Casino Capitalism: Gambling, Finance, and the Ethics of Speculation

[Note: students interested in enrolling must attend the introductory session on Tuesday, Sept. 4, from 9:00-10:15am, in CGIS South 250, and submit a lottery form at the Gov. Undergraduate Program Office by 6pm on Thursday, September 6.]

Gov. 94ca: Casino Capitalism: Gambling, finance, and the ethics of speculation

Professor Michael J. Sandel Fall semester 2018 Mondays, 3-5 pm, Knafel 107 Email: [email protected]

Course description

Is casino gambling morally objectionable? What about financial speculation? Are they morally on a par? Is there a connection between the growing role of finance and the increasing acceptance of lotteries and casinos? To what extent are life prospects governed by luck and chance rather than effort and work? The seminar will explore ethical controversies about various risk-taking activities, from lotteries to life insurance to hedge funds. It will also examine the role of luck and merit in allocating social and economic rewards.

Course requirements

The seminar depends on the informed participation of all members in each week’s discussion. Students who enroll in the seminar should be prepared to keep up with each week’s readings, to post short response memos on the course discussion board each week, and to participate in class discussions. Response memos, due on Sunday evening by 5:00pm, should address (in about 500 words) one of the assigned questions, with reference to key readings. A final paper of 10-12 pages is due on Dec. 10. Sixty percent of the course grade will be based on attendance, preparation, and participation in the seminar, and 40 percent will be based on the final paper.

Books for purchase

Jonathan Levy, Freaks of Fortune: The Emerging World of Capitalism and Risk in America (Harvard University Press, 2012).

Adair Turner, Economics after the Crisis (MIT Press, 2012)

Greta R. Krippner, Capitalizing on Crisis: The Political Origins of the Rise of Finance, Harvard University Press (2011)

Michael Lewis, Flash Boys: A Wall Street Revolt (Norton, 2015)

Seminar topics

Sept. 4 Introduction (Tues., Sept. 4, CGIS South 250) Sept. 17 Betting on misfortune: Life, death, and terrorist futures Sept. 24 Gambling, insurance, and speculation Oct. 1 The history of risk Oct. 15 Financialization Oct. 22 Derivatives and naked swaps Oct. 29 The moral status of gambling Nov. 5 The growth of gambling: Casinos, state lotteries, and sports betting Nov. 12 Is Wall Street rigged? Nov. 19 Meritocracy: Merit, luck, and moral desert Nov. 26 Mobility and the American Dream Dec. 3 Inequality and “patrimonial capitalism”

Betting on misfortune: Life, death, and terrorist futures

[Note: Please do the reading for both Parts I and II, and be prepared to discuss both sets of readings; your response paper may address the questions in either Part I or Part II.]

Part I: The lives of strangers

Is it morally objectionable to bet on when someone will die? Is the secondary market in life insurance an investment or a form of betting on the lives of strangers? What is the moral status of death bonds, viatical contracts, and internet death pools?

Ellen E. Schultz and Theo Francis, “Valued Employees--Worker Dies, Firm Profits,” Wall Street Journal, April 19, 2000. http://search.proquest.com.ezp- prod1.hul.harvard.edu/abicomplete/docview/398806171/fulltext/FE7272BA1BC74298P Q/1?accountid=11311

Charles Duhigg, “Late in Life, Finding a Bonanza in Life Insurance,” New York Times, December 17, 2006. http://www.nytimes.com/2006/12/17/business/17life.html?pagewanted=all

Mark Maremont and Leslie Scism, “Odds Skew Against Investors in Bets on Strangers’ Lives,” Wall Street Journal, Dec. 21, 2010. http://search.proquest.com.ezp- prod1.hul.harvard.edu/abicomplete/docview/818772439/fulltext/9D9772446EAA428CP Q/1?accountid=11311

Matthew Goldstein, “Profiting from Mortality,” Business Week, July 30, 2007, pp.44-51. http://www.businessweek.com/stories/2007-07-29/profiting-from-mortality

Jenny Anderson, “Wall Street Pursues Profit in Bundles of Life Insurance,” New York Times, Sept. 5, 2009. http://www.nytimes.com/2009/09/06/business/06insurance.html?pagewanted=all

Michael Sandel, “You Bet Your Life,” New Republic, Sept. 7, 1998. http://web.a.ebscohost.com.ezp- prod1.hul.harvard.edu/ehost/detail/detail?vid=25&sid=ca23dcb6-b2ba-453d-98e2- 9e6d5d811ded%40sessionmgr4004&hid=4114&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY2 9wZT1zaXRl#db=bth&AN=988164

Viviana A. Zelizer, Morals and Markets: The Development of Life Insurance in the United States (Columbia University Press, 1979), pp. 61-65, 91-117. http://isites.harvard.edu/fs/docs/icb.topic1458134.files/NOV%203%20Valuing%20huma n%20life%20II/V.A.%20Zelizer%20-%20Morals%20and%20Markets.pdf

Part II: Prediction markets and terrorist futures

Was the Pentagon wrong to propose a prediction market enabling investors to bet on when and where a terrorist attack would occur? What is the strongest moral objection to such a predication market, and how convincing is it?

Bradley Graham and Vernon Loeb, “Pentagon Drops Bid For Futures Market; Investors Could Bet on Terrorism, Coups,” Washington Post, July 30, 2003. http://www.lexisnexis.com.ezp- prod1.hul.harvard.edu/lnacui2api/api/version1/getDocCui?oc=00240&hnsd=f&hgn=t&l ni=4961-7VH0-010F- 919Y&hns=t&perma=true&hv=t&hl=t&csi=270944%2C270077%2C11059%2C8411&seco ndRedirectIndicator=true

James Surowiecki, “Damn the Slam PAM Plan!,” Slate Magazine, July 30, 2003. http://www.slate.com/articles/news_and_politics/hey_wait_a_minute/2003/07/damn_ the_slam_pam_plan.html

Adam Meirowitz and Joshua A. Tucker, “Learning from Terrorism Markets,” Perspectives on Politics, Vol. 2, No. 2 (Jun., 2004), pp. 331-336. http://www.princeton.edu/~ameirowi/published/pop2004.pdf

Dan Weijers and Jennifer Richardson, “A Moral Analysis of Effective Prediction Markets on Terrorism,” International Journal of Technoethics, vol. 5, Jan. 2014:

3 http://www.danweijers.com/pdf/A%20Moral%20Analysis%20of%20Effective%20Predict ion%20Markets%20on%20Terrorism-%20Weijers%20and%20Richardson.pdf

Noam Scheiber, “Futures Markets in Everything,” New York Times, Dec. 14, 2003: http://www.nytimes.com/2003/12/14/magazine/14FUTURES.html

Optional reading:

For an account of prediction markets generally, see Justin Wolfers and Eric Zitzewitz, “Prediction Markets,” Journal of Economic Perspectives 18 (Spring 2004): http://pubs.aeaweb.org/doi/pdfplus/10.1257/0895330041371321

Gambling, insurance, and speculation

Is there a morally significant difference between gambling and speculation? Are commodities futures trading, gambling, and life insurance contracts morally on a par? What is the social purpose of finance? Should gambling and financial speculation be treated differently for purposes of public policy and law?

Roy Kreitner, “Speculations of Contract, or How Contract Law Stopped Worrying and Learned to Love Risk,” Columbia Law Review, vol. 100 (May 2000): http://www.jstor.org.ezp- prod1.hul.harvard.edu/stable/pdfplus/1123538.pdf?acceptTC=true&jpdConfirm=true

Shaheen Borna and James Lowry, “Gambling and Speculation,” Journal of Business Ethics, vol. 6, April 1987. http://ezp- prod1.hul.harvard.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true& db=bth&AN=5400479&site=ehost-live&scope=site

James J. Angel and Douglas M. McCabe, “The Ethics of Speculation,” Journal of Business Ethics, vol. 90, 2009. http://ezp- prod1.hul.harvard.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true& db=bth&AN=51524302&site=ehost-live&scope=site

Eric Posner and E. Glen Weyl, “Against Casino Finance,” National Affairs, No. 14, Winter 2013: http://www.nationalaffairs.com/publications/detail/against-casino-finance

Lawrence E. Mitchell, “The Morals of the Marketplace,” Stanford Law & Policy Review, vol. 20, Winter 2009. http://www.lexisnexis.com.ezp- prod1.hul.harvard.edu/lnacui2api/api/version1/getDocCui?oc=00240&hnsd=f&hgn=t&l ni=4WN3-B6M0-00CV-

4 V10Y&hns=t&perma=true&hv=t&hl=t&csi=270944%2C270077%2C11059%2C8411&seco ndRedirectIndicator=true

The history of risk

Is “risk” a permanent condition of human life or does it have a history? If the latter, how and when did it emerge? What is the relation among risk, self-ownership, and freedom? What is the “chance-world” of capitalism? Answer with reference to Jonathan Levy, Freaks of Fortune.

Jonathan Levy, Freaks of Fortune: The Emerging World of Capitalism and Risk in America. Harvard University Press (2012): Prologue, chapters 1-3, 6-7, epilogue.

Financialization

What is the evidence that financial activity represents a growing share of economic activity in the U.S.? Is this a welcome or worrisome development? What accounts for it?

Adair Turner, Economics After the Crisis, MIT Press (2012), ch. 2.

Greta R. Krippner, Capitalizing on Crisis: The Political Origins of the Rise of Finance, Harvard University Press (2011), pp. 1-92, 140-150.

Rana Foroohar, “American Capitalism’s Great Crisis,” Time, May 12, 2016: http://time.com/4327419/american-capitalisms-great-crisis/

Bruce Bartlett, “’Financialization’ as a Cause of Economic Malaise,” N.Y. Times blog Economix, June 11, 2013: http://economix.blogs.nytimes.com/2013/06/11/financialization-as-a-cause-of- economic-malaise/?_php=true&_type=blogs&_r=0

Robin Greenwood and David Scharfstein, “The Growth of Finance,” Journal of Economic Perspectives, vol. 127, Spring 2013: http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.2.3

Bradford DeLong, “Starving the Squid,” Project Syndicate, June 28, 2013: https://www.project-syndicate.org/commentary/time-to-bypass-modern-finance-by-j-- bradford-delong

Howard Davies, “The Banks that Ate the Economy,” Project Syndicate, Feb. 24, 2014: https://www.project-syndicate.org/commentary/howard-davies-points-to-growing- doubt-about-the-financial-sector-s-contribution-to-overall-economic-health

Optional readings:

Adair Turner, et al., “The Future of Finance: The LSE Report,” (2010): http://www.cetking.com/wp-content/uploads/2012/12/futureoffinance5.pdf

Derivatives and naked swaps

What are derivatives? What are “naked credit default swaps”? What are the strongest arguments for banning naked swaps? What are the strongest arguments against? Which do you find more persuasive?

Andrew Leonard, “Credit Default Swaps: What are they good for?,” Salon.com, April 20, 2010: http://www.salon.com/2010/04/20/naked_credit_default_swaps/

Uwe E. Reinhardt, “Nudity and the Financial Markets,” N.Y. Times blog Economix, May 28, 2010: http://economix.blogs.nytimes.com/2010/05/28/nudity-and-the-financial- markets/

Floyd Norris, “Naked Truth on Default Swaps,” N.Y. Times, May 20, 2010: http://www.nytimes.com/2010/05/21/business/economy/21norris.html

Wolfgang Munchau, “Time to Outlaw Naked Credit Default Swaps,” Financial Times, Feb. 28, 2010: http://search.proquest.com.ezp- prod1.hul.harvard.edu/abicomplete/docview/229334810/fulltext/CE5D7872912546B0P Q/48?accountid=11311

Stuart Turnbull, “Why Markets Need ‘Naked’ Credit Default Swaps,” Wall Street Journal, Sept. 12, 2012: http://search.proquest.com.ezp- prod1.hul.harvard.edu/abicomplete/docview/1039014162/fulltext/CE5D7872912546B0 PQ/49?accountid=11311

Luigi Zingales, “Credit Default Swaps on Trial,” Project Syndicate, April 19, 2010: https://www.project-syndicate.org/commentary/credit-default-swaps-on-trial/

Charles Murdock, “Credit Default Swaps: Dubious Instruments,” Harvard Business Law Review, 2013: http://www.hblr.org/2013/03/credit-default-swaps-dubious-instruments/

6 Lynn A. Stout, “Regulate OTC Derivatives by Deregulating Them,” Regulation (Fall 2009), pp. 1-12 (including comments and response): http://object.cato.org/sites/cato.org/files/serials/files/regulation/2009/9/v32n3-1.pdf

The moral status of gambling

Part I: Is gambling morally objectionable? Compare the arguments against gambling presented in the articles below. Which, if any, do you find persuasive?

Barbara Dafoe Whitehead, “Gaming the Poor,” New York Times, June 21, 2014: http://opinionator.blogs.nytimes.com/2014/06/21/gaming-the- poor/?module=Search&mabReward=relbias%3Ar

David Blankenhorn, “Wanna Bet?: Gambling and the Decline of Decency,” American Interest (Jan. 2014): http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1548704577

John A. Hobson, “The Ethics of Gambling,” International Journal of Ethics, vol. 15 (1905), pp. 135-148: http://www.jstor.org/stable/2376380

Part II: What attitudes toward work and luck does gambling promote, according to Jackson Lears? Is gambling at odds with the work ethic? If so, is this an argument for or against gambling?

Jackson Lears, “Playing with Money,” Wilson Quarterly, vol 19 (Autumn 1995): http://www.jstor.org.ezp-prod1.hul.harvard.edu/stable/40259046

Optional reading

Jackson Lears, Something for Nothing: Luck in America (2003).

The growth of gambling: Casinos, state lotteries, and sports betting

What accounts for the growth of gambling in recent decades? Does it reflect a changing orientation to chance and risk? Is there a possible connection between the growth of gambling on the one hand, and the financialization of the economy on the other? Will sports betting corrupt sports?

Daniel Denvir, “Casino Capitalism: As gambling spreads, metaphor becomes reality,” Salon, March 3, 2009:

7 http://www.salon.com/2012/03/09/casino_capitalism_as_gambling_spreads_metaphor _becomes_reality/

Elisabeth Povoledo, “Fears of Social Breakdown as Gambling Explodes in Italy,” N.Y. Times, Dec. 28, 2013: http://www.nytimes.com/2013/12/29/world/europe/fears-of- social-breakdown-as-gambling-explodes-in- italy.html?pagewanted=all&module=Search&mabReward=relbias%3Ar%2C{%221%22% 3A%22RI%3A9%22}

David Purdum, “Inside how sports betting went mainstream,” ESPN, August 9, 2018: http://www.espn.com/chalk/story/_/id/24310393/gambling-how-media-daily-fantasy- new-thinking-us-pro-sports-commissioners-helped-sports-betting-become-accepted

David Purdum and Ryan Rodenberg, “Future of sports betting: The bettors,” ESPN, Oct. 27, 2016: http://www.espn.com/chalk/story/_/id/17900400/the-future-sports-betting- bettors-landscape-legalized-sports-betting-us

Dennis Dodd, “College football will struggle to define 'integrity' in the age of legalized sports betting,” August 16, 2018: https://www.cbssports.com/college- football/news/college-football-will-struggle-to-define-integrity-in-the-age-of-legalized- sports-betting/

Hampton Stevens, “The Great American Gambling Boom,” Atlantic, Sept. 2014: http://www.theatlantic.com/entertainment/archive/2014/09/how-daily-fantasy-sports- will-create-an-american-gambling-boom/380382/?single_page=true

Allen Barra, “Is March Madness a Sporting Event—or a Gambling Event?,” Atlantic, March 2014: http://www.theatlantic.com/entertainment/archive/2014/03/is-march- madness-a-sporting-event-or-a-gambling-event/284545/

Karen Weise, “How Poor Families Fund College for Wealthy Students,” Bloomberg Businessweek, Sept. 5, 2014: http://www.businessweek.com/articles/2014-09-05/how- poor-families-fund-college-for-wealthy-students

For articles and data on gambling and state lotteries from critics and proponents, see the following websites:

Institute for American Values: Gambling Initiative http://www.americanvalues.org/gambling/

American Gaming Association http://www.americangaming.org/

8 State of the States: The AGA Survey of Casino Entertainment: http://www.americangaming.org/industry-resources/research/state-states

North American Association of State and Provincial Lotteries http://www.naspl.org/index.cfm Historical timeline: http://www.naspl.org/index.cfm?fuseaction=content&menuid=11&pageid=1016

Is Wall Street rigged?

What is high frequency trading? How can it be used to gain an unfair advantage in the buying and selling of stocks? What, if anything, should be done about it? Does high frequency trading contribute to the social purpose of finance? If not, does it represent an exception or are other Wall Street practices also at odds with the social purpose of finance?

Michael Lewis, Flash Boys: A Wall Street Revolt

Meritocracy: Merit, luck, and moral desert

What is a meritocracy? What is the strongest argument in favor of meritocracy, and what is the strong argument against? Which is more persuasive? In what sense, if any, is meritocracy consistent with inequality? Should income and wealth be distributed according to merit?

Michael Young, The Rise of Meritocracy (1958), ch. 5, 7.

Frederick A. Hayek, “Equality, Value, and Merit,” ch. 6 in The Constitution of Liberty (1960): http://www.woldww.net/classes/General_Philosophy/Hayek-equality.htm

Michael Young, “Down with Meritocracy,” The Guardian, June 29, 2001. http://www.theguardian.com/politics/2001/jun/29/comment

“Meritocracy and Its Discontents,” The Economist, Oct. 5, 2006. http://www.economist.com/node/7961962

Jo Littler, “Meritocracy as Plutocracy: The Marketing of ‘Equality’ under Neoliberalism,” New Formations (2013).

9 http://www.lwbooks.co.uk/journals/newformations/pdfs/nf8081_littler.pdf

Mobility and the American Dream

Is the U.S. still the land of opportunity or is mobility a myth? Is it harder to rise in the U.S. than in other countries? If so, what are the implications for the American dream?

Raj Chetty, et al., “The Fading American Dream: Trends in Absolute Income Mobility Since 1940,” Executive Summary, Dec. 2016: http://www.equality-of-opportunity.org/assets/documents/abs_mobility_summary.pdf

David Leonhardt, “The American Dream, Quantified at Last,” N.Y. Times, Dec. 11, 2016: https://www.nytimes.com/2016/12/08/opinion/the-american-dream-quantified-at- last.html

Jason DeParle, “Harder for Americans to Rise from Lower Rungs,” N.Y. Times, Jan. 4, 2012: http://www.nytimes.com/2012/01/05/us/harder-for-americans-to-rise-from- lower-rungs.html?pagewanted=all&_r=0

[See also accompanying graphic, “Comparing Economic Mobility”: http://www.nytimes.com/interactive/2012/01/04/us/comparing-economic- mobility.html?ref=us]

Timothy Noah, “The Mobility Myth,” New Republic, Feb. 8, 2012: http://www.newrepublic.com/article/politics/magazine/100516/inequality-mobility- economy-america-recession-divergence

Scott Winship, “Mobility Impaired,” National Review, Nov. 14, 2011: http://www.nationalreview.com/articles/282292/mobility-impaired-scott-winship

The Pew Charitable Trusts, “Moving On Up,” Nov. 2013: http://www.pewtrusts.org/~/media/Assets/2013/11/01/MovingOnUppdf.pdf

The Pew Charitable Trusts, “Pursuing the American Dream: Economic Mobility Across Generations,” 2012. See especially Figure 3, p. 6, and Figure 18, p. 28. http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/PursuingAm ericanDreampdf.pdf

OECD, Economic Policy Reforms: Going for Growth, ch. 5 (“A Family Affair: Intergenerational Social Mobility across OECD Countries”), pp. 181-185 (see esp. Figure 5.1):

10 http://www.oecd.org/tax/public-finance/chapter%205%20gfg%202010.pdf

Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, “Where is the Land of Opportunity? Intergenerational Mobility in the U.S.,” Feb. 4, 2014: http://www.voxeu.org/article/where-land-opportunity-intergenerational-mobility-us

Stefanie Stantcheva, “Prisoners of the American Dream,” Project Syndicate, Feb. 22, 2018: https://scholar.harvard.edu/files/stantcheva/files/prisoners_of_the_american_dream_b y_stefanie_stantcheva_-_project_syndicate_0.pdf