Wall St. and Business Wednesdays: E-Letter To Marc Lacey and The New York Times Re: "Africa's Betting Public Lures Foreign Investors"
As we begin lessons today in the Business Semester Of Black Electorate Economics University (BEEU), I thought of the importance of your article "Africa's Betting Public Lures Foreign Investors", as it touches on very important dynamics that we will be exploring through guest-lectures, chat sessions and cyber-dialogue. I hope you will consider enrolling.
The subject of risk-taking (especially among the ethnic poor) is one that the standard static-equilibrium models generally ignore, or are ill-equipped to handle. This is true of both the Keynesian and neo-Keynesian economic thinking as well as the classical and neo-classical models. These economic models have a simple and flawed view of human nature (based on a supposed "rational economic man" or "typical individual") and as a result have no room in their model for the apparent contradictions and idiosyncrasies that humans exhibit when deciding to take risks and launch new ventures; or, when they organize themselves in kinship systems and groups in efforts to pool or take risks or gamble on unproven ideas and instruments.
In the case of the classical and neo-classical models, the entrepreneur and business manager, are ignored in favor of a narrow look at the world in terms of theories of capital, labor, income, rents and interest - none of which truly explains the cost-and-benefit analysis or risk-to-reward ratio that humans construct in their minds as they make decisions. These costs, benefits, risks and rewards often have nothing to do with money, as the popular Western models suppose. If costs, benefits, risks and rewards are not holistically examined, there is no way to accurately define what "profits" are in financial terms and in the mind of an entrepreneur, manager, employee or organization involved in an economic undertaking.
Largely because of the economic context in which influential classical theorists like Jean Baptiste Say, Adam Smith, and Karl Marx wrote, the role of risk-taking and venture capital in theoretical models was made subservient to a more narrow view that equated all business activity to a varying mixture of capital and labor; all in a world where capital was very centralized and competition was not developed. Indeed, in that era, it was very difficult to "obtain" capital through organized persuasion (business plans) or financial markets, which did not exist or were not very sophisticated.
By the time John Maynard Keynes came around, it was not seen as abnormal that an economist would boast that they had arrived at a general equilibrium theory for interest, inflation and employment. Only consider the title of Mr. Keynes most famous book, The General Theory of Employment, Interest and Money. But "general" static, equilibrium models are only half of the story - as no condition remains the same, and change occurs - at the individual level, as human beings take risks and gamble on life - on unproven or uncertain ideas or instruments in business, politics, religion, science and arts. While there does appear to be a natural progress toward states of equilibrium in everything in the universe - that state is not omnipresent, and is always the result of states of disequilibrium. Perhaps one can see this more clearly when looking through the lens of religion and philosophy. In Islam there is a duality principle that under girds the universal order, and the Holy Qur'an makes references to alternating states of difficulty and ease, experienced by individuals. And in Chinese Han philosophy the principles of yin and yang are used to explain the opposite forces that reflect the nature of the universe. The static equilibrium models of Western economists, in how they generalize, and artificially divide reality, are the equivalent, in my view, of looking at the nature of the universe without the duality principle or the yin and yang.
In light of that context, I have a few suggestions for areas for you to consider, possibly, in a follow-up piece, on why it appears that gambling is spreading in Africa and the dynamics affecting the phenomenon. I think my research suggestions, all of which grow out of the curriculum at BEEU; will provide you with a fuller context of what is happening and the mechanics of how it is happening.
Native Americans, Specialists, and Islam. When you wrote, "Bulgarians are bankrolling a new lottery in Kenya, and Chinese businessmen recently revived Uganda's Lotto. An American company based in Rhode Island, Gtech Corporation, has joined with British, Australian and South African investors in the continent's fastest-growing sweepstakes of all, South Africa's National Lottery.", I thought of Indian tribes involved in gaming inside of the United States. Due to various barriers and restrictions in America, the sovereignty and unique status of Native Americans has allowed them to capture a leadership position in a market that others are kept out of, for moral and legal reasons. So, it is no surprise that the same would happen in Africa, even after independence, due to indigenous and religious customs and the fact that gambling "industries" and individual risk-taking were not part of the socialist ideology that was central to the thinking of many of those that fought against colonialism. Both of these factors could slow the movement of indigenous gambling markets over the last 40 years. So, today, the Bulgarians, Chinese, Americans and others jump in as specialists to serve the market, as African leaders embrace capitalsim.
A similar emergence of "foreign specialists" in domestic markets also happened beginning a millennium ago when Italian merchants like Cosimo de' Medici, and then, members of the Jewish community, began to specialize in "international banking", taking advantage of the fact that Christians and others were prevented from entering into the field, due to religious teachings and the nature of many European economies (and in the case of Jews prohibited from participating in other aspects of the European economy.) I can forsee the day when the "Native Americans" on African soil- those tribes and ethnic groups that have been victimized by European colonialism and African statism, may use their "special status" to get involved in the gaming industry.
Now, I think you left out a major factor in your piece related to all of this. In the Qur'an there is a prohibition and warning on gambling or games of chance, in at least two locations. In Surah 2: 219 (Maulana Muhammad Ali translation) it reads, in part..."They ask thee about intoxicants and games of chance. Say: In both of them is great sin and (some) advantage for men, and their sin is greater than their advantage...". In Surah 5:90 and 91 it reads, "O you who believe, intoxicants and games of chance and (sacrificing to) stones set up and (dividing by) arrows are only an uncleanness, the devil's work; so shun it that you may succeed. The devil desires only to create enmity and hatred among you by means of intoxicants and games of chance, and to keep you back from the remembrance of Allah and from prayer. Will you then keep back?" I was surprised that you did not deal with the role that these verses in Qur'an have and will continue to play, on gambling restrictions in an increasingly Islamicized Africa. Look at Sudan or Nigeria for example. Will Islamic governments allow foreigners to get involved in the gaming industry and develop it; will they ignore or re-interpret the Qur'an so that they may assume a monopoly on the business as has been the case in the United States of America with state governments? While there is no prohibition on risk-taking in business and venture investment in Islam, there are prohibitions on moral grounds. And in light of the close to 5% rate of South African gambling addictions or "problem gamblers" reported in your story; there is plenty of fertile ground for religious leaders in Africa (as there is in America) regarding the negative influence of gambling. Don't minimize or leave religion, spiritual beliefs and tribal customs out of your analysis as the Keynesian and classical economists do.
Reuven Brenner and Frank H. Knight. There are two economists that you should consider getting familiar with as it relates to the subject of gambling and risk-taking. One is McGill University's Reuven Brenner who also provides "guest lectures" at BEEU. The other is Frank H. Knight, an economics professor at the University of Chicago, from 1927 to 1955; and author of the important, Risk, Uncertainty and Profit. Mr. Brenner is important because it is his writing on gambling, contained in two books: History - The Human Gamble and, Betting On Ideas that, among other things, show the economic reasons why the poor spend a relatively greater portion of their income on lotteries and "games of chance" than do the relatively rich. Mr. Brenner brilliantly connects the role that changes in the wealth distribution have on gambling practices among the poor and rich; without ignoring the entertainment value of gambling for some, and the effect of moral prohibitions on gambling. His expertise comes not just as an economist with academic expertise or theoretical insight; but from his actual work in business as an adviser and consultant in the gaming industry. His view of human nature as it relates to gambling and insurance, developed over two decades ago, still shapes the thinking of his most recent crtitically-acclaimed work, The Force Of Finance.
In a more fundamental and historical sense, Frank H. Knight is important because he was the most lucid at identifying the void in the assumptions in the theories of classical economists like Karl Marx and Adam Smith, as it pertained to risk-taking where entrepreneurs, insurers and speculators were concerned and how this related to profits. Mr. Knight taught that risk refers to a situation where the probability of an outcome could be determined, and therefore, the outcome could be insured against. Uncertainty, was different, he argued, saying that it referred to an event whose probability could not be known. Mr. Knight argued that even in a period of long-run equilibrium, entreprenuers would earn profits as a return for their facing uncertainty. Frank Knight's argument sheds light on price inelasticty and why venture capitalists frequently seek an "enduring uniqueness" in a business model when investing. His insight, that the value of economic goods does not "naturally" equal their costs contradicted the classical theories that argued to the contrary. Frank Knight challenges Adam Smith's "invisible hand" better than Karl Marx did, in my opinion. And his writings illuminate a void in establishment economics on a subject that has a bearing on the decison-making of the ethnic poor.
Race, Kinship, Hierarchies and Capital Mobility. You should consider the role that kinship systems (family, race, religion, ethnicity, and tribe) play in risk-pooling and risk-sharing. It would help you understand why lotteries are popular, not just among the "poor" - but among certain groups within that broad category of the poor. The customs of kinship groups as well as the social and legal environments that have historically surrounded them provide keys to understanding why certain groups apparently gamble or invest more or less than others. You can consider Blacks in America, for starters. There is some rich, and as-yet unexplored territory in the juxtaposition of why Blacks prefer a "bear lotto over a bull market", as Rev. Jesse Jackson says. Lotteries are enormously popular among Black people - underclass, poor and middle-class. You can understand why in terms of Reuven Brenner's model - as the small cost for a lottery ticket when compared with its possible return makes the undertaking attractive for individuals in a group that is relatively but persistently poor or increasingly declining in the wealth distribution. But following that insight why hasn't that translated overwhelmingly into a sustained engagement of Blacks in the stock market - where it is now possible for middle and upper-class Blacks to participate in financial markets at a relatively low cost? The answer could be found in the fact that financial illiteracy (begun during slavery and maintained through discriminatory practices) still abounds; and that accumulating wealth and investing in capital markets is seen as riskier than buying lottery tickets (although it can easily be shown that it is not). Look at how new Black investors interpreted or reacted to the recent stock market decline. Notice their preference for homebuying as an "investment".
Look at this disproportionate sentiment against investment in Wall St. in the current environment, along racial lines. Perhaps this is because the kinship system of Blacks, created largely (not entirely, as powerful ideologies and persuasive opinion leaders have been important) as an adaptation to slavery and Jim Crow laws, has not revolved around engagement in formal capital markets; and because Blacks, in general, feel more comfortable with gambling with familiarity, at the local convenience store [by the way, these inner-city convenience stores which serve as the primary point-of-sale for lotteries for Blacks, are disproportionately owned by Koreans and Arabs (in this sense these American immigrants are like the Jews and Italians of international banking 1,000 years ago; and the Bulgarians, Chinese and Americans in Africa setting up lotteries today)] or outside of the legal framework ("playing the numbers"), rather than in anonymous financial markets.
Looking at human nature and financial wealth distributions is not enough if you do not include the societal paradigms of kinship systems and the social and legal framework that surrounds them (in the past and present). The hierarchies, customs and sentiments that characterize these systems determine how mobile capital and labor are in a society, which affects the expectations that individual members, and the society as a whole, have for their future standing in the internal and external wealth distribution(s). This determines their state of mind - whether one of satisfaction and dissatisfaction - and influences the unpredictable, contradictory, and idiosyncratic behavior that breaks or "violates" the static equilibrium models. And yes, these considerations could explain why a poor African with only $1 dollar would be willing to spend all of it, on a lottery ticket.
In your view in the rise of gambling in Africa, you should also include a look at the kinship networks and institutions that are poised to benefit from gambling among the poor and their own membership; or, who among these various networks and institutions will view gaming as another opportunity for risk-pooling and risk-taking. This can occur profitably inside or outside of the legal framework. Just look at the Sicilian Mafia and the Russian mobs that dominate certain markets.
You have written a good piece but one that can be broadened and tracked with greater clarity and explanatory power if it includes some more factors.
I look forward to more of your quality reporting. And, why not gamble on Black Electorate Economics Univerity? I think it is better than a lottery ticket, in the grand scheme of things...
Wednesday, October 8, 2003