The late nineteenth century was a busy time for inventors: the automobile, the telephone, the bicycle, the electric light. But another invention of the time has received much less attention: the “slot machine.” Slot machine in the beginning did not have its present-day connotation. The term referred to any sort of “vending machine”: you deposited your coin in a slot; you got to open a box. By the 1890s slot machines were selling chewing gum, cigars and cigarettes, opera glasses, chocolate rolls in individual paper wrappers, even quick looks at the precursor-to-the-phone-book city directories— all manner of things. The basic innovation was a lock activated by the deposit of a coin.
But then a new use was discovered. It wasn’t long before slot machines began to include gambling machines. A newspaper of the time dates the appearance of slot machines in this modern sense to 1893. One of those early machines rewarded winners with fruit candy rather than money; it was not long before everybody ascribed special meaning to that rare coincidence: the appearance of three cherries.
Before the 1890s were over, a new kind of addiction, to gambling slot machines, had been born. In 1899 the Los Angeles Times reported, “In almost every saloon may be found from one to half a dozen of these machines, which are surrounded by a crowd of players from morning to night…. Once the habit is acquired it becomes almost a mania. Young men may be seen working these machines for hours at a time. They are sure to be the losers in the end.” (...)
What Markets Do for Us
The history of the slot-machine-good/ slot-machine-bad from the 1890s to the present illustrates our dual view of our market economy. Most fundamentally, we applaud markets. Free markets are products of peace and freedom, flourishing in stable times when people do not live in fear. But the same profit motive that produced those boxes that opened and gave us something we wanted has also produced slot machines with an addictive turn of the wheel that takes your money for the privilege. Almost all of this book will be figuratively about slot-machines-bad, rather than about slot-machines-good: because as reformers both of economic thought and of the economy we seek to change not what is right with the world, but rather what is wrong. But before we begin, we should reflect on what markets do for us.
To do so, it is useful to take a long perspective and return to that era of the late nineteenth/ early twentieth century. In December 1900, in The Ladies Home Journal civil engineer John Elfreth Watkins Jr. participated in the sport of predicting what life would be like one hundred years hence. He predicted we would have “hot and cold air [coming] from spigots.” We would have fast ships that would get us “to England in two days.” “There will be airships,” mainly used by the military, but sometimes for passengers and freight. “Grand opera will be telephoned to private homes and will sound as harmonious as though enjoyed from a theatre box.” The predictions go on.
Watkins described his predictions as seeming “strange, almost impossible”; but, remarkably, free markets, with their incentives to produce what people want, as long as a profit can be made, have made his predictions come true, and more.
However, free markets do not just deliver this cornucopia that people want. They also create an economic equilibrium that is highly suitable for economic enterprises that manipulate or distort our judgment, using business practices that are analogous to biological cancers that make their home in the normal equilibrium of the human body. The slot machine is a blunt example. It is no coincidence that before they were regulated and outlawed slot machines were so common that they were unavoidable. Insofar as we have any weakness in knowing what we really want, and also insofar as such a weakness can be profitably generated and primed, markets will seize the opportunity to take us in on those weaknesses. They will zoom in and take advantage of us. They will phish us for phools.
Of Phish and Phool
The word phish, according to the Oxford English Dictionary, was coined in 1996 as the Web was getting established. That dictionary defines phish as “To perpetrate a fraud on the Internet in order to glean personal information from individuals, esp. by impersonating a reputable company; to engage in online fraud by deceptively ‘angling’ for personal information.” 11 We are creating a new, broader meaning for the word phish here. We take the computer definition as a metaphor. Rather than viewing phishing as illegal, we present a definition for something that is much more general and goes much further back in history. It is about getting people to do things that are in the interest of the phisherman, but not in the interest of the target. It is about angling, about dropping an artificial lure into the water and sitting and waiting as wary fish swim by, make an error, and get caught. There are so many phishers and they are so ingenious in the variety of their lures that, by the laws of probability, we all get caught sooner or later, however wary we may try to be. No one is exempt. (...)
Four broad areas indicate how widespread are the NO-ONE-COULD-POSSIBLY-WANTs, regarding personal financial security; the stability of the macroeconomy (the economy as a whole); our health; and the quality of government. In each of these four areas we shall see that phishing for phools has significant impact on our lives.
Personal Financial Insecurity. A fundamental fact of economic life has never made it into the economics textbooks. Most adults, even in rich countries, go to bed at night worried about how to pay the bills. Economists think that it is easy for people to spend according to a budget. But they forget that even if we are careful 99 percent of the time, the remaining 1 percent, when we act as if “money does not matter,” can undo all that prior rectitude. And businesses are keenly aware of those 1-percent moments. They target the events in our lives when love (or other motivations) trumps our budgetary caution. For some, this is an annual Christmas potlatch. For others, it occurs at rites of passage: such as weddings (where the wedding mags assure brides that the “average wedding” costs almost one half of annual per capita GDP); funerals (where the parlor director carefully lays out the caskets to induce the choice, for example, of the Monaco “with Sea Mist polished finish, interior richly lined in 600 Aqua Supreme velvet, magnificently quilted and shirred”); or births (where Babies “R” Us will give a “personal registry advisor”).
But rites of passage are not the only life punctuations where sticking to budget is presented as being mean. It is thus no coincidence that, as rich as we are in the United States, for example, relative to all previous history, most adults still go to bed worried about their bills. Producers have been just as inventive in getting us to feel we need what is produced as they have been in filling the needs that we really have. No one wants to go to bed at night worried about the bills. Yet most people do.
One source of our angst about those bills comes from rip-offs: as consumers we are especially prone to pay too much when we step outside of our comfort zone to make the rare, expensive purchase. In some 30 percent of home sales to new buyers, total— buyer plus seller— transaction costs, remarkably, are more than half of the down payment that the buyer puts into the deal. Auto salesmen, as we shall see, have developed their own elaborate techniques to sell us more car than we really want; and also to get us to pay too much. Nobody wants to be ripped off. Yet we are, even in the most carefully considered purchases of our lives.
by George Akerlof and Robert Shiller, Evonomics | Read more:
Image: George Akerlof and Robert Shiller
But then a new use was discovered. It wasn’t long before slot machines began to include gambling machines. A newspaper of the time dates the appearance of slot machines in this modern sense to 1893. One of those early machines rewarded winners with fruit candy rather than money; it was not long before everybody ascribed special meaning to that rare coincidence: the appearance of three cherries.Before the 1890s were over, a new kind of addiction, to gambling slot machines, had been born. In 1899 the Los Angeles Times reported, “In almost every saloon may be found from one to half a dozen of these machines, which are surrounded by a crowd of players from morning to night…. Once the habit is acquired it becomes almost a mania. Young men may be seen working these machines for hours at a time. They are sure to be the losers in the end.” (...)
What Markets Do for Us
The history of the slot-machine-good/ slot-machine-bad from the 1890s to the present illustrates our dual view of our market economy. Most fundamentally, we applaud markets. Free markets are products of peace and freedom, flourishing in stable times when people do not live in fear. But the same profit motive that produced those boxes that opened and gave us something we wanted has also produced slot machines with an addictive turn of the wheel that takes your money for the privilege. Almost all of this book will be figuratively about slot-machines-bad, rather than about slot-machines-good: because as reformers both of economic thought and of the economy we seek to change not what is right with the world, but rather what is wrong. But before we begin, we should reflect on what markets do for us.
To do so, it is useful to take a long perspective and return to that era of the late nineteenth/ early twentieth century. In December 1900, in The Ladies Home Journal civil engineer John Elfreth Watkins Jr. participated in the sport of predicting what life would be like one hundred years hence. He predicted we would have “hot and cold air [coming] from spigots.” We would have fast ships that would get us “to England in two days.” “There will be airships,” mainly used by the military, but sometimes for passengers and freight. “Grand opera will be telephoned to private homes and will sound as harmonious as though enjoyed from a theatre box.” The predictions go on.
Watkins described his predictions as seeming “strange, almost impossible”; but, remarkably, free markets, with their incentives to produce what people want, as long as a profit can be made, have made his predictions come true, and more.
However, free markets do not just deliver this cornucopia that people want. They also create an economic equilibrium that is highly suitable for economic enterprises that manipulate or distort our judgment, using business practices that are analogous to biological cancers that make their home in the normal equilibrium of the human body. The slot machine is a blunt example. It is no coincidence that before they were regulated and outlawed slot machines were so common that they were unavoidable. Insofar as we have any weakness in knowing what we really want, and also insofar as such a weakness can be profitably generated and primed, markets will seize the opportunity to take us in on those weaknesses. They will zoom in and take advantage of us. They will phish us for phools.
Of Phish and Phool
The word phish, according to the Oxford English Dictionary, was coined in 1996 as the Web was getting established. That dictionary defines phish as “To perpetrate a fraud on the Internet in order to glean personal information from individuals, esp. by impersonating a reputable company; to engage in online fraud by deceptively ‘angling’ for personal information.” 11 We are creating a new, broader meaning for the word phish here. We take the computer definition as a metaphor. Rather than viewing phishing as illegal, we present a definition for something that is much more general and goes much further back in history. It is about getting people to do things that are in the interest of the phisherman, but not in the interest of the target. It is about angling, about dropping an artificial lure into the water and sitting and waiting as wary fish swim by, make an error, and get caught. There are so many phishers and they are so ingenious in the variety of their lures that, by the laws of probability, we all get caught sooner or later, however wary we may try to be. No one is exempt. (...)
Four broad areas indicate how widespread are the NO-ONE-COULD-POSSIBLY-WANTs, regarding personal financial security; the stability of the macroeconomy (the economy as a whole); our health; and the quality of government. In each of these four areas we shall see that phishing for phools has significant impact on our lives.
Personal Financial Insecurity. A fundamental fact of economic life has never made it into the economics textbooks. Most adults, even in rich countries, go to bed at night worried about how to pay the bills. Economists think that it is easy for people to spend according to a budget. But they forget that even if we are careful 99 percent of the time, the remaining 1 percent, when we act as if “money does not matter,” can undo all that prior rectitude. And businesses are keenly aware of those 1-percent moments. They target the events in our lives when love (or other motivations) trumps our budgetary caution. For some, this is an annual Christmas potlatch. For others, it occurs at rites of passage: such as weddings (where the wedding mags assure brides that the “average wedding” costs almost one half of annual per capita GDP); funerals (where the parlor director carefully lays out the caskets to induce the choice, for example, of the Monaco “with Sea Mist polished finish, interior richly lined in 600 Aqua Supreme velvet, magnificently quilted and shirred”); or births (where Babies “R” Us will give a “personal registry advisor”).
But rites of passage are not the only life punctuations where sticking to budget is presented as being mean. It is thus no coincidence that, as rich as we are in the United States, for example, relative to all previous history, most adults still go to bed worried about their bills. Producers have been just as inventive in getting us to feel we need what is produced as they have been in filling the needs that we really have. No one wants to go to bed at night worried about the bills. Yet most people do.
One source of our angst about those bills comes from rip-offs: as consumers we are especially prone to pay too much when we step outside of our comfort zone to make the rare, expensive purchase. In some 30 percent of home sales to new buyers, total— buyer plus seller— transaction costs, remarkably, are more than half of the down payment that the buyer puts into the deal. Auto salesmen, as we shall see, have developed their own elaborate techniques to sell us more car than we really want; and also to get us to pay too much. Nobody wants to be ripped off. Yet we are, even in the most carefully considered purchases of our lives.
by George Akerlof and Robert Shiller, Evonomics | Read more:
Image: George Akerlof and Robert Shiller
