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A pyramid scheme is an economic version of woo designed to trick people into believing they will make money, while actually only benefiting a very small number (the "tip" of the pyramid). Chain letters such as the infamous "Make Money Fast" emails from the 1990s are an example of a pyramid scheme. Do the math, folks. It don't add up.
In addition, there is a high correlation between those involved in some pyramid schemes, and promoters of pseudolaw, pseudoscience, and quack health nostrums. Pyramid schemes have existed involving the sale of everything from pseudo-legal training in debt elimination and "sovereign citizenship" scams, to non-working devices purported to run your car on water, to ineffective improve-your-eyesight exercises.
Pyramid schemes in general rely on recruiting new people into the business (or some other entity), who in turn recruit new people. In actuality the schemes involve little to no sales to those outside the business. Theoretically each person is supposed to recruit several more people. Doing the math on a theoretical pyramid scheme in which each person recruits seven people, each of whom in turn recruits seven more people, in as few as nine levels the scheme would involve 40,353,607 individuals. In reality such a scheme would run out of people willing to join well before that point, with most of those who got involved finding they lost money by joining. Pyramid schemes are an unsustainable business model, usually lucrative only for those at the very top levels and ripping off those below who fall for the scam.
The collapse of several such pyramid schemes in Albania in 1996-97, in which an estimated two-thirds of the country's population had participated, led to rioting and a near-collapse of the Albanian government and economy.
Multilevel marketing schemes, of which Amway, Shaklee, and Herbalife are among the best known, are legally distinguished from illegal pyramid schemes in that multilevel marketing involves real products, and income is (supposedly) derived primarily from sales of those products to outside parties. However, for most of these, income derived from selling products is dwarfed by income derived from recruiting new members who are obliged to buy stock or franchise rights or make some some of initial investment, making the distinction slight in a practical sense (but not in the legal sense).
Some pyramid schemes will try to pass themselves off as multilevel marketing, with the "product" being sold mainly consisting of information, or mainly sold only to new people recruited into the business. In practice, the legal distinction between the two is often a fuzzy one. For these reasons many people charge that MLMs are nothing more than legalized pyramid schemes.
In the early 1990s a "game" called "airplane" was a blatant pyramid scheme, in which seven people paid in a thousand dollars per "game," with the "captain" getting paid all the money. Four players had to be "new," or "passengers." Playing as a passenger entitled one to then play as one of two "crew" members, as soon as four new passengers could be found. Play as a crew member entitled one to then play as "captain." As long as people were willing to keep joining in as passengers, one's three thousand dollar "investment" paid off seven thousand dollars. In highly-charged (read: cocaine fueled), well-paid social circles, this game was considered to be "fun" - people would keep playing. As long as a group kept playing, the money would just change hands between them. The excitement came partly from the ever-present risk that people would stop playing and one could lose a couple thousand dollars.
Related cons: The Ponzi scheme
Pyramid schemes are similar to bubbles, and also to Ponzi schemes, where early investors are paid using the investments of later investors. The main difference between a pyramid scheme and a Ponzi scheme is that in a pyramid scheme, money passes from one level to another, while in a Ponzi scheme, all of the money goes through the scammer. While early investors in a Ponzi scheme will profit at the expense of later joiners (assuming they aren't, as often happens, suckered into rolling their money into further "investments"), they aren't directly taking money from the later joiners.
In a pyramid scheme, however, early joiners act as both victims and perpetrators. Since Ponzi schemes have an intermediary between participants, their nature tends to be less transparent. With a pyramid scheme, participants often don't bother questioning where the money is ultimately coming from, but it is clear to anyone who bothers to seriously examine the system that there is no source of funds external to the participants. The scammer in a Ponzi scheme, on the other hand, usually presents some purported external source of money, typically some complicated financial strategy. Depending on the scheme, the explanation can vary wildly in both specificity and plausibility, although it is almost always sufficiently lacking in both that it does not stand up to careful examination.
Argumentum ad pyramidem
A common fallacy among pushers of doomsday scenario paranoia and rugged individualism is the denigration of systems designed to operate with little or no assets on hand as pyramid schemes. The flaws in this comparison obvious to anyone who knows what a pyramid scheme is and why they're illegal in basically every jurisdiction worldwide, are that a pyramid scheme must expand in size in order to avoid collapse, and that they exist purely to concentrate funds from new inductees into the pockets of their recruiters.
In contrast, typical targets of this slander (Social Security, fractional-reserve banking, fiat currency...) are sustainable in perpetuity (or, in the case of Social Security, can be if the government would just collectively pull their heads out of their asses and do the unpopular but essential job of
adjusting the age raising the payroll tax cap), and act only to protect or enhance the financial status of all participants.
- Or it can mean the schematics for, and/or the process of building, the pyramids built in Egypt.
- Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0471272426.
- Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0470387963.
- Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13–19.
- Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime. 2. Sage Publishing. p. 880. ISBN 0761930043.