The Economics of Vice

Vice markets can never be free markets—especially in the digital age.

Today, America is living through a new golden age—for vice merchants, that is. Gambling, once confined to seedy establishments in dark alleys, or cordoned off in swanky but soulless casinos in a few unregulated jurisdictions, has gone mainstream. Soon, you will not be able to watch Fox or CNN without a scrolling bar of the latest odds from prediction markets—as if every newscast were the Kentucky Derby.

The professional sports leagues are tripping over one another to sign the most lucrative deals with the new gambling tycoons. Kalshi has taken out 30-foot-high ads on the sides of buildings across D.C. Meanwhile, the federal government, far from trying to rein in this orgy of exploitation, has announced its intention to deregulate the whole domain using the dubious authority of the Commodity Futures Trading Commission to preempt state-level action. It’s the same move, incidentally, that the administration has taken for states seeking to regulate the epidemic of addictive “AI companions,” the other emerging scourge of our youth rapidly displacing social media addiction, which seems almost quaint by comparison.

Sports gambling, prediction markets, AI companions, pornography, and social media all have at least two things in common. The first is that their native habitat, and prime accelerant, is the smartphone. The second is that they are vice industries. If we are to have any chance of salvaging a lost generation of young men and women, Americans need to rediscover in a hurry why vice markets are not and can never be free markets, and why the only prudent course of action is to ban or at least aggressively regulate them.

The Demand Curve Inversion

For generations, economics textbooks presupposed that consumers could generally be trusted to make rational choices. By acting in their self-interest to maximize their utility, these choices would automatically prompt producers to supply what consumers want or need at the best possible price. Outside of such textbooks, however, we know full well that consumers are not particularly rational and can often be manipulated by sellers into decisions that are not best for them. Nevertheless, classical economics has tried to save its theory by insisting that while consumers may be irrational in all sorts of ways, these all tend to offset each other, so that by the law of averages we still arrive at an approximation of a rational consumer in the aggregate. Also, economists insist that while individual consumers may sometimes make poor choices, they can at least be trusted to err less often than some third party trying to make choices for them.

This is true enough in many or perhaps even most domains. But it is not true for vice markets, as society used to understand.

There’s a reason these products and services traditionally flourished in the margins and shadows—in back alleyways, red light districts, or the seedy fringes of town. They were the business not of respectable tradesmen but of mafia bosses or corrupt policemen. Gambling, prostitution, pornography, alcohol, narcotics—why did these used to be frowned on by polite society? Are the old taboos against “vices” mere old-fashioned moralism, and their recent demolition the mark of our liberation?

In a word, no. There is in fact a very good reason why we have traditionally sought to restrain such industries, even if we could not suppress them altogether: Where vices are concerned, the ordinary laws of economics do not apply. Vice economies break that most basic graph of Economics 101: the supply-demand curve.

The ordinary shape of the demand curve is influenced by the principle of diminishing marginal utility. Ordinarily, we buy things because they make us feel better or happier, which tends to place a natural cap on how much the consumer will buy. Either the product doesn’t do its job, in which case, I won’t buy it again; or the product does do its job, in which case, I don’t need to buy another—at least for a while.

This can be maddening for producers, since the better they make their product, the less of it they might be able to sell. Apple found to its chagrin that iPads were so durable that sales plunged 50% after peaking in 2013—our family still uses the same one we bought over a decade ago. But the principle works out well for consumers. To the extent that a product satisfies my desires or needs, I’m only willing to pay a fraction of the price for a second helping. I will pay a lot more for one sofa than for a second sofa, and certainly a seventh sofa, and the same goes for steak dinners.

Depending on the product, my demand may revive more slowly (as with sofas) or more quickly (as with steak), but in most markets, it won’t revive quickly enough for me to binge-spend into personal bankruptcy. This means that producers cannot keep increasing supply indefinitely, because very soon they will reach market saturation, where there is simply not enough aggregate consumer demand to keep people buying more than a given number of sofas or steak dinners. This number can be boosted slightly by effective marketing, product upgrades, and rising incomes, but it won’t budge massively.

However, there is an important class of substances or services where this does not apply, because our biochemistry has certain weak points that can be hacked and exploited, such that the first act of consumption makes us more, not less, eager for the second. As Shakespeare’s Enobarbus says of Cleopatra, “she makes hungry where most she satisfies.” This is the basic feature of addictive substances and behaviors, from cigarettes and alcohol to video gambling and pornography. These pull us further and further in despite disastrous effects on ourselves and others, until we have spent the last penny—what video gambling game designers call “playing to extinction.”

Of course, the addictive product doesn’t necessarily affect all consumers equally—not all gamblers become “problem gamblers,” and most alcohol drinkers do not become alcoholics. Many factors—biological, psychological, and social—shape a person’s habits, but there is no question that certain products and services are particularly prone to foster addictions, and some are almost irresistible. Consumers caught in this net will become increasingly dependent on the substance, and thus, rather than paying less for each additional unit, they will become more and more willing to part with their money to get more of it.

This inversion of the typical demand curve has profound consequences. In vice economies, individuals cease to exercise rational choice in their decision-making, if by that we mean genuinely maximizing their utility (as opposed to simply scratching whatever desperate itch they are feeling in the moment). While rational consumers will have some short-term bias (“discounting” the value of future goods on the basis of risk), the addict suffers from a radical form, sometimes unable to plan beyond tomorrow or even the next few minutes. He does not just prioritize the present over the future; he mortgages the future to pay for the present, blindly accepting potentially catastrophic long-term harms in order to enjoy the next pleasurable hit.

This problem is compounded in the most predatory forms of vice economy, which are characterized by information asymmetry. Revisiting classical economics, we know that a free market can only thrive when producers and consumers have access to roughly equal information. If I know that the used car I sold you is missing a critical part, and you don’t, I’ll be able to rip you off—at least until word gets around. Indeed, sellers usually have an information advantage over buyers, which is why we rely on free returns, warranties, and legally mandated disclosures to level the playing field.

The most pernicious vice industries, then, are those in which the seller knows his product is addictive but the buyer does not, or knows its long-term side effects when the buyer knows only the short-term pleasure. Sometimes this information may technically be public knowledge, but once hooked, the addict may not be in an epistemic position to access and process it. Accordingly, he will waste enormous amounts of time and money on substances and behaviors that don’t just have low utility, but may well have negative utility, harming his physical and mental health, his relationships, his job. Such vice economies have negative spillover effects on broader families and communities, which suffer the harms of individual addiction.

A Digital Accelerant

From this standpoint, vice industries or addiction economies are basically parasitic, not productive. That said, we do not necessarily need to ban them outright; as noted already, not everyone who drinks alcohol becomes an alcoholic, and the experience of Prohibition reminded us of the evils of driving vice markets into underground black markets. We have, however, consistently taken middle roads like banning them for minors, intuitively recognizing that youth are both biochemically more vulnerable to addictive impulses, and also have the most to lose by developing such habits early in life. Other vice regulations include high taxes to restrain demand, or advertising restrictions to limit the chance of unsuspecting customers falling into the addictive net.

Something very strange, however, happened when society embraced the internet in the 1990s: We pretended that neither the laws of human nature nor the laws of human society applied in these domains. Vice merchants were quick to see what should have been obvious to everyone: the internet offered the greatest vice playground the world had ever seen. First, it removed what till then had been the primary restraint on vice: shame. You had to get dressed and go out in public. Even those whose consciences were untroubled by their gambling or whoring habit knew that others—whose good opinion they needed—might not be. The anonymity of online spaces thus removed one of the main speed bumps on addictive appetites.

Second—and ultimately more importantly—it removed friction. It took time and effort to travel to a casino or strip club. With the advent of broadband and then the ultimate accelerant—the smartphone—it took virtually none. Finally, the internet profoundly intensified the information asymmetry within which vice markets flourish. The architecture of digital systems is almost wholly opaque to most users, but with the online data collection that soon became standard, propensities and vulnerabilities of users were almost wholly transparent to their exploiters. In online spaces, there were soon almost no meaningful psychological barriers to the domination of powerful dopaminergic addiction loops, and there were few legal barriers either.

Congress’s 1996 and 1998 attempts to restrict online pornography foundered on the rocks of technical infeasibility and then-regnant free speech absolutism. These failures proved catastrophic when Apple, abetted by inattentive parents, began handing pocket porn aggregators (and porn generators) to most Americans aged ten and up, leaving a whole generation scarred and exploited.

Regulation of online gambling proved marginally more successful, until the dam began to crack in the 2010s and burst after the Supreme Court’s 2018 Murphy v. NCAA decision. Now, just as laws are at last tightening on pornography, young men are flocking to sports gambling and prediction markets by the millions.

While the digital domain has supercharged old vices like porn and gambling, it’s worth noting that its frictionless rewards and variable reinforcement schedules manage to replicate the patterns of a vice market even in otherwise innocent domains. In 2013, Alexis Madrigal wrote a brilliant essay for The Atlantic, “The Machine Zone,” which explained how addiction techniques developed by the Vegas video gambling industry were weaponized against social media users. In the years since, this once-radical diagnosis has become mainstream, and finally received vindication in a landmark verdict against Meta last month. Such platforms, like Cleopatra, make hungry where they most satisfy. And like the best vice industries, they thrive on pervasive information asymmetries, as Meta engineers rake in millions to learn far more about you than you ever knew about yourself.

Our current predicament, then, is absurd and inexcusable. Having created the greatest engine of self-destructive feedback loops the world has ever seen, we have systematically stripped these industries of the regulations that curtail vice in the physical world—above all, the age gates that once served to protect the most vulnerable among us.

The excuses are as manifold as they are unconvincing. We were told that the internet simply could not be regulated or age-gated; that it was technically impossible and loopholes would always lurk in plain sight. That may have been true once, but no longer, and it is a national scandal that we allowed our tech industry to drag its feet so long in building the technological architecture. It took nearly two decades after the introduction of the app store for Apple to roll out age verification; in the two decades prior, Apple had managed to progress from the first color desktop monitor to the iPhone.

We were told that everything that happened online was somehow a form of “speech,” protected by the First Amendment against even the barest inconvenience or friction-point for the user. James Madison, who wrote for Washington’s first inaugural that “the foundation of our national policy should be laid in private morality,” would never recognize such an argument. And we were told that those who wanted vices would find ways to access them anyway, so we might as well legalize them. If so, it is difficult to explain the twenty-five-fold increase in sports wagers in the first six years after rapid legalization.

Even where lawmakers and regulators cannot summon the courage to ban such platforms or conjure the technical architecture to age- and geo-gate them, they can and should restrict their promotion. Historically, our constitutional regime has distinguished between toleration and celebration; there are many distasteful and harmful behaviors that we may tolerate as ineradicable evils, but that does not mean we must allow their purveyors to shamelessly hawk them in the public square, on the airwaves, or to children. Constitutional law allows far more restrictions on the commercial advertising of vice industries than most lawmakers seem willing to enact or regulators to enforce.

Our American Founders proclaimed that corporate self government requires individual self government: only a nation of people disciplined to regulate their desires could rule themselves and their communities. But unlike their modern libertarian perverters, they believed the converse was also true: that a free people must legislate at the level of their communities to make possible such individual self-government, protecting citizens against those who would ruthlessly exploit their ignorance and their passions. For the founding generation, there was no contradiction between “vice regulations” and a liberal society; the two, in fact, went hand in hand. Today, after a three-decade experiment in allowing a lawless cyberspace within our society, it is high time to restore the forgotten logic of vice regulation in the online spaces that need it most.