Industrialized gambling will have a geopolitical effect

Following the rapid development of online gambling and prediction markets in the United States made me think quite a bit about where this is heading and I came to have quite a pessimistic expectation.

The issue with allowing and promoting gambling on the large scale in the USA hits different levels. This, I believe, will have an actual geopolitical effect.

The Scale of the U.S. Market and “Capitalism on Steroids”

Only after I got to live in the United States the enormity of the US market became obvious to me. It’s so large that it enables a level of acceleration that simply doesn’t exist elsewhere.

If you build a product here, you don’t need to reach everyone. Selling to just 10% of the population already gives you access to tens of millions of customers. And if you fail in one corner of the country, you can just move to another corner, try again and have a better outcome. That sheer scale enables industrialization, consumerism, and monetization on steroids.

This scale influences how the market and the systems that shape the market evolve and there are several historical examples showing us the bad side of the scale effect.

Smoking

People used tobacco long before the United States existed. Indigenous populations in the Americas used it ritually. Europeans smoked pipes and cigars for centuries. But in the 20th-century United States, smoking transformed into something else entirely: a mass-produced, aggressively marketed consumer product.

The numbers show how fast this scaled. It was in 1880 that James Bonsack invented an automatic cigarette rolling machine that allowed for mass production of cigarettes ¹. This invention allowed opening up of the tobacco market which grew more than 270x from consuming 2.5 billion in 1900 to its peak consumption of 680 billion cigarettes in 1981. Having around 30% of adults being active smokers, we come to around one and a half packs a day per person, on average.²

Why did it scale so rapidly? The US market was, and still is, large, unified, and highly consumer-oriented and sparsely regulated and it enabled the scale up.

Aggressive advertising - including physician endorsements, celebrity campaigns, and targeted marketing toward women and youth - worked because the infrastructure for mass distribution already existed.

The health consequences followed with a delay but at massive scale. Since the first US Surgeon General’s report in 1964 until 2014, cigarette smoking is estimated to have caused more than 20 million deaths in the United States³. Today that number is around ~0.5 million of people per year⁴

Industrialization of consumption led directly to industrialized harm. The scale that enabled the market expansion is making it hard to contain the problem, once identified. Starting to undo the harm required decades of regulation, litigation, and cultural change. And it’s not even done yet.

Opioids

A more recent example of harmful scaling driven by market size is the opioid epidemic in the United States. Unlike smoking, this was not a recreational habit becoming normalized but rather a case where a medical product got abused on the industrial scale.

Similar to smoking, opioids have existed for a long time. Morphine was isolated in the early 19th century. Pain treatment using opioids existed across Europe and elsewhere but it was in the United States, with its market size, where the spreading of prescription opioids scaled so much and had horrible and long-lasting effects.

In the late 1990s and early 2000s, opioid manufacturers aggressively marketed prescription painkillers as safe and non-addictive for chronic pain. The pain management campaigns successfully positioned opioids as something that everyone in the world should be interested in. But it was the US market, with its size and scaling capabilities, that allowed for an incredibly rapid, profit-oriented, growth.

The US healthcare system allowed, or rather failed to realize what was happening and to stop it. Prescription opioid sales went for 4x from 1999 until 2010. ⁵

The consequences scaled accordingly. Number of deaths related to opioid abuse more than tripled from 1999 until 2010, and peaked in 2016.⁶

Again, the pattern repeats: profit incentives, a vast market, aggressive expansion, and delayed regulation. Once dependence was widespread, reversing course became extremely difficult.

The industrialization of pain treatment became the industrialization of addiction and the correction is still ongoing.

Gambling as the Next Hyper-Industrialized Exploitation

This large scale exploitation potential mixed with how much we and the coming generations are embedded with the online world is why I’m deeply worried about the expansion of gambling and prediction markets in the United States.

The United States had a rollercoaster relationship with gambling. From completely normalized view of gambling as another vice, to using lottery revenue to fund public works as well as kick starting universities. ⁷ Today, we have it back in the main stream as a skill based way to generate revenue.

For most of the 20th century, gambling in the United States was primarily state-regulated and largely barred from crossing state lines. It was localized and contained in a way that would prevent the scale up across the whole country. Additionally, due to 1992 PASPA⁸, sports betting was prohibited at the federal level.

This changed in 2018 with Murphy vs. NCAA⁹, when PASPA was overturned and states were given the right to decide if they wanted to allow or prohibit sports betting.

In those same 25ish years, from federal ban to the overturning of the sports betting act, we had such a technology development that a computer you needed a room for in 1992, now fits in your pocket. That same computer allows you to access almost all the knowledge generated in the world so far, with just few clicks. But it also allows you, with just few clicks, to throw some money on your favorite sports team.

Since the overturn of PASPA, we saw several very big players in the field of sports betting. Both ones that are very direct about being gambling companies, such as DraftKings and FanDuel, and the ones branding themselves like they’re not gambling companies, such as Polymarket, Kalshi, and RobinHood.

Similar to PMI and Purdue, gambling companies are well equipped to serve their “product” to the large masses, through data-driven and user-targeted marketing campaigns to the highly consumeristic society. These companies, but also the market, are ready for industrialization of gambling.

And target group is very clearly defined: mostly young and mostly men. ¹⁰ With current Millennials and Gen Zs being the main consumers, I would assume because those generations are now young but also, because those generations are the ones embedded with the digital world.

There’s been quite some talk recently how the young men today are lost and are finding themselves in different ways. One being becoming more religious ¹¹ and I believe that broader access to gambling opportunities will be another way for those young men to find excitement in the absence of purpose. But this is out of scope of this article.

While there are studies showing that individuals with higher income are more likely to gamble ¹² it is also shown that lower income individuals spend more on gambling, in relative terms, and get hit disproportionally by the gambling disorders. ¹³ And that is where the phrase “Gambling is poverty tax” comes from.

Another layer to the problem of the consumer packed “product” that gambling is trying to be is that it misleads the “users” of these online platforms to believe they can win their way out of poverty using “skills” to predict game winners. Gambling, for some, will become a way towards the fulfillment of the ”American Dream”. With the ever slower raise in wages and harder jobs without higher degrees, winning that bet on the Sunday’s game looks like a legitimate way to get out of the hole or to cover for the next car payment, and it doesn’t require luck like playing a lottery. ¹⁴ However, these are not skills based competitions, it’s a zero-sum game and the house will always win.

Gambling Mechanics Are Embedded Into Modern Video Games

What makes all this even worse is how gambling mechanics are now disguised and offered through modern video games.

The vast majority of popular online multiplayer games are actually free and the profits are generated on buying aesthetics for your characters. These are called microtransactions and even though they are small in absolute monetary terms and optional, they are nonetheless a very effective way to get revenue for your free-to-play games. However, it’s not anymore enough to just buy your aesthetic accessories, nowadays you’re actually paying for a “loot box” that allows you to spin the wheel and get one of the items. Items are sorted by rarity and of course, if you want to get a rare one, you need to spin more. And finally, there are marketplaces for items and rare items can go for really high sums of money.

Functionally, this mirrors gambling mechanics and triggers the same responses, even if legally labeled otherwise.

Kids are effectively being trained from an early age to associate money, chance, and dopamine. By the time they start working or receiving allowances, they’re already primed to believe that “winning” is a viable path to acquiring what they want, or even worse, a viable path to financial stability.

Prediction Markets Are Gambling

Prediction markets give people the illusion that they can use their intelligence and acquired information to predict outcomes. What makes this illusion even more believable is that, in prediction markets, the users are predicting against other users, and not against the house as it’s usually the case. But the old school gambling was exactly that, two people throwing dice and betting on the outcome with winner taking it all. At some point there came the third guy who rented the dice and throwing board for a small fee and then later that same guy also set the rules of the game. Yours was just to show up, bring money, and play.

Prediction markets platforms are doing exactly that: setting the game (controlling the questions), providing the dice and the throwing board (the platform), and finally, also accepting unregulated crypto as a payment method.

You can predict, or rather let’s use the right term - you can bet on everything from the next US president, over the next Nicks-Celtics game all the way to the next Eurosong winner.

By all definitions and descriptions, prediction markets are gambling markets.

Furthermore, top online betting companies (FanDuel, DraftKings etc.) are also becoming prediction markets¹⁵. Everyone understands the schtick.

The Geopolitical and Economic Consequences

There’s also a larger economic and geopolitical consequence here - GDP distortion and capital relocation.

Foreign exchange markets (FX) are called out for non-insignificantly contributing to the GDP even though nothing is produced. Basically, there’s no P in the FX contribution to the GDP. FX exist because countries need to trade real goods and services. In the lack of globally agreed money, FX are necessary to enable international exchange of goods and services.

Unlike FX, which exists to support real trade, gambling markets are economically extractive by design.

There’s no, nor it ever will be, a P in all the increase of GDP gambling will bring. And in 2023, gambling allowed for redistribution of north of $110B from gamblers to U.S. casinos ¹⁶

Gambling extracts money without producing goods, infrastructure, or long-term value.

Money flows from individuals to large corporations. We end up creating a new class of “winners” who didn’t build anything other than a tool to tax the poor and extract money while giving nothing but potential for addiction in return.

Additionally, due to the ways new gambling and prediction markets platforms are built around using crypto currencies, there’s a chance a large fraction of this money will leave the country entirely. Either when gambling companies are foreign based or when participants are foreign-based.

This means that less money stays in the economy, less is invested into making real products and support the real industries.

Wealth disparity is further exacerbated while GDP growth is further distorted.

Final Thoughts

Enabling gambling through internet access with very limited constraints is bound to have really bad consequences on the society, both culturally and economically.

It’s obvious that excessive gambling is addictive and detrimental. And it should be obvious that allowing it unbounded access to the power of the US market, that can scale, get optimized and turbocharged for profit generation is a really really bad idea. Imagine how bad it can get when they, if they haven’t already, hire McKinsey to help them be more profitable. ¹⁷

I cannot predict (pun intended) how it’s gonna look like but I’m really worried it’s going to be quite ugly.

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