David Rodeback's Blog

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Tuesday, April 5, 2005
Gambling vs. Investment

Over the weekend, in the General Conference of the Church of Jesus Christ of Latter-day Saints (commonly known as the Mormons), Church President Gordon B. Hinckley strongly counseled Church members against participating in gambling in any form, including lotteries, raffles, poker, etc. This is not a new position for the Church, but it is a renewed emphasis, apparently in response to the proliferation of gambling on the Internet, at youth parties, and elsewhere - even on ESPN.

(We interrupt this blog for a disclaimer. While President Hinckley may speak officially for the LDS Church in matters of doctrine, I do not.)

Many Church members (of whom there are millions in the US alone and even more outside the US) will welcome this direction and clean up their act, so to speak, as appropriate. But a few, in their zeal, will go too far, and some others will resent the counsel, as if a church had no business telling its members how they should live.

It won't be long before some in both the latter groups - the zealots and the rebels, if you please - will take aim at the stock market and similar investments. The rebels will insist that gambling is no worse than investing in the stocks or commodities, so what's the big deal? The zealots will insist that such investments are no better than gambling, and that the truly faithful will avoid those risks, too. Both groups are wrong; investment is fundamentally different from gambling. This is the case despite the fact that we sometimes speak of investments as bets or gambles.

Here I'm relying on Thomas Sowell's very clear explanation of this point in Basic Economics. Investment, even high-risk speculation on commodities futures, for example, is a legitimate and necessary process by which investors assume much of the existing risk involved in farming, business, and other ventures. For example, without such activity, the farmer would have to bear the entire risk of his venture, including weather- and price-related risks. He would be much more prone to being put out of business altogether in a bad crop year, or even in a very good crop year, if prices fell. Likewise the business owner: without investors, she would only be able to start and grow a business to the extent that she could assume the entire risk herself. (This happens, but it is not generally the most successful way to start or expand a business.) But if outside investors are able and willing to assume much of the risk, she can start the business sooner or bigger and grow much faster.

Obviously, investment and speculation involve risk, but here is the essential point: They involve the transfer of necessary, existing risk from one party to another. This doesn't mean that every investment is good or wise or safe, of course. I think it would be morally wrong for me to invest the family's grocery money in oil futures; but that is because we cannot afford to lose the grocery money, not because the principle of investment itself is bad.

Similarly, you could make a case for a given business startup being an unnecessary and unwise risk, but business in general is quite essential. Without it, every individual or family would have to survive on what it could gather or make on its own. Many of us, therefore, would go without food or clothing (let alone SUVs and DVDs) until we died of starvation or exposure. Then there would be no mortician to embalm the body or sell us a casket. Even a shovel for digging the grave would be problematic, with no iron mine, no steel mill, no lumber industry, no shovel factory, and no hardware store to sell us the finished product. You have to wonder if the survivors would even have grave-digging time to spare from gathering berries, hunting and cooking squirrels, and weaving grass skirts.

Gambling is just the opposite. It creates unnecessary risk, either for entertainment, to satisfy an addiction, or because someone wants to get something for (almost) nothing. Overall, it is not a productive risk, except for the casino, government, or church which sponsors it. What is won never exceeds what is lost, and if a sponsoring organization gets some of the money, what the winners win can be far less than what the losers lose. By contrast, investing in business typically creates more wealth.

So it will not do to compare investment to gambling, in order either to excuse gambling or to condemn investment. They are not the same. Transferring existing, needed risk is quite different from creating unnecessary, gratuitous risk.

Something else about gambling bears mention: When someone actually wins at it, it reinforces the seductive notion that something can be had for (almost) nothing. This idea is poison to a free, democratic society - but that is a blog for another day.

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