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What happens when gambling is banned and related thoughts

In the previous posting by Brian on the alleged match-fixing scam involving Pakistan’s cricket team, one commenter called Jim made the excellent point that gambling is illegal in Pakistan. It is, as the practice is banned under Shariah law – but there is a vast and thriving underground gambling industry there and indeed across the Indian sub-continent.

Now, as we libertarians like to point out, if you ban consenting activities between adults – such as betting on sports – then when such activities are driven underground, criminals get involved, with all the sort of consequences we are now writing about. That is not to say, of course, that if gambling were legalised in Pakistan, that the match-fixer gangsters would hang up their hats and do something else. But it would, in my view, help a great deal to drive some of these scum away.

Americans bored by all this talk of cricket might recall that baseball has had its problems in the past, as have other sports too. This Wikipedia entry is worth reading (and maybe improving).

And there are certain parallels in this issue with insider dealing in financial markets. On one level, I think that it should not be made illegal since it is difficult to work out the difference, sometimes, between a trader who is just quick off the mark to exploit new information and someone who happens to be privy to inside information. Arguablym, distortions caused by insider dealing eventually get arbitraged out by other investors. However, in the case of private stock markets, they are, as private institutions, perfectly entitled to set the rules so that trading is seen to be “fair” and open, if only to encourage investors to buy and sell stocks who might otherwise have been cynical about insiders getting all the best deals. It is like a private sports association setting down rules against things such as use of enhancement drugs, and so on. So long as no-one is forced to compete against their will, no-one can carp about the rules, and the adoption of such rules draws in more people and interest.

Back to the insider dealing point: As more people play in a market if the rules are seen to be fair, then this encourages greater liquidity and reduces the cost of capital. With the match-fixing issue, the costs of not punishing wrongdoers is something similar: it will drive away people from the sport due to greater cynicism, and hence reduce revenues, investment in new grounds and facilities, and so on. Cynicism, whether in sports, business or elsewhere, is a sort of deadweight cost on an activity by driving away fans, investors, etc.

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4 comments to What happens when gambling is banned and related thoughts

  • I just made a comment on Brian’s earlier post saying that this story is about more than just cricket. (Alas, that comment is being fumbled with by a spam-fielder while the batsman makes loads of runs, although I’m not sure who the batsman is in this analogy.)

    One aspect of this story that relates to wider libertarian concerns is how voluntary associations police themselves. The voluntary associations here are both the cricketing world and the informal and formal associations of gamblers and bookmakers. How do people get to know who can be trusted? How does the internet and worldwide cheap phone calls affect that question? How does the state – or multiple states including failed states – help or hinder this process?

  • Furthermore, by not making insider trading a criminal offense, the onus for policing it is on the company and the stock market — coincidentally those best placed to police it in the first place!

  • mdc

    Possible topic for a future article: should insider trading by illegal, and if so, why?

  • Laird

    Anyone who subscribes to the “efficient market” hypothesis should support the elimination of bans on insider trading. If persons in possession of “material nonpublic information” are free to trade on it the market prices of securities will reflect true values much more quickly than if such activities are suppressed.