Gambling: Not the Worst Bet
by Guy Calvert
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Gambling is once again under the microscope. In 1996, the US Congress established the National Gambling Impact Study Commission to study the social and economic impacts of gambling in the United States, and the Australian government has now received a draft report on gambling from the Productivity Commission.

Ever dogged by controversy, gambling has a long and colourful history. Historians Lisa Morris and Alan Block hold that Ôuntil the 1840s professional, organised gambling was primarily carried out on steamboats plying the Mississippi and Ohio Rivers and the Great LakesÕ (1997: 664). Later, in spite of prohibitionøor perhaps because of itøunderworld gambling operations thrived on land, spawning Ôa series of infamous Òcrime townsÓ.Õ Lotteries, moreover, hark back to the Old World; Queen Elizabeth chartered the first English lottery, which was drawn in 1569. Later, in both colonial America and the independent United States, lotteries prospered as a much-promoted and voluntary means of supplementing the public coffers. But a steady procession of public scandals took its toll, and in the 19th century a political backlash against lotteries culminated in universal prohibition. The legal lottery did not return until 1963 in New Hampshire; between 1965 and 1993, 35 states and the District of Columbia introduced state lottery monopolies. And so the historical tug-of-war between gambling proponents and detractors continues.

The evident predilection of the American people to gamble is unique neither to modern times nor, indeed, to Americans. To all appearances it is inextricably bound up with the propensity of human beings to take risks, an enduring and arguably benign trait of our nature. Granted, people enjoy gambling for many reasons, some of which may well seem unfathomable to other people. But there is common ground too. For to gamble, by definition, is to play games of chance for money. At heart, therefore, gambling is a combination of risk and ritual. Both components are mainstays of human society, for the very good reason that they are a part of our makeup. It is no wonder, therefore, that gambling is universal.

I do not suggest here that gambling behavior, simply because it is natural, is necessarily a moral good. For in many ways the morality issue is beside the pointøif gambling is a vice then that is a matter for philosophers or the clergy, and ultimately individual conscience. My main concern is that a coercive effort to eliminate or reduce gambling must compete against that most formidable opponent, human nature.

That explanation will not please everyone. But the perhaps uncomfortable truth is that there is something stimulating about risk taking. This is the evil apple; the Ômoral risks of gambling for individuals and societyÕ begin and end here. And yet, for those who appreciate the civilising virtues of free enterprise, there remains a niggling doubt. After all, as William Galston and David Wasserman put it, ÔIf gambling is a vice, why isnÕt capitalism?Õ (Galston and Wasserman 1996: 62). The answer is not at all obvious. Gambling and speculation alike necessarily entail a voluntary assumption of risk, which to some onlookers may seem a little rash. To the moralists, at least, the Ôriverboat gambler is a dangerous icon because he appeals to the darker side of capitalismÕ (Galston and Wasserman 1996: 62).

Suppose, for the moment, that the moralists have a point. Still, if risk appetite is at the Ôheart of darkness,Õ we might well ask what is at the heart of that. Do gamblers perhaps harbour an innate appetite for risk? In other words, is gambling, or at least risk appetite, simply a part of human nature? And if so, then can efforts to suppress gambling ever really succeed? According to risk expert John Adams, these questions should not be addressed in isolation. Indeed, when it comes to questions of risk management and regulation, he insists that Ôan understanding of human behaviour is fundamentalÕ (Adams 1995: 211). Fortunately, just such an understanding is beginning to emerge from the insights of the evolutionary psychology school, as Matt Ridley explains in his intriguing book, The Origins of Virtue.

The nature of gambling

Ridley is at pains to point out that human beings are distinguished from all other species of the earth by their Ôcollection of hyper-social instinctsÕ (Ridley 1996: 6). Evolution has endowed us with a kind of Ôexchange organÕ, which predisposes us to reciprocity in our dealings with others and underlies our sense of what is virtuous and fair. Those individuals who maintain a good reputationøwho appear to value the good of the groupøare also considered most unlikely to breach agreements of good faith. They are, quite literally, the sort of people with whom one can do business. So cooperation affords the opportunity to specialise and to reap the benefits of trade. And as Ridley emphasises, this is surely a powerful incentive. For humans, Ôthe advantages of society are those provided by the division of labourÕ (Ridley 1996: 41).

Agreed. But if the benefits of trade drove the evolution of human nature via the Ôexchange organÕ, then that was only part of the story. After all, we do not all just passively divide our labour according to some predetermined and well-known plan. On the contrary, information is scarce. For all the entrepreneurial success stories of history and prehistory, the path to technological progress and wealth is strewn with failures, sometimes catastrophes. Attempts at innovation entail risk, indeed uncertainty. Nobel laureate Friedrich Hayek argues similarly:

Humiliating to human pride as the insight may be, we must recognize that we owe the advance and even the preservation of civilization to a maximum opportunity for accidents to happen. These accidents occur in the combination of knowledge and attitudes, skills and habits acquired by individual men, and also in the confrontation of qualified men with the particular circumstances with which they are equipped to deal. Our necessary ignorance of so much means that we have to deal largely with probabilities and chances (Hayek 1977: 273).

It should be added that risk taking cannot simply be a matter of calculation, of weighing probabilities and chances. For it is rarely obvious in advance what benefits will ensue if we are successful, or what disasters will befall us if we fail. If some individuals had not been prepared to take mad uncalculated risks, then who knows where evolution would have left us? The entrepreneurs, or pioneers if you will, were arguably those who combined superior insight with the preparedness, often, to gamble (in the more general sense of the Oxford English Dictionary definition: Ôto stake money [esp. to an extravagant amount] on some fortuitous eventÕ). Our success as a species is testimony that gambling has always been with us.

Redistributing risk

That is not to suggest that gambling, for all of us, is entirely a matter of risk. But to the extent that risk taking is a part of it, there are consequences for policymakers who would coercively rein in the perceived excesses. For there is a significant body of evidence that each of us is comfortable with only so much risk in our lives. Risk tolerance levels differ from one individual to the next, and those differences may foment disagreement or even trigger conflict. But for our purposes the important point is that people are apt to adjust their behavior to compensate for changes in their risk environment. Adams explains:

If people do not wish to be safer, if they do not reduce the settings of their risk thermostats, they will frustrate the efforts of risk managers who seek to make them safer than they wish to be. The evidence . . . suggests that the principal effect of their efforts is not a reduction in risk, but a redistribution (Adams 1995: 211).

Examples are legion, but a couple of case studies from AdamsÕ book will suffice to illustrate the point. On road safety, Adams cites clear evidence that engineering improvementsøwhether to the car or to the roadøthat increase a carÕs grip on the road will produce a behavioural response that offsets the potential safety benefit of the improvement (Adams 1995: 141-142). In other words, make the car safer and drivers will drive even faster to get back to the level of risk with which they are comfortable.

Another, similar example is the Davy lamp, which Adams notes Ômost histories of science and safety credit with saving thousands of lives,Õ and is Ôusually described as one of the most significant safety improvements in the history of mining.Õ

But it appears to have been a classic example of a potential safety benefit consumed as a performance benefit. Because the lamp operated at a temperature below the ignition point of methane, it permitted the extension of mining into methane-rich atmospheres; the introduction of Ôthe safety lampÕ was followed by an increase in explosions and fatalities (Adams 1995: 211).

The implications for lawmakers are clear. Unsolicited attempts to exterminate gambling behaviour are unlikely to reduce the risks that gamblers are determined to assume anyway. Such efforts may only succeed in increasing risk for others. To see how, it may help to consider an analogous and much-studied case historyøthe 1920-33 US prohibition of alcohol.

The perils of prohibition

Detractors of gambling contemplating a federal Ôstrategy of containmentÕ would do well to note the similarity between their position and that of the early temperance reformers. For, as economist Mark Thornton explains, the Ônoble experimentÕ was an unmitigated disaster:

Although consumption of alcohol fell at the beginning of Prohibition, it subsequently increased. Alcohol became more dangerous to consume; crime increased and became ÔorganizedÕ; the court and prison systems were stretched to the breaking point; and corruption of public officials was rampant. No measurable gains were made in productivity or reduced absenteeism. Prohibition removed a significant source of tax revenue and greatly increased government spending. It led many drinkers to switch to opium, marijuana, patent medicines, cocaine, and other dangerous substances that they would have been unlikely to encounter in the absence of Prohibition (Thornton 1991).

It is essential to note that while the particulars of this experience derive from the circumstances of the time, the generalities follow a pattern that should be familiar to economists. Prohibitionist policies impose costs in several ways.

Of course, there is an immediate loss of liberty inasmuch as consumption of the good or service in question is now prohibited by law. This cost is incurred not only by those directly affected (the would-be producers and consumers) but also by those who value personal freedom generally and mourn the loss of liberty itself. Similarly, we are all penalised if effective enforcement of the prohibition leads to the erosion of certain legal rights or liberties, such as an easement of constraints on evidence gathering by police, probable cause for search and seizure on private property, and so on.

Moreover, there are the direct costs of enforcement to the taxpayer, who must now either foot the bill for additional police or put up with a lower level of police service elsewhere due to redirection of existing police resources. And taxpayers are further shortchanged to the extent that the justice system for which they pay is infiltrated with public officials, such as lawmakers, judges and police officers, who have been corrupted by the rewards of trade in contraband.

In addition, and increasing with the enforcement costs, there are the evasion costs imposed on the not-so-easily-dissuaded consumer of the prohibited good or service. Those costs are particularly significant if the good or service in question admits a class of Ôcompulsive consumersÕ, who for whatever reason just cannot kick the habit (examples include gambling and also prostitution, tobacco, alcohol, and some other drugs). And to the extent that the prohibition law was initially passed in a paternalistic effort to protect compulsive consumers from themselves, such costs are somewhat perverse.

Casino licensure invites corruption

For many years, while casino gaming and even lotteries were prohibited almost everywhere, gambling was mostly the province of organised crime. Today, however, casinos are typically owned and managed by publicly traded companies, answerable to the market discipline imposed by ordinary shareholders in denim rather than the old-fashioned intimidation of men in dark suits.

That widespread gambling legislation has dispelled criminal influence is beyond dispute. Whether government oversight played an important role is debatable. This question is important because, naturally enough, industry representatives are eager to defray concerns about cheating. Fearing to lose the patronage of the mainstream public, casinos must be seen to be above reproachøwhispered rumors about maliciously programmed video slot machines, or the old Hollywood stereotype of the electromagnet under the roulette wheel, do serious damage to a casinoÕs reputation. But instead of taking their own steps to assure observers of their integrity, the typical response is to call for more strenuous government licensure and oversight of the entire industry.

Except for complete prohibition, it is difficult to think of a sillier policy. By artificially raising the cost of entry to the casino industry, licensure serves to protect current industry participants from new competition. Moreover, to the extent that a license becomes a valuable commodity, public officials overseeing the licensing process are easily put in a compromising position. Did former Louisiana Governor Edwin Edwards take money and gifts in exchange for casino licenses? Did Secretary of the Interior Bruce Babbitt deny a casino license to the Wisconsin Chippewa tribes because of pressure from a competing casino interestøone which, it just so happens, had generously donated a six-figure sum to the Democratic National Committee? The courts will decide, but in any case it is questionable that government licensure is doing anything to shore up the integrity of the industry. Quite the opposite, the whole process must at least be perceived as a grubby exercise in political back scratching and suppressing competition.

And licensure is as unnecessary as it is undesirable. Casinos that value their reputation for fair play can always submit themselves to private oversight. This is hardly a radical idea (Yilmaz 1998). Among other vendors of entertainment services, authors, playwrights, moviemakers, and restauranteurs routinely submit their products to independent reviewøafter all, this is the function of those familiar and ever-despised Ôcritics.Õ Similarly, the not-for-profit quality assurance company Underwriters Laboratories evaluates more than 17,000 types of products from over 40,000 manufacturers; about 80,000 product investigations were completed in 1997 alone. In all, approximately 14 billion products enter the market annually bearing the UL mark. And all at the manufacturersÕ cost.

Whether it be of a boring play or an unsafe hairdryer, an unflattering review does grave damage to the market prospects of the product concerned. It follows that it is unnecessary to forcibly restrict market access; consumers can and probably will voluntarily steer clear. And the competitive market for third-party accreditation affords a powerful incentive for the reviewers to maintain their standards. They owe their livelihood to their reputations for good judgment and, above all, independence.

But perhaps the most powerful argument for third-party accreditation of casinos is that many Internet gambling sites, in the absence of state licensure, already employ it. Evidently, these services recognise their customersÕ security concerns and regard expenditure on quality assurance as essential. There is no reason to believe that other casinosøon land or on waterøwould come to any other conclusion.

Conclusion

In the recent film Gattaca, two brothers compete against each other in a futuristic Brave New World. Every day as they grow up together, they swim stroke-for-stroke out into the sea, each striving to outlast the other. It is a game of chicken. If one gets scared or cannot continue, he turns back to shore, defeated.

The naturally conceived Vincent, plagued by congenital disorders and doomed to mediocrity, seems no match for his genetically screened younger brother, Anton, whose superb DNA assures him of a bright athletic and intellectual future. Although Vincent becomes more and more determined to win the contest, he is consistently beaten, as in all else. For many years, as expected, Anton is the undisputed champion.

Until one day. On this occasion, incredibly, Anton falls behind, struggles, and very nearly drowns. Now Vincent, saving his brotherÕs life, is transformed by a new confidence. His victory becomes a springboard from which his once hopeless dreams suddenly seem possible. Leaving home, he assumes a new genetic identity and dares to contest a prize reserved by society for a carefully bred elite.= As the story unfolds, the brothers are reunited, and we learn of AntonÕs bitterness and self-disgust in defeat. Demanding satisfaction, he returns with Vincent to the beach, intending to set matters straight. But again, after an Olympian struggle, Vincent is the victor. Anton, humiliated but still unbelieving, pleads to understand how his handicapped brother could twice so outdo him. VincentÕs answer is inspiringly simple: ÔI never saved anything for the swim back.Õ= A heroic battle against the odds, or a reckless gamble? In truth it is both at once, and therein lies the point.

Granted, Vincent is not the typical gambler, spinning wheels or shooting craps. And yet he gambles, risking death for a slim chance of a meaningful life, and at lousy odds. To many of us, there is something stirring in his determination to fight the ÔpercentageÕ, a defiant expression of an indomitable human spirit. We understand that, while the risk of failure is greatøand the consequences are terribleøsometimes, at least, fortune favours the bold. As Vincent insists, ÔIt is possible.Õ

This is not to get caught up in romanticism but simply to acknowledge that VincentÕs choice is, for good or ill, his own. The wisdom of his choice, which affects him so personally, is entirely a subjective matter. But in a free society, it is and must be his choice to make. It seems only fair that the same freedom should extend to other gamblers.

The public conflict over gambling animates a larger debate that is of crucial importance to all of us. On one side is the view that, in some situations, individuals cannot be trusted to face the personal consequences of their own decisions, and so cannot be held accountable when things go wrong. Therefore, in the public interest, government officials must decide for them.

Weighing in on the other side of the argument are those who, like George McGovern, a former Democratic candidate for president, are concerned about a general decline of tolerance. In a recent op-ed in The New York Times, McGovern eloquently took to task

those who would deny others the choice to eat meat, wear fur, drink coffee or simply eat extra-large portions of food. While on any day each of us may identify with the restrictive nature of a given campaign, there is a much larger issue here. Where do we draw the line on dictating to each other? How many of these battles can we stand? Whose values should prevail? (McGovern 1997)

It is incumbent upon classical liberals to resist this presumption: that consensual pastimes are a matter for the state to tolerate sometimes but to outlaw when politically expedient. As the 19th century economist and philosopher John Stuart Mill famously declared, ÔOver himself, over his own body and mind, the individual is sovereign.Õ To depart from that standard is to put at risk our inheritance, the tradition of individual liberty that marks a free and civilised society. And that would indeed be a reckless gamble.

References

Adams, John 1995, Risk, UCL Press, London.

Galston, William A. and David Wasserman 1996, ÔGambling Away Our Moral CapitalÕ, The Public Interest 123 (Spring).

Hayek, Friedrich A. 1977, ÔThe Creative Powers of a Free CivilizationÕ, in Essays on Individuality, ed. Felix Morley, Liberty Fund, Indianapolis. =

McGovern, George 1997, ÔWhose Life Is It?Õ, New York Times, August 14.

Mill, John Stuart 1859/1974, On Liberty , Penguin, London.

Morris, Lisa and Alan Block 1997, ÔOrganized Crime and Casinos: An International PhenomenonÕ, in Gambling: Public Policies and the Social Sciences, ed. William R. Eadington and Judy A. Cornelius, Institute for the Study of Gambling and Commercial Gaming, Reno, Nevada.

Ridley, Matt 1996, The Origins of Virtue, Viking, London.

Thornton, Mark 1991, ÔAlcohol Prohibition Was a FailureÕ, Cato Institute Policy Analysis no. 157, July 17.

Yilmaz, Yesim 1998, ÔPrivate Regulation: A Real Alternative for Regulatory ReformÕ, Cato Institute Policy Analysis no. 303, April 20.

About the Author
Guy Calvert, a quantitative analyst at a Wall Street firm, holds a B.Sc. (Hons) from the University of Sydney and a D.Phil. in mathematics from Oxford University. He attended the CIS Liberty and Society programme in 1997. This is a condensed version of an article entitled ÔGambling America: Balancing the Risks of Gambling and Its RegulationÕ published by the Cato Institute, Policy Analysis Paper no. 349. Available at www.cato.org.

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