Finance and gambling in early modern Europe or why Arrow-Debreu can be fun

Hedge fund managers playing poker and investment gurus using their skills in casinos are part of the contemporary mythology surrounding the world of finance. This makes it surprising that when Merton listed the functions performed by financial markets and institutions he did not include a very important one: entertainment. Had he considered early modern Europe, the striking resemblance between a casino and a stock exchange would certainly not have eluded him.

Before, say, 1850, the frontier between finance and gambling was very thin. At the time, the lottery element in the purchase of any security was openly acknowledged. In 1693, the Million Adventure in England, offered (on top of a 10% coupon) a chance to win a prize worth up to a hundred times the initial investment.

And the commonalities between gambling and finance in early modern Europe did not end there! Both activities shared the same spaces (e.g. the Via dei Banchi in Rome). They were also equally suspicious to the Catholic Church as smelling of usury and the English government created regulation applying to both such as the law of 1774 symptomatically known as the Gambling Act as well as the Life Insurance Act. Finally, but I could go on further, both involved roughly the same crowd, such as the Jewish sensali (brokers) in Baroque Italy.

This oft-remarked link between gambling and finance could be very useful to historians and economists alike. As a test for their theories; after all, if they appear so alike, whatever is thought to explain one should also at least partly explain the other.

For quite some time now, I’ve been poorly satisfied by the institutional explanations offered by Douglass North as being at the roots of the financial development of Europe. Above anything else, I find it somewhat problematic to seek the causes of this evolution entirely outside the financial sector itself. I believe that a large part of financial history can be explained by endogenous causes (in fairness, North makes just that point here).

And that’s when the comparison with gambling becomes useful. If we pause for a minute and wonder what impact the Glorious Revolution – that North identifies as instrumental in the evolution of finance – had on gambling, one has to admit that it had some effect but that these were quite limited. For sure, it triggered a mania for lotteries that lasted a few years but little else. If the bulk of the causes driving gambling history is to be found outside of the grand political events why would financial history be any different?

Lets consider the drivers of the history of gambling in early modern Europe.

Here the collapse of transaction costs had an obvious impact. For instance the new media had a large impact on the development of lotteries. If they wanted a good shot at success, promoters had to advertise their schemes as widely as possible. This only became possible with the rise of reasonably priced prints: the walls of early 16th-century Venice were covered with posters announcing lotteries of every sort and, a few decades later, their Roman counterparts used newspaper to let the whole Peninsula know of the details of their draws. In parallel, the quick set up of brokers networks were the necessary condition for a healthy lottery sector to develop as it brought down costs of entry, allowed gamblers to reach a sufficient diversification to hedge off their risks and it is likely that it also diminished asymmetric costs in a way news papers could not. These networks could have arisen ex nihilo or evolved from pre-existing ones but while their impact on gambling in general (they were also used to place bets to far-away bookies) is evident, their immediate causes were certainly not “institutional”.

When the English promoter Thomas Neal copied a Venetian lottery he had to content himself with 10% of the funds collected, compared to 35% in the original scheme. This is part of an array of evidence indicating that lotteries were more beneficial to their promoters in more mature markets. If this trend was to be confirmed, it would imply that early schemes had to grant a sort of novelty premium to purchasers. As the new game became better known and trust grew with habit, promoters increased their margin. This could only occur at the condition that, as competition grew, it focused on the quality of the prizes (indeed Italian gamblers seem to have been particularly attracted by the relative liquidity of the prizes). Here again, a non-institutional factor (force of habit) helps explain the growth of gambling.

Another such factors could be what Joel Mokyr would call “the spirit of Enlightenment”. There is no doubt that applied thinkers were driven to the field of gambling to better capture the odds long before the 1700s but it is also quite certain that the 18th century marked a peak in mathematicians’ interest for bets, cards and lotteries. At this points names like De Moivre, Fermat and Bernouilli come to mind. Feeling better equipped both promoters and players jumped anew in the arms of Lady Chance, hence we can in effect observe a technology-driven moment of growth in the history of the sector. In other words, creativity led by specialization (read obsession) also explains the evolution of gambling, and again it is not an institutional cause.

This very quick overview showed that three non-institutional factors were among the mechanisms explaining the growth of the sector up to the complete gambling addiction that overtook Europe in the 18th century. If we were to consider the situation in terms of a Cobb-Douglass, no doubt that both the amounts of labor and capital input poured into this sector grew strongly over the period considered, but it is also clear that the productivity of promoters grew also tremendously and not for any of the social or political reasons that are usually put forward by the supporters of institutional economics.

As a final note, I’d like to go back to the assertion that has been presented in the introduction: if an argument is to be applied to early modern gambling, it should also be effective to explain the also evolution of finance. Endogenous factors it appear certainly had an impact on gambling, hence…


R. C. Merton. A functional perspective of financial intermediation. Financial Management, 24(2), Summer 1995.

J. Mokyr. The Enlightened Economy: An Economic History of Britain 1700-1850. Yale University Press, 2010.

A. L. Murphy. Lotteries in the 1690s: investment or gamble? Financial History Review, 12(2):227–246, 2005.

D. C. North. Institutions, transaction costs, and the rise of merchant empires. In J. D. Tracy, editor, The Political Economy of Merchant Empires: State Power and World Trade, 1350-1750, pages 22–40, 1991.

E. Welch. Lotteries in early modern italy. Past and Present, 199(1):71–111, 2008.

One Response to Finance and gambling in early modern Europe or why Arrow-Debreu can be fun

  1. Grant says:

    Macaulay put it typically eloquently, especially if quoted out of context
    “these userers, it was said, played at hazard with what had been earned by the industry and hoarded by the thrift of other men. If the dice turned up well, the knave who kept the cash became an alderman: if it turned up ill , the dupe who furnished the cash became a bankrupt.”

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