaptations of Dostoyevsky’s novels, I do not know one showing him overcoming the problem and settling into calm domesticity. Delusional gamblers’ stories are fascinating and memorable – though exceptional. In a society often referred to as "a money culture," stories about making or loosing it are sensationalized and sell more papers than yet one more person ending up in jail on a DUI, drug bust or the poor young woman suffering from bulimia who is down to 75 pounds.
There will always be isolated tragedies. Modern media’s distribution capabilities would suggest that rather than being an exceptional event, they represent a problem of epidemic proportions, posing a threat and requiring significant government intervention. Yet, even over-regulated (prohibition) and with billions spent on enforcement, no society entirely eliminates the adverse effects of "living." Although the US is now trying very hard to do so. Even the simple pleasure of jumping into a pool has become "bad" for us. Earlier this year, Texas lawmakers enacted a de facto prohibition on diving boards by making safety standards so stringent that few existing pools can meet them. Pool and Spa News reported that there were less than 20 spinal injuries per year, which, tragic as they really are, happened out of millions of jumps and dives. We are forgetting a wise 18th century writer, John Butler, who observed that "probability is the very guide of life." There will always be sensational stories involving unfortunate events, tragedies and accidents. Yet exaggerating fears and fictionalizing the past can ruin the future. The key is to find a balance between regulations and freedoms.
Worrying about youth and potential addiction has merit, but they have solutions. Software is available for identification, verification, and to automatically monitor and warn the player to be disciplined, stay within his limits, and even bar gambling, if requested or necessary. Actually, an argument could be made that controlling compulsive behavior online, using these tools, may be better than off-line. In a windowless land-based casino, where every marketing tool imaginable is used to keep gamblers at the table, there is nobody to tap them on the shoulder to suggest they should call it a day.
Another issue often raised in public debates concerns lost revenues by the states. It is not surprising that today, prominent among the states favoring prohibition, are those where casinos and state lotteries bring in high revenues to the states’ coffers, to which the present untaxed online gambling business are a threat. A simple solution to this problem would be to require online gaming companies to incorporate and operate their businesses in the US. Software exists to identify the players. Thus taxing them, and bringing the proper revenues to State coffers is not an issue either – though I am not saying that negotiating such a deal would be easy.
Legalizing online gambling and regulating it properly would help establish an already thriving global industry in the US, attracting investment, retaining entrepreneurs and brains specialized in this business, and increase employment and tax revenues – as any high-tech, entertainment industry would. Online gaming companies would take the initiative in the US to advocate abiding by regulations designed for the online gambling business, by the Nevada authorities perhaps, known for their scrupulous checking. It would allow legislators to enforce laws against those gambling businesses that do not comply on US soil. Technically, it is not very difficult to shut down access to sites at the ISP level and control access for users. Having provided and discussed some of the options and alternatives described above, of which we have more, with parties on all sides of the debate, we believe that these solutions are viable.
Whether online gaming or any other industry, I have always advocated open and democratized markets, because facts brought me to that conclusion. History has shown time and again that prohibitions rather than solving problems cause more. Prohibition brings about flight of brains and capital either underground or out of the country. Eventually, after incurring significant costs and harmful long-term consequences, societies abolish prohibition and regulate the industries. But they may never attract back the cluster of skills that left.
Most of the above facts, arguments and conclusions with regards to such sequence of events, concerning attitudes toward "risk industries," gaming in particular, have appeared in my books, from the first one dating back over twenty years – History – the Human Gamble (1983), to my most recent Force of Finance. One, titled Gambling and Speculation (Cambridge University Press, 1991, with Gabrielle A. Brenner) was specifically about many of the topics summarized here. These citations are not made for personal gain, but to highlight what lost in today’s debates: objectivity. I wrote about all these topics long before online gambling or even the "public" Internet for the masses, as we know it today, even existed.
Reuven Brenner and Ira Terk are partners in Match Strategic Partners. Mr. Brenner also holds the Repap Chair at McGill’s Desautels Faculty of Management. For more information on Mr. Brenner, please consult his short bio.
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