What is a Pyramid Scheme?

The term pyramid is synonymous with pyramid scheme or ponzi scheme.  But what is a pyramid, really?

This is an interesting question that comes up in the world of multi level marketing.  Practically everyone you know has probably been touched in one way or another by a multi level marketing company.

At factsaboutherbalife, the site actively speaks against the multi level marketing company Herbal Life.  Here, they state, "The organization is deemed a pyramid scheme if the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers". – Dr. Peter J. Vander Nat, senior economist at the FTC, Journal of Public Policy and Marketing, Vol 21-1, 139-151, (2002)

The site also states, "In a pyramid scheme, the money at the top is made from the losses of the people at the bottom."

Here, perspective's may differ.  For instance, some people might say, relationships underly all businesses.  Therefore, to see the vision of a company come to pass, the business must actively recruit the talent necessary to accomplish that vision.  Whether directly or indirectly, I would say every big business obtains its monetary benefits primarily from recruitment.

Imagine a store purchases products from a manufacturer to stock a shelf.  If the store goes out of business, the store may take a loss while the manufacturer made a profit.  Likewise, imagine a franchise company convinces a business owner to purchase the franchise.  If the franchise then goes out of business, the business owner takes a loss while the franchise company made a profit.  Lastly, imagine a college convinces a student to start a diploma program.  If the student drops out or doesn't get a return on the investment, the student takes a loss while the college made a profit.

The manufacturer may recruit as many stores as desired, the franchise company may recruit as many business owners as desired and the college may recruit as many students as desired.

The only thing that is clear to me is that it is very difficult to define a pyramid.  It is also hard to argue that services are not being provided since education and experience are valid services.  I have to say, I am stumped.  Any help?

This post was reposted from http://finlit.biz/business/what-is-a-pyramid-scheme/, originally written on March 21st, 2013.