Lobbying, Subsidies, and U.S Multinational Corporations (Part 3)

June 30th, 2008 Comments off

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” Increasing demand for lobbyists in the late 1980s led to a growth in popularity of the practice, and the “Washington Game” began to perpetuate itself. The high demand also changed the traditional viewpoint that it was inappropriate for former elected officials to become lobbyists. Since 1998, 43 percent of the 198 members of Congress who are no longer in any elected office have registered as lobbyists at least once. [4] The overall result of this evolution is the ever-increasing presence of private money circulating in public affairs. The bottom line is that to the American politician, money matters greatly. In the 2002 midterm elections, candidates who spent more money than their opponents won 95% of all contested House seats and 75% of all Senate seats. [5]

In context of the model provided, there are many examples of the significant influence of multinational corporations on economic policy. America, despite being considered the most laissez-faire major power, is a massive provider of corporate welfare. A symbolic and instrumental assessment of most recent U. S. policy relating to multinationals bears very strong explanatory power. Partisan politics serve as a major front for symbolic stratification of policy. Generally, at least some semblance of connection between the larger stated ideological issues and the actual policies must exist. Though members of both the Democrat and Republican parties regardless receive immense contributions from multinationals, the prime political actors on behalf of large MNCs usually consist of Republicans, likely due to their ideological platforms which usually involve deregulation, trade liberalization, belief in the strength of entrepreneurship, and so forth. These beliefs, ironically, are used as the symbols to mask the economic interventionism of subsidizing large MNCs.

Given the general claims stated up to this point, the next inquiry must be into their actual historical relevance: what contemporary examples are there of MNCs demonstrating a palpable influence on U. S. policy? The difficulty of finding information on the topic is testament to the transparency that MNCs often enjoy in their lobbying activities, at least in regards to the general public. To discover the appropriate connections, one must integrate diffuse pieces of information from diverse sources in order to draw the connection between a particular firm’s action and how a government policy was determined. Furthermore, lobbying disclosure law is only relatively new, with the Lobbying Disclosure Act having been only passed in 1995. Besides the fact that lobbying activities falling under the guidelines of the law were sometimes underreported (especially during the first few years), there are still many methods of lobbying that have no legal disclosure requirements. These include “revolving door” offers, personal favors, insider information, and other transactions that frequently have no official paper trail. Discovering these obscure relationships beyond mere speculation is a matter of intensive research, including investigative reporting across many sources that only provide small amounts of information individually. For now, we will briefly explore two major and well-known contemporary examples of multinational industries that engage in and profit from abundant political activity: pharmaceuticals and petroleum.

The pharmaceuticals and health products industry constituted the largest portion of reported political contributions in 1998-2006, spending over $1 million.

Their critical policy objectives focus on international recognition of “intellectual property” rights to their drugs, in order to undermine cheaper competitive drugs which cut into their market shares, and the elimination of price controls caused by growing desires for healthcare guarantees. [6]

The pharmaceutical industry deals primarily with products that prolong or improve the bodily well-being of humans. In most societies, the act of “saving lives” is a moral priority, or at least a noble deed. It is no surprise, then, that all related policies are couched in strongly symbolic terms. Their public claims are broadly reflected by statements such as “without [assistance on this issue] from government, expensive research on important drugs will stop and many life-saving implements will not be available. ”

The industry’s influence on international trade is very palpable and significant. Its trade association, Pharmaceutical Research and Manufacturers of America (PhRMA) includes Pfizer Inc. GlaxoSmithKline Plc, Merck & Co Inc. primarily functioning as a means to increase transparency of individual companies’ political influence. PhRMA has filed 59 lobbying reports concerning the Office of the U. S. Trade Representative, more than any other organization historically. Drafts of the Dominican Republic-Central American Free Trade Agreement echo the pharmaceutical industry’s sentiments about price controls and intellectual property. Under its provisions, member nations will be required to comply with deregulated pricing and international patent laws. An examination of the voting record for implementing DR-CAFTA demonstrates almost unanimous votes along party lines: only 15 Democrats voted for the measure, and only 27 Republicans voted against it. [7] Furthermore, in light of CAFTA in 2005, Guatemala was pressured to repeal a law that would allow for increased marketing of generic drugs as long as the drugs were demonstrated to behave like approved drugs. The U. S. ambassador to Guatemala issued presented an ultimatum: Guatemala had to change its law to provide the clinical study data exclusivity mandated by CAFTA, or the U. S. Congress would not allow them membership. [8]

The oil industry, especially in extraction and transportation, is the beneficiary of a large amount of both direct and indirect subsidies. Two of the most significant (relating to their international position) are in the use of government resources in protecting their assets abroad as well as expanding their potential asset base, and in their lack of responsibility for environmental externalities caused by the consumption of fossil fuels.

The physical security of oil drills, pipelines, and shipping lanes constitutes billions of dollars of U. S. government services. Friendly diplomatic relations must be maintained with major exporter countries, especially those with U. S. -owned holdings. Likewise, military force must be readily available to combat any attempt to seize or otherwise disrupt oil supplies by foreign aggressors. Besides maintaining existing American assets and relationships, the government has also engaged in policies in seeking out new sources of oil. One need only imagine a world that did not need petroleum, and aptly ask: “would our foreign policy be the same if that were the case? ” It is misleading, of course, to characterize the government’s heavy interest in maintaining and expanding oil supplies as only a resource transfer to large oil companies, as much income in America is authentically dependent on the energy generated by oil. Nonetheless, it is still a subsidy that discourages substitutes and conservation.

It is no surprise that Republicans advocate the very symbolic policy goal of an aggressive outward foreign policy. According to the Center for Reponsive Politics, in the 2006 election cycle, Republicans received 84% of all campaign contributions from the oil industry.

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Lobbying, Subsidies, and U.S Multinational Corporations (Part 2)

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Prior to any government assistance, a firm makes a certain level of profit; they can then receive more profits via subsidy from the government, but must count their expenditure in attaining those subsidies against them. EL is not only meant to contain formalized lobbying spending conducted through institutions established for that purpose, but any expenditure of resources on attempting to influence political outcomes (the primary means being appeals to officeholders’ individual interests). EL includes election campaign contributions to candidates who promise to reflect their contributors’ interests and any promises of special employment or other benefits after a policymaker’s term in office. It also consists of the payment of lawyers to assist policymakers in drafting the language of policies and experts to assist in implementation.

Next, we must consider the interests of the policymaker, and his obligation to the public:

Ug rEL f(Cp)a (2)

The government policymaker’s utility, Ug, is the difference between the benefits received from private interests and a penalty caused by institutional mechanisms for public accountability. The first component is the product of some proportion r times the firm’s lobbying expenditure EL, representing the amount of EL that government agents “capture” for their own gain. Lower values for r tend to indicate more reliable institutional structures separating private from public interests. If r had a value of one, lobbying expenditure would essentially be direct bribery in exchange for arbitrary decree. The more that a firm has to spend in figuring out how the law works, what kind of law would benefit them the most, and other institutional intricacies, the lower r is.

The second component constitutes the role of the public in holding policymakers accountable for their decisions. It is the product of some proportion f times the perceived cost (to the public) of a policy, raised to an exponent a. a can be taken to represent the level of public attentiveness and responsiveness to how their tax dollars are used, and it is assumed that a ≥ 1 (if it were otherwise, the public would penalize the government marginally less for each extra dollar it spends- an absurd outcome). f represents the institutional manifestation of the public’s attitude: the higher it is, the more sensitive policymaking must be to public opinion. We also constrain this parameter between 0 and 1, for practical purposes.

Thus far, we only defined public opinion as a function of the perceived cost of a subsidy, which is actually defined by the actual cost of the subsidy minus some error:

Cp Cs ui (3)

Moreover, the cost of a subsidy is the quotient of the subsidy’s value over some efficiency proportion F > 0:

s F*Cs                                                                                                                (4)

Thus, substituting (4) into (3) and then into (2), we have

Ug rEL f(S/F ui)a (5)

F represents how cost-effectively the government can perform the policy at hand. ui indicates the level of misinformation the public has about the cost of a subsidy.

Taking the first-order conditions of each equation (i. e. optimizing firm profits and government utility with respect to the choice variables, s and EL), we attain an equilibrium level of s:

s ((r*F/a*f)1/(a-1) ui)*F                                                                                      (6)

From this, general intuition can be drawn about how each parameter affects the equilibrium subsidy value- in more plain language, how institutional, economic, and political environments determine the incentive structure for policymakers’ behavior. In short, differentiating with respect to each parameter individually yields the following results: greater government efficiency increases subsidies (dF/ds > 0); structural corruption increases s (dr/ds > 0); misinformation increases s (dui/ds > 0); Public responsiveness decreases s (da/ds < 0); and strong public institutions decrease s (df/ds < 0).

The model operates on a short-run, ad hoc basis; the equilibrium value reflects optimization from a single firm’s perspective at a particular point in time. Appropriately, the parameters differ depending on the specific firm’s (or industry’s) case, the institutional nature of the policy in question, the public attitude toward the symbolic issues, etc. For the most part, this is concordant with the reality of the assumed profit-maximizing firms: they are willing to gain at anyone else’s expense. Overall, the model given above is not intended to deal with quantitative specifics, but to create an overarching cost-benefit analysis of one method of altering a firm’s profits: exploiting politics. It is sufficiently abstract to accommodate any form of government which allows for some degree of private property, whether it is a dictatorship or a modern liberal democracy; the parameters are what change, but not the logic.

With quantitative reasoning in mind, we can begin to examine the qualitative aspects of the lobby-subsidy process. The distinction between “symbolic” and “instrumental” policy, a concept outlined by Murray Edelman in The Symbolic Uses of Politics (1964), is critical to fully understanding how MNCs (or any special interests, for that matter) can successfully have their private interests supported by government policies, even when those policies are detrimental to the public as a whole. He discusses the reality of the gap between the symbols invoked when policy decisions are being made and the actual instrumental, material status of such policies (i. e. what kinds of resource transfers the policy entails). These symbols are aimed at triggering conditioned responses, and are meant to be a substitute for the actual things they represent. For example, “the elimination of poverty” is supposed to trigger a positive response in favor of a policy, but its implementation may in fact be a tax break for the wealthy.

In accordance with that idea, important lobbying strategy lies in promoting favorable ideas to support firm or industry-specific goals. The aim is to achieve ideological or empirical consensus in policymakers and in, more importantly, the public. While some expenditure for this objective is through private organizations, the end result when it is successful is a favorable alteration of the law. [3]

Besides the standard range of direct government benefits which multinational corporations seek for their domestic markets (direct subsidies, tax breaks, etc. MNCs often pursue policies that positively affect their standing as international companies (or negatively affect their competitors’). This could mean, for example, arguing for a tariff that may not be necessarily to inhibit a rival’s trade, but to make its production inputs more expensive if it depends heavily on outsourced components. MNCs can lobby for direct negotiations or even the use of force between its home country and a potential host country in order to increase its stock of investment abroad. These are but two examples of the many ways in which MNCs can attain indirect subsidies, whose legislative elements frequently obscure their ultimate beneficiaries who, in public discussion, are supplanted by symbolic language.

U. S. MNC Lobbying in the 90s to the Present

American institutions have a long history of lobbying, beginning in essence with the first amendment of the Constitution: “[Congress shall make no law abridging] the right of the people peaceably to assemble, and to petition the government for a redress of grievances.

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Lobbying, Subsidies, and U.S Multinational Corporations

June 30th, 2008 Comments off

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In 2006, U. S. interest groups spent $2. 44 billion on reported lobbying expenses- approximately $5 million per Congressman. [1] A large portion of that expenditure came from multinational corporations (MNCs), the famed special interests who generate and control large amounts of money and are behind the sinister conspiracies in action thrillers. Notwithstanding fantastical story-telling, it is important to investigate why these corporations spend so much money on Capitol Hill. For a basic starting point, if we know that an agent is profit-motivated, and time after time he spends money on an activity, there lies only one inevitable conclusion: that he believes he would be worse off without doing it. Furthermore, long histories of political lobbying in the world also have shown that, on average, such expenditure pays off. For all the literature on corporate strategy, one area of theory that has been covered in comparatively less detail is that of the political relationship between a MNC and its home country, specifically in terms of the role of the MNC in ultimately affecting its home government’s policies. –more–>Lobbying can be generally defined as the expenditure of resources by a firm or group of firms in order to secure a favorable political or legal environment for their activities. Though lobbying actions are most frequently geared toward achieving preferable domestic policies, larger governments with regional or international influence can be petitioned for favorable foreign policies. Domestic interest groups attempt to gain, often indirectly, economic benefits through a government’s exclusive diplomatic channels. Governments often hold a great deal of information unknown to the private sector, as well as direct contacts with officials and lawmakers of foreign countries. As monopolists of force, states also reserve the threat of war as a means to their ends. Economic interest groups can, instead of expending resources on adjusting their business to market conditions, expend those resources on adjusting market conditions to their business (“rent-seeking”).

For markets, lobbying has profound implications. The law has nearly limitless potential to interfere in the economy. Where there is this capability, laws become a commodity to be bought and sold. A fundamental error to make is to think that politics are non-quantifiable and non-economic. To quite the contrary, political structures are simply markets in which the rules are different (albeit radically at times). “Political entrepreneurship” becomes as much a skill as innovation in one’s industry: if the principal goal is profit for a group of people, then a dollar earned productively or coercively is, other things equal, the same.

The United States is the prime example of a powerful nation whose foreign dealings and economic policies are highly responsive to special interests. Both the structures of the electoral system and the government’s coercive powers grant a significant level of policymaking access to private organizations. A thorough examination of the government’s scope of powers, the structure of policymaking institutions, and the long-term trend of increasing reported lobbying expenditure reveals considerable evidence that political proficiency is part of an essential set of skills for the modern U. S. multinational corporation.

General Theory Concerning Multinationals and Lobbying

The political sphere is even more immensely complicated in the absence of the premises upon which the free market functions. Political structures frequently alienate the agent from the results of his actions (or inaction) in some way. The chief structure that causes this alienation is bureaucracy, partly via “diffusion of responsibility” effect. While this phenomenon occurs to some degree in free markets with large firms,[2] it is less of a problem, because productive deficiencies are more quickly answered by declines in profits and labor market adjustments. The obstacle is most often described as the principal-agent problem, which is especially pronounced in government. Whereas in the private sector, the “principal” at hand is concerned with easily quantifiable profits, the objectives of government institutions are much more specific, varied, and difficult to measure. On one hand, firms are naturally controlled by productivity, and in turn, profits; on the other, governments are validated simply by force and by the cost inefficiency of rapid change (revolution). Though democracies require input from the entire population, their input is channeled through a central decision-making and enforcement process; this should not be mistaken for the kind of integration of dispersed information that markets have. The end-state of a market is the product of an aggregation of many individuals associating in ways that benefit them individually, each person possessing a small amount of resources (relative to the rest of the economy). Alternatively, the end-state of government is the product of a pre-established institutional structure (e. g. a constitution) determining how to allocate a large amount of resources.

That the agents involved in government seek the maximization of their individual utility should not be ignored. In fact, this is the core assumption that does not differ between private and public activity. The agent does not change; only his constraints do. Though this view may appear to some as cynical, the basic intuition behind it is that while the costs of some kinds of choices may differs, an agent’s preferences generally do not change upon attaining public office. As might be argued, a sense of duty or responsibility (conscience? may develop, altering the agent’s utility function. Nevertheless, it is clearly too limited to overcome the bureaucratic risk-reward gap.

For purposes of simplicity, we will assume that firms as a whole attempt to maximize their profits, without the risk of individual actors in the firm placing their own individual benefit above the firm’s profit (e. g. no corrupt CEOs trying to swindle shareholders). The objective of this investigation is to examine the specific nature of the relationship between rational market actors and government institutions.

It was stated earlier that laws can function as a commodity to be bought and sold. Beyond mere metaphor, we can construct a model that recognizes that political institutions are entities that possess the ability to, ceteris paribus, exogenously impose any desired condition of operation on market processes. Because these institutions are operated by individuals who are factually no different than market actors, the result is that these individuals possess some degree of that exogenous power for use at their own discretion. They are liable for what they do with it, but not completely. It is this discrepancy that subjects policymaking to a certain level of autonomy, and thus subjects it to market forces. From these assumptions, we can model the lobby-subsidy process.

The interaction between firms and the government can be summarized by the following model, beginning with a firm’s basic profit function:

pd pm s – EL (1)

A domestic firm’s profit, pd, is a linear function of the firm’s exogenous market profit (pm), plus subsidies (s), minus lobbying expenditure (EL).

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Anti-laissez-faire Ideas since the Founding: 1870-1918 (Part 3)

June 28th, 2008 Comments off

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As German sociologist Max Weber explained, “The rise of modern freedom presupposed unique constellations which will never repeat themselves. ” These “unique constellations” likely refer to the vast expanses of land and resources in North America, among other contingent facts, which gave rise to the harmony provided by decentralization. Otherwise, freedom must be centrally planned to be had beyond its occurrence through plain luck. Bellamy comments that Americans in the nineteenth century possessed a “galling personal dependence upon others as to the very means of life. ”[11] The founder of the American Economic Association, leader of an organization created to battle laissez-faire economics, wrote “we regard the state as an educational and ethical agency whose positive assistance is one of the indispensable conditions of human progress. ”[12]

Woodrow Wilson, in fulfillment of many of Herbert Croly’s ideas, advocated a “New Freedom. ” In The Meaning of Democracy (1912), he claims that while laissez-faire Jeffersonian ideals furnished “a government of free citizens and of equal opportunity,” the contemporary physical characteristics of the nation were suited to it; families each lived in separate households, employers were closer to their employees, and so forth (arguments very much similar to Weber’s “unique constellations”). Using Glasgow as an example, Wilson draws a metaphorical parallel between the Scottish city’s common hallways in residential buildings being defined as public streets and the “corridors” of large corporations being regulated as part of the public domain. In this, he claims he is fighting against “monopolistic control,” and in turn “fighting for the liberty of every man in America, and fighting for the liberty of American industry. ” [13] Not coincidentally, the Wilson administration heralded the introduction of the discretionary federal income tax through the Sixteenth Amendment in 1913.

Clearly, attitudes toward laissez-faire capitalism have turned significantly against it since the Founding. This is not to suggest that there was unanimity over the issue during America’s formative years, but major policy battles accompanied by successful movements have led to aggregate changes in economic viewpoints. The prominent influences of the postbellum period, such as the Progressives, have nearly eradicated belief in the functionality and even morality of absolute laissez-faire­ governance. Likewise, the public institutions established in the wake of those movements have furthermore ingrained the permanent, expanded role of government in the national consciousness (euphemistically speaking). Even “right-wing” politicians who profess the values of capitalism take their cues from business interests in exchange for financial and political support. Few candidates can plausibly survive electorally on a genuine non-interventionist policy platform. For America, the unabridged free market is dead.


[1] To clarify, any mention of “capitalism” alone still is referring to unlimited, absolute laissez-faire capitalism with the proper host of necessary political rights. Likewise, “liberal” refers to the host of values associated with it.

[2] This is, obviously, supposing that these trade unions are behaving by legitimate and economic means. In the “Forgotten Man,” Sumner attacks unions which restrict the free flow of labor, by limiting the pool of tradesmen in order to artificially raise wages.

[3] Some thinkers were nationalistic, like Bellamy; others were religious, like Ryan; and so forth.

[4] For space considerations, this analysis will not go past the Wilson administration.

[5] Edward Bellamy. “Looking Backwards. ” In American Political Thought, ed. Kenneth Dolbeare and Michael S. Cummings, 293 (Washington, D. C. CQ Press, 2004).

[6] Eric Foner, The Story of American Freedom, 144 (New York: W. W. Norton & Company, Inc. 2004. )

[7] Henry Demarest Lloyd. “Revolution: The Evolution of Socialism. ” In APT, 304-305.

[8] Foner, 144.

[9] Debs, “Revolutionary Unionism. ” In APT, 359.

[10] Eugene V. Debs, “Revolutionary Unionism. ” In APT, 355.

[11] Foner, 129.

[12] Foner, 130.

[13] Wilson, Woodrow. “The Meaning of Democracy. ” In APT, 393-395.

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Anti-laissez-faire Ideas since the Founding: 1870-1918 (Part 2)

June 28th, 2008 Comments off

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“The reward of any service depended not upon its difficulty, danger or hardship, for throughout the world it seems that the most perilous, severe, and repulsive labor was done by the worst paid classes…,” states Dr. Leete, a knowledgeable member of the society. [5] Indeed, this was not the case in 1887; the natural system of economic rewards resulting from liberal rights is, first and foremost, based on the mutual exchange of desired values, i. e. supply and demand. “Wage slavery” became a popular phrase to describe status of the common laborer. In The Living Wage (1906), John A. Ryan argues that the “American standard of living” is a “natural and absolute right” of citizenship. Though he argued it as a dictum of Christian values, many other leftists embraced a similar belief, and an ends-oriented theory of economic freedom gained popularity. No longer would individual autonomy provided by rights determine one’s economic freedom, but the level of wages would. [6]

Collectivism vs. Individualism

Logically entailed by the change in moral principles was an insistence that the good of the collective trumps the good of the individual. Since the notion of the fairness of market-defined wages was fully rejected, the market was replaced by newly-found social and moral considerations. Henry Demarest Lloyd, one of the foremost antagonists of Social Darwinism, placed great emphasis on collective governance and production. “Our liberties and our wealth are from the people and by the people,” he contends, “and both must be for the people. ” His use of “the people” is not merely political euphemism, but imperative: “wealth, like government, is the product of the co-operation of all, and, like government, must be the property of all its creators. ”[7]

Historically, a principal element of collectivization derived from stressing the importance of labor, in contrast to the capital-focused Industrial Revolutions of the 1800s. In 1914, Congress announced via the Clayton Act, “The labor of a human being is not a commodity. ”[8] There is no better example of American labor-class activism than the writings of Socialist Party figurehead Eugene V. Debs. In Revolutionary Unionism (1905), Debs argues for the unity of the working class and, in Marxist form, condemns the purported separation of the worker from the rightful fruits of his labor. He repudiates the validity and effectiveness of craft unions- usually selective organizations of skilled workers- underscoring that “infinitely greater than [their] loyalty to their craft is their loyalty to the working class as a whole. ”[9] He fiercely criticizes the structure that denies the struggling laborer his desires, but fervently protects “the product of [the worker’s] labor, the property of the capitalist. ” Then, when the dissatisfied become agitated and unrest begins, the government arrives to silence the menace: “If you… have made more steel than your master can sell, and you are locked out and get hungry, and the soldiers are called out, it is to protect the steel and shoot you who made the steel. ”[10] Debs’ arguments reflected common sentiments of outrage toward a society in which a vast majority of people, though they were a necessary part of production, toiled heavily and possessed little while a tiny group reaped gigantic rewards.

A different form of collectivism, nationalism in the spirit of the times also was a popular source of ideological opposition to the free market. Similar opinions had already a large presence during the Founding in the form of the Federalist Party and Alexander Hamilton, who argued for state intervention as a means of furthering the nation’s economic goals. Bellamy’s Looking Backward, which cued a short-lived but large nationalist movement, extolled the replacement of self-interest with a higher cause: “Now that industry of whatever sort is no longer self service, but service of the nation, patriotism, passion for humanity, impel the worker as in your day they did the soldier,” says Dr. Leete. Another thinker, Herbert Croly, believed nationalism belonged hand-in-hand with democracy, stating “the first duty of a good democrat would be that of rendering to his country loyal patriotic service. ”

The Role of the State

Government would be the primary tool in executing these policies, with force as the only way to guarantee Americans their social and economic rights.

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Anti-laissez-faire Ideas since the Founding: 1870-1918

June 28th, 2008 Comments off

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Most libertarians would say that capitalism is dead in America. Many on the left would say that it is still raging. It’s ultimately a matter of what you define as “capitalism” (voluntary exchange vs. large corporation mercantilism), but we can be sure that the voluntary exchange aspect is killed day by day, and has been attacked and defeated repeatedly in the past, particularly in the 20th century. But big pro-state changes like that don’t happen overnight. They’re usually preceded by years of philosophy (usually very bad) and state-caused problems, much civil unrest, and are followed by gigantic losses of liberty and increases in dependency on the state. –more–>

Let’s take a look at some of the philosophy of anti-laissez-faire, particularly in its heyday: just before the first World War. There is little doubt the explosive growth of America’s economy was the result of the great human effort, the application of knowledge to production to create technology and capital, and the vast land and natural resources at its disposal. The framework of classical liberal (in full form, laissez-faire) economics pioneered by Great Britain gave great incentive for this process. A century of liberalism arose from thousands of years before of dysfunctional human civilization, growing the population and standard of living of human beings far larger than ever before in any century.

However, following the Civil War and the Second Industrial Revolution, class divisions had grown and fresh voices bemoaned the supposedly unjust distribution of wealth in society, calling into question the validity of the free market. Though lacking true ideological conformity, changes in attitude toward laissez-faire capitalism[1] since the Founding have been generally defined by any or all of three major shifts: most importantly, the replacement of liberal political rights with economic entitlements; closely connected, a new emphasis on collective instead of individual good; and in effect, the belief in the use of government as a valuable tool for bettering those collectives.

Of course, some important qualifications must be made. Firstly, not all objections made to the state of the nation under capitalism in the late 19th– and early 20th– centuries were necessarily at odds with traditional liberal principles. Truly consistent advocates of laissez-faire capitalism such as William Graham Sumner believed that government obstruction of trade unions and other forms of collective bargaining[2], for example, interfered with the individual’s right to freedom of association and self-determination. Broadly speaking, the political environment that permitted wealth to buy power in government was an essential threat to traditional liberty. Furthermore, it would be disingenuous to attempt to collectivize the entire spectrum of objections to liberal society, as they can be vastly different in their moral values, justifications for their principles, and the nature and practical execution of their policies. [3] Overall, the following breakdown is only a brief approximation of the characteristics of those opposed to laissez-faire economics, with a select few of several possible examples.

The Rise of “Economic Freedom” As a Standard of Living

The issues of most profound significance to any attitude toward economic and legal systems are the moral concepts that underlie them. Almost universally, opponents of capitalism believed that wrong-doing necessarily occurred from its implementation, whether in its means or in its ends. Previously, most of an individual’s rights in America were defined by a Lockean theory of natural law. Freedom of contract (and a right to a fulfillment of those contracts) permitted one the ability to freely associate with others economically. However, great disparities in wealth concentration led critics of capitalism to denounce the status quo, which was allegedly caused by the consistent legal enactment of these principles. Factions such as the Populist movement, the Progressive movement, and the Socialist Party of America formed in the antebellum period as a response. [4] The introduction of a new kind of right pervaded these new alternatives to laissez-faire capitalism: the economic freedom.

Karl Marx’s famous maxim, “from each according to his ability, and to each according to his need,” was one widely accepted economic substitute for property rights. Looking Backward (1888), a novel by Edward Bellamy, details a futuristic society that has supplanted competition with economic rights and duties in line with Marx’s axiom.

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The Online Gambling Industry[Part 4]

December 17th, 2007 No comments

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As it stands, the U. S. government is the only real obstacle to the reliable, credible, and successful operation of internet casinos.

Online Gambling: A Perfect International Market?

While perfect markets can never realistically exist, internet gambling has the potential to be one of the closest approximations yet in human history. Usually, the export of services becomes complicated, as it usually involves the movement of people and equipment over state borders thus introducing new externalities; contrarily, gambling is one of few services that can be supplied exclusively via the internet, which practically operates in the absence of the burdens of physical limitations and their corresponding distortions.

Cyberspace is an abstract realm that holds the possibility of achieving closer adherence to perfect-market assumptions. It shows promise for the ever-increasing transparency of economic transactions. Practically infinite capacity, decentralization of access control, and constant innovation of hardware and software methods allows for thousands of companies to compete and cater to different preferences, making monopoly virtually impossible (no pun intended) in 2006, U. K. government estimates projected that there are 2,300 online gambling sites worldwide. The ready, rapid access of information can allow website to provide catalogues of competitors sorted by the user’s preferences, increasing symmetry of information. Even the elusive condition of arbitrage could be brought closer to fruition by compiling prices internationally.

Present efforts by private companies, namely Google, Inc. to centralize information have been met with great success. However, such centralization is a double-edged sword for the future of internet gambling and markets like it: while it can give the consumer easy access to a wealth of information never had before, it also gives government regulators new opportunities to police internet usage. Google’s recent cooperation with Chinese authorities in blocking access to government-censored websites is testament to this danger. When the appropriate technology is attained, the political climate surrounding internet gambling will determine whether it will be abolished entirely or permitted to blossom into the profit-making machine it has the potential to be. Nevertheless, in the status quo, legal barriers have held and continue to hold the industry’s growth in check.


[1] Internet gaming, online gambling, online gaming, etc. henceforth all refer to the same thing.

[2] The term “Brick & Mortar” (abbreviated B&M) used to describe casinos refers to conventional gaming houses.

[3] A good explanation can be found at http://en. wikipedia. org/wiki/Expected_value.

[4] Texas Hold’em is presently the most popular variant of poker played in casinos and online.

[5] This is just a variant of Texas Hold’em where the betting structure allows a player to bet all the chips he has on the table at any time. The result is a very volatile, but highly skill-dependent game.


[i] Cross-Border Gambling on the Internet: Challenging National and International Law, 21. Swiss Institute of Comparative Law. (Zurich: Schulthess, 2004)

[ii] National Gambling Impact Study Commission Final Report. http://govinfo. library. unt. edu/ngisc/reports/fullrpt. html (this and all websites accessed December 9, 2006).

[iii] Online Poker. Wikipedia. http://en. wikipedia. org/wiki/Online_poker

[iv] Basu, Indrajit. US-barred gambling set to roll in Asia. http://www. atimes. com/atimes/South_Asia/HJ31Df01. html

[v] Internet World Stats. “World Internet Usage and Population Statistics. ” http://www. internetworldstats. com/stats. htm.

[vi] McCarthy, Michael. New legislation may pull the plug on online gambling. http://www. usatoday. com/tech/2006-10-02-internet-gambling-usat_x. htm? POE=TECISVA.

[vii] Illegal Internet Gambling: Problems and Solutions. http://www. ncalg. org/Library/internet/Kyl_Internet. pdf

[viii] Hansen, Burke. Tiny Antigua grabs the US by its illegal, online dice. http://www. theregister. co. uk/2006/11/21/antigua_wto_bet/

[ix] Cross-Border Gambling on the Internet, 146.

[x] Burke, http://www. theregister. co. uk/2006/11/21/antigua_wto_bet/

[xi] Bell, Tom. http://www. cato. org/testimony/ct-tb052198. html

[xii] The Technical Feasibility of Regulating Gambling on the Internet. Australian Institute of Criminology http://www. anu. edu. au/people/Roger. Clarke/II/IGambReg. html

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The Online Gambling Industry[Part 3]

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In 2006, 69. 1% of North Americans (about 229 million) and 51. 9% of Europeans (about 240 million) had internet access. In both these markets, alliances were formed between television and individual websites following the explosion in popularity of televised poker events. The largest sporting event worldwide featuring multi-million dollar cash prizes, The World Series of Poker, grew huge markets in the developed world almost overnight. In addition to providing regular cash games and tournaments, sites began hosting “satellites,” in which one pays an entry fee and competes with other players to win entries into one of the major televised events. The thrilling nature of No-Limit Texas Hold’em[5], plus enormous sums of money, appearance on television, and a chance at immortal fame as a World Champion of Poker was heartily accepted, especially by Americans. In 2005, PartyGaming Plc- the largest online gaming company at the time- earned 80% of its $1 billion revenues from U. S. players. Between 50% and 60% of the entire industry’s revenues of $12 billion in 2005 can be attributed to North American players. [vi]

Legal Issues and Obstructions

The issues most prominently affecting the growth and progress of internet gambling are nearly always legal. At the forefront of attacks on the industry, the United States Federal Government has been consistently battling domestic internet gambling since the late 1990s. It has justified this on grounds that internet betting sites can be easily exploited for money laundering, additionally arguing that online betting accentuates pathological gambling problems and undermines the integrity of professional sports. [vii] A more plausible explanation for this stance points to protectionism on the behalf of deep-seated domestic gambling interests. [viii] Because U. S. players constitute the industry’s most important market, the federal government’s aggressive stance is of immense concern. In October 2006, Republican Senator Bill Frist championed and passed the Unlawful Internet Gambling Act of 2006, a last-minute rider on the essential Port Security Act which passed in the final vote before Congress adjourned for the session. The law expressly prohibits U. S. financial institutions from conducting any transactions with “bet-taking” websites. The result of this law was the total shutdown of U. S. operations for three of the largest internet casinos: PartyGaming Plc, Sportingbet Plc, and 888 Holdings group, which lost 84%, 54%, and 52% of their revenues, respectively. Though business still continues for many rogue, but reputable sites, U. S. policy dealt a crushing blow to the industry.

International legal frameworks have played a role, albeit a minor one thus far. In 2003, the tiny island nation of Antigua lodged an official complaint in the World Trade Organization against the United States, citing that the U. S. discriminated between domestic and foreign providers of remote gambling and was therefore in violation of trade reciprocity requirements set forth in the General Agreement in Trade Services. It would either have to ban domestic remote bets, or permit WTO member nations access to its remote gambling markets. [ix] The U. S. was given until April 3, 2006 to comply, but took no action and claimed it had complied. Antiguan counsel Mark Mendel commented that it was the first time “an implementing [losing] party has announced itself in compliance with the recommendations and rulings of the Dispute Settlement Body of the WTO without having done anything at all. ” Nonetheless, the ruling demonstrates that the U. S. will have to comply eventually, or repudiate the workings of the WTO. Trade partners Japan and the EU have filed reports in support of Antigua; threats of undermining U. S. intellectual property rights are in the making. [x]

What of the regulatory option, supposing it were to be exercised? The internet intrinsically grants online casinos a great deal of protection from regulators. The ability to send and receive messages anonymously, change locations, and encrypt transmitted data may not make it impossible to trace transactions, but the cost of doing so will be prohibitively high. Mass subpoenas of thousands of private internet service providers’ records would be required, raising a storm of objections and privacy issues. “The very architecture of the Internet renders gambling prohibition futile,” states Tom Bell of the Cato Institute, as many experts have about the futility of regulation. [xi] New web-crawling technologies may begin to solve this problem, but even then, problems of jurisdiction persist. The ubiquity of possible locations for gambling sites’ servers presents a formidable obstacle to regulators, and sites can even go as far as making their operations extra-jurisdictional by preventing their cyberspace activities from being associated with any geographic location. [xii]

Given the regulatory environment, or lack thereof, in most of the world besides the U. K. this means that a sizeable portion of the internet gambling market is almost completely anarchic. There are no legal controls to protect consumers’ gambling accounts, yet the number of fraud operations conducted by any major sites has been limited for the brief history of the industry. A small degree of self-regulation has risen, likely due to large profit incentives and a desire to appear credible to skeptical customers. Accusations that online casinos are run by criminals persist, especially from the U. S. government, but these claims reflect scare tactics more than reality (at least in terms of how large sites treat their customers, not in the personal behavior of their owners). Ironically, government prohibition policies are responsible for driving poker sites underground.

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The Online Gambling Industry[Part 2]

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Driving, parking, waiting in line, and breathing second-hand smoke among all the other costs of visiting a B&M casino vanish. Getting into a game is nearly as fast as leaving a game; with two clicks players can quit for the day or just for a restroom break. Also, for communal games like poker, all sites have a chat feature for communicating with other players. Although the social experience is incomparable to that of a traditional casino, the difference may help as much as it hurts. Internet poker provides a non-committal, anonymous environment to play and interact with others (and for the sadistic, to take their money). These factors are likely to attract latent markets of individuals greatly discouraged by the prospects of visiting a local casino.

The products supplied by the casino can be understood in terms of the different games in which one can wager. B&M establishments, to add one new game, must allocate floor-space for it, pay for the table or machine, and hire staff to operate and oversee it. On the other hand, computer software only needs to be designed once to be replicated infinitely; it only occupies abundant, cheap memory and processing power; and it requires a minimal fraction of the oversight. This has allowed a wide variety of games and stakes to be available instantly when there is a demand for them. Expenditure on the construction of massive buildings, their aesthetics, and their infrastructure is no longer needed. Meanwhile, internet servers can support numbers that would conventionally require an entire stadium: in 2005, PartyGaming Plc often hosted over 60,000 players at one time. Hosting is so cost-effective that most sites offer an amount of “play money” games identical to real ones. This has the added benefit of letting customers get comfortable enough with the games and software interface to make the transfer to real wagers.

Relative ease of physical set-up is also a great boon of efficiency. Unlike in most material goods and services industries, infrastructural concerns including electricity, water, and mass/rapid/heavy transportation are not troublesome. Internet server housing facilities can be built practically anywhere, while only needing one or two landlines to a web source or a satellite uplink. Electricity and power demands can be met by autonomous sources. Transportation only needs the capability to support individual commuters. Most importantly, internet infrastructural technology has become so advanced that, especially for activities demanding as little bandwidth as online gambling, almost any two places on the globe can be seamlessly connected.

The Importance of Financial Transactions

It can be said that automobiles benefited from prior development of the petroleum industry. Similarly, internet gambling has profited tremendously from the well-developed financial system that preceded it, though this analogy does not do justice to the critical dependence of the former on the latter. The modern, advanced international financial system provides a strong foundation for the rapid and convenient placement of bets. The popularity of electronic, low-cost bank transactions goes hand-in-hand with an industry that is inherently monetary in its end product: money flows in for wagers, and money flows out for winnings. Inconveniences or long wait periods at either stage result in lost profits, by slowing down the wagering process and alienating casual consumers.

As it is in the B&M business model, the average user is potentially the source of greatest revenue. Millions of users around the world are already acquainted with using credit cards, and EFT-funded “e-cash” accounts such as Paypal to purchase goods on Amazon, eBay, and major retail stores’ websites. These stores have brought interstate and international trade closer to the average consumer by making him a direct participant. As buyers’ comfort with purchasing on the internet increases, so increases their likelihood of gambling online.

Internet gaming has even caused some minor new developments in the financial system. U. S. prohibition of credit card use for e-gaming transactions has itself produced an evolution of payment methods. Several offshore “e-wallets” and other accounts out of the reach of U. S. regulators sprung into existence to meet demand for legal and safe transfer points for gambling funds. International phone card balances became legal tender for some sites. Exchange rates play a major role in allowing individual sites to unite markets. Some sites, such as those hosted by Cryptologic, Inc. allow users to keep their accounts and even wager in different denominations.

In the past four years, investment has reached online betting. Explicit legalization and effective regulation has made the U. K. the de facto capital of online gambling, and the London Stock Exchange is host to all major publicly-traded gaming sites. The introduction of new cash reserves was originally part of an expansionary plan that shifted to consolidation via acquisition, following U. S. legislation in 2006 that prevented American financial institutions from dealing with online gaming sites, yielding devastating effects on revenue. [iv]

Global Markets

Games of chance are nearly cultural universals, especially in the Western World. Any person with access to a personal computer and the internet is a potential customer, and the internet is a single, united global network. As such, internet gambling is a truly global market. Ownership of computers and internet access has grown significantly in the past 10 years, and continues to grow quickly. Internet users constitute 16. 6% of the world’s population, for a whopping total of approximately one billion. [v]

North America is the first and biggest market considered by large online gaming firms, and the European Union is the second.

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The Online Gambling Industry [Part 1]

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A report on the Online Gambling industry, focusing on general issues of the business and government interference in it. This was partially motivated by the Senate ruining my shit by launching the war on international gambling.

Online Gambling: The Ideal Global Industry?

Gambling has long been a part of human history. For the past two thousand years, and likely even longer, societies have wagered their properties in games of chance. The earliest evidence of gaming for money coincides with the invention of the coin in 700 B. C. [i] In the present, gambling is still a popular past-time: in 1999, over two-thirds of Americans reported having gambled at least once in the previous year. [ii] With the introduction of personal computing and the integration of the internet into mainstream culture, real-money wagering has moved into cyberspace, resulting in the birth of a brand new industry: online gambling. –more–>Internet gambling[1] is blessed, having essentially “hopped on” pre-existing, well-developed technologies and infrastructures that constitute a majority of its business necessities. The industry relies on the independent, rapidly-expanding internet; the well-developed, low-cost financial system available to the consumer; and the large global markets created by the widespread cultural phenomenon of gambling. Despite these favorable circumstances, the industry is ultimately constrained by legal issues. Regardless, internet gambling in its current state is inherently international, with greater possibilities to be made available by the destruction of those legal barriers.

The Nature of Gambling as a Business

In most respects, internet gaming is an unconventional international industry. Its first defining characteristic lies in the character of the service provided by gambling, whether by traditional means or internet. A casino (“the house”) has several different outward manifestations its ways to make money, but its methods reduce to two basic concepts: rake and house edge.

Rake is primarily used only in games such as poker and sports betting, where wagers are made against other players and the house has no stake in the outcome. At some stage in each wager, a “fee” is collected for the services provided by the casino for the game (tables, cards, dealers, video screens, security, etc. This allows for a gambling environment that permits skilled players to become consistent winners, meanwhile not affecting the casino’s profits.

House edge, undoubtedly the most popular method used in Brick & Mortar[2] casinos, is incorporated into slot machines, bingo, “dealer” games, etc. which are the indicated preference of the average gambler. In such games, one wagers against the house, some randomized selection occurs, and the wager is either lost or the appropriate payout is given. The randomization process can occur through dice, a deck of cards, or computerized machines, but how these games are designed is ultimately governed by the principle of expected value: in short, the sum of the products of each payoff and the probability of it occurring, which equals the house edge. [3] Thus, if a house edge for a given slot machine game is 2%, in the long run each pull of the lever with a $1 wager should yield on average $0. 02. Conversely, the player’s edge is -2%, losing $0. 02 per $1.

By definition, a negative expectation is a losing proposition and should be avoided. However, casinos understand this and always investigate how their customers will treat it as well. Any casino’s profit-maximizing objectives can be generally summarized as a function of the number of wagers made in a given time-frame (quantity supplied), the size of the house edge or rake (price per wager), non-monetary value for the customer (entertainment, social interaction, etc. and the costs of meeting those goals.

The Speed, Power, and Expansiveness of Internet Technology

The internet is, quite obviously, as important to online gambling as roads are important to automobiles. Barring some disanalogies, both industries have largely been the beneficiaries of massive subsidies: common and widespread means for their customers to consume their products.

By far, the internet has become the supreme technology of commerce. The exponentially growing power and applicability of computers combined with lightning-fast transmission of data over long distances has- beyond its obvious contributions to production itself- lowered transaction costs while uniting buyers with sellers unlike ever before. By employing the tremendous strength of computers to achieve the casino’s profit-maximizing objectives, internet businesses have attained new-found efficiency in the service of gamblers.

Computers have reduced the physical limits of wagering itself. In traditional casinos, games like poker and blackjack are constrained by the ability of a human dealer to shuffle and distribute cards, count and appropriately pay bets, and determine outcomes- each with the possibility of human error at any stage. These obstacles are eliminated in the virtual world, thus allowing for the rapid, error-free execution of all games. For example, the average 10-player B&M Texas Hold’em[4] game plays about 30 hands per hour (thus rake is collected 30 times), but an online game of the same type plays between 60 and 80. Players also have the option of playing in multiple games at once (some experts play up to 12) since the games can be centralized and sorted conveniently on a single screen. [iii] In the same amount of time, the result is much more enjoyment of the game itself for the player and greater profitability for the casino.

To the consumer, the principal advantage offered by internet gambling is the increased comfort level of enjoying entertainment in one’s own home.

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