Casinos
once upon a time were a staple film setting where action heroes proved they
moved at ease with wealth, glamour and risk. But gambling nowadays has moved
beyond the portals guarded by liveried doormen and permeates the culture of
leisure pursuits of all classes and age groups. From bingo, to lotteries, to
betting on the next
Small
wonder in
Proponents
of the brave new world of gambling think their critics are a blast from the
past. They point out that the terms of the new regime propose closing down many
gambling opportunities accessible to minors. In come high-tech fruit machines,
out go the penny drops on seaside piers. It's time for the industry to grow up,
and keep kids safe. Critics are staid sticks in the mud, blocking progress and
job creation.
Moral
concerns explain only part of the objections. Not only has the gambling
industry matured, so has consumers' awareness of how markets work and whether
producers offer consumers value for money. This is why supporters of the
Gambling Bill still have some explaining to do.
Governments
began using lotteries as a means to raise revenue in the 18th century. Back
then it became common practice to issue bonds, with payoff schemes offering
supernormal returns to bond holders chosen at random. Charles de Talleyrand in
1789 wrote a treatise Des loteries arguing lottery bonds were
fundamentally flawed. Lottery bonds, he said, were bought mainly by the poorer
sections of society, who thus bore a disproportional burden of taxation.
Lotteries were inherently iniquitous. Talleyrand might have used different
terminology, but the point he was making was that lotteries are effectively a
form of regressive tax. Even today many still subscribe to this view. (With the
benefit of hindsight, one might have pointed out to Talleyrand that many French
aristocrats by 1789 were mired so deeply in debt, buying lottery bonds might
have been a perfectly rational strategy to salvage their fortunes.)
In fact,
Talleyrand got it partly wrong and partly right. Lotteries, like taxes, may be
a means for governments to raise revenue, but that's where the similarity ends.
Taxes are compulsory, lotteries are not. If the terms of a lottery look a bad
deal, hang on to your cash and spend it on something else.
On the
other hand, Talleyrand was right to assert that lotteries are a mug's game.
They recycle money from the pockets of one set of punters into the pockets of
another set of punters, minus a surplus which the sponsor creams off. Running a
lottery is a risk free business. That explains why so many countries keep
lotteries in the public sector or channel their surplus to charities. Britain's
National Lottery in only ten years has raised £16 billion for good causes.
Betting
has proliferated. Forecasting has become more complex. Operators have become
more sophisticated. When it comes to forecasting the next Booker Prize winner,
the odds offered by bookies have been beating literary critics hands down. Yet
then and now, the underlying process is still the same. Betting operators
cannot influence outcomes.
In
Talleyrand's day, members of Brooks's Club in London on rainy days would sit by
the bay window and bide their time placing sizeable bets on which raindrop
would win the race to the bottom. Today, placing sums on future outcomes is a
mainstay of financial markets. It is commonplace to compare markets for
financial futures with betting shops. The comparison cuts both ways. The
Business School at the University of Iowa some years ago started a futures
markets where users buy and sell contracts on future events, for example on
election outcomes, or first day takings of Hollywood blockbusters.
This is
where fruit machines and one-arm bandits are fundamentally different. Like
lotteries, they recycle money from the pockets of one set of punters to another
set of punters, minus a commission. Understandably, when casinos fix pay out
rates they err on the side of the caution. Or has anyone heard of a casino that
went out of business? The mechanics of a casino business are down to
statisticians equipped with appropriate software. Casinos can adjust pay out
rates at the push of a button.
Given
that investing in a casino is a one-way bet, what is the appropriate structure
for the industry? The instinctive animosity of casino critics against gambling
behemoths which crowd out competition is perfectly legitimate. There is a
genuine challenge for public policy and for regulators: who determines pay out
rates and profitability.
The crux
with licensing casinos is to ensure consumer protection by means of transparency
and competition. Proponents of casinos should make it plain the rules of
competition will not be rigged. For example, put pay out rates in the public
domain and let consumers rank casinos. Moreover, ensure there are no barriers
to entry for competitors. No casino will retain an excess share of takings,
knowing new entrants are waiting in the wings. Third, ensure that casinos face
competition along the entire value chain, from slot machines to restaurants to
overnight accommodation. The best regulator are market forces. And, finally,
for goodness sake keep those penny drops. They do no more harm to Britain's
youth than chips with vinegar.