Modern Ponzi Schemes: An Introduction
The last couple of years has marked a resurgence in public understanding of ponzi schemes. Whether it is individuals (Madoff) or institutions (federal reserve, ‘wealth’ management, underfunded pension plans, housing bubbles and various other bubbles) there is no doubt that people are becoming more cognizant of the effects of a particular series of actions/ choices originating in the late 1970s-early 1980s. However ponzi schemes have been a feature of human history, culture and civilization since the beginning. Indeed it is not possible to understand the success of ponzi schemes unless one understand the mental calculus that enables them.
If you want a brief ‘official’ understanding of the concept and history of ponzi schemes, the following links are useful: Ponzi Schemes (wikipedia), List of Ponzi Schemes (wikipedia) and the similar Pyramid Schemes (wikipedia).
While the preceding links give you a good basic introduction to the concept, they tend to concentrate on money related ponzi schemes that failed. Discussions about successful financial ponzi schemes and non-financial ponzi schemes are either absent or mentioned in passing. This attitude gives the casual reader an impression that ponzi schemes are never too successful when the converse is true.
At their core, all ponzi schemes are based on the following basic concept:
A socially ‘respectable’ group convinces a much larger group of persons to accept their control (or give them goods/ services) on the promise of future benefit derived from esoteric concepts which these group pretends to understand and control.
The real kicker is that these socially ‘respectable’ groups are neither knowledgeable nor in control of what they claim, and depend on sophistry and various frauds to perpetuate their illusions of power over reality.
It is now obvious that many ‘respectable’ institutions and accepted practices are in fact just ponzi schemes, albeit successful ones. Whether we are considering the investment decisions of your ‘wealth’ management expert, doctors treating diseases with ineffective, harmful (and expensive) modalities and protocols, religions promising an afterlife if you follow their teachings and priests, universities that charge you over 50k-200k for a degree that promises nothing, ‘experts’ who can predict trends/ futures, intellectuals who pretend to understand their field very well, but resent explaining it to ‘outsiders’.
All of the above examples, and ponzi schemes in general, suck away money and resources from people (and ideas) that actually have a non-zero chance of improving the status quo. They cause heavy malinvestment, sabotage efforts to correct it and help perpetuate the status quo which is just another facet of zero sum thinking and behavior.
The mental calculus that motivates the followers of such ‘faiths’ is equally interesting and also based in a zero sum view of the world.
People follow such groups because they think that such actions will allow them to gain advantage over others, a view distinctly based in a zero sum mentality. They do not care about the validity of their ‘priests’ beliefs, nor question their actions (or honesty). Indeed, the same people who seek an unfair advantage over others, also believe that leaders of these cults have the best interest of their followers at heart. The irony of this mentality is hard to miss.
Followers rarely question, contest or disobey cult leaders because:
1. Accepting that they have been conned is painful.
2. They want to avoid ostracization, loss of social status etc.
3. Hope of rising up through the ranks (of their cult) is a motivator.
4. If feels better to pretend conning somebody else, even if that is not the case.
A fifth reason is the topic of another discussion.
Most people find it necessary to believe in an extrinsic ‘ordered’ universe with independent meaning in order to justify their existence.
There will be many posts on this topic (or related to it) in upcoming weeks and months.
Update: My next post in this series is now up- Modern Ponzi Schemes: Underfunded Pensions