Bryan Caplan  

Ponzi Schemes: What's the Big Deal?

Cream of the Crop... And Bring on the Mexicans...

At last night's paternalism debate, David Balan repeatedly returned to the example of the Ponzi scheme. Later, I found myself reflecting: What's so bad about Ponzi schemes? By definition, Ponzi schemes have an expected rate of return of 0% minus transactions costs. How is that worse than the payoff of casino gambling?

Is the problem that the initiators of the Ponzi scheme know they'll benefit? Well, they know they'll benefit if the Ponzi scheme gets off the ground, but that's far from a sure thing. And in any case, don't casinos know with near-certainty that they'll benefit over the course of any given day?

My point is not, of course, that you should invest in Ponzi schemes. Rather my point is that they are no worse than lots of things that are uncontroversially legal.

Comments and Sharing

COMMENTS (13 to date)
Matthew Cromer writes:

So Balan was suggesting that Ponzi schemes were an example of something that beneficent paternalism should protect us from?

That's quite fascinating, because in the Overcoming Bias comments thread posted before the debate, David suggested that Social Security was an example of "good paternalism" that he supports, and I replied that Social Security was a forced Ponzi scheme that will lead to substantially negative real rates of return for my age cohort. He never did answer that objection. Perhaps he believes that Ponzi schemes are just fine as long as the "contributions" are extorted by government agents. . .

Caliban Darklock writes:

Maybe he just likes to say "Ponzi". So do I. Ponzi, Ponzi, Ponzi. Try it. Ponzi, Ponzi. Isn't that fun? Ponzi.

Xellos writes:

Isn't the primary problem with Ponzi schemes the fraud that inevitably accompanies them? The people who get the ball rolling have an interest in presenting it as a sure-win scheme (and, for them, it is), but so does everyone else down the line (and at some point this becomes very not true).

If it was a straight up "Join us now so I can make some bucks off you, but good luck getting anyone else to pay you this late in the game" I don't think many would have a problem with it.

dcpi writes:

Ponzi schemes are a fraud = deception for gain. Gambling is not = no deception for gain. Legal gambling establishments cannot hide the odds of winning. Ponzi scheme operators promise a "guaranteed" return on investment.

Maniakes writes:

As Xellos and dcpi point out, the problem is fraud. Ponzi schemes are often marketed as legitimate investments or as financing of illegal operations, with the Ponzi dividends used to create the illusion of profitability in order to get more people to pay in.

ryan writes:

Right -- fraud, or distrust, is the issue. To quote the Simpsons version of the SEC, "It's scum like you who undermine investor confidence!"

R. S. Porter writes:
Isn't the primary problem with Ponzi schemes the fraud that inevitably accompanies them?
While it may be true it's a poor reason for anything to be illegal.
ryan writes:

R.S. Porter,

Really? Fraud is more or less theft and defense of property rights and enforcement of contracts is a power even of the minimal state (yes, Dr. Caplan, it's not really "minimal"). Ponzi schemes "are therefore tantamount to that most heinous of crimes, theft of money", right? [Bonus points to anyone who gets that reference.] Certainly it could very well be efficient.

Eric Crampton writes:

Any video or transcript of the debate out there? Some of us live in New Zealand...

Edgardo writes:

Bryan, you're right, but you should note that what you call transaction costs must include the cost of distributing the losses that often are real and very high (most studies about financial crises often ignore this cost and just focus on the fiscal cost).

M.D. Fatwa writes:

Ryan, do you have the complete Matt Groening collection on DVD?

R.S. Porter, the fraud in a Ponzi scheme isn't incidental, but part-and-parcel of the scheme. Take the fraud out of a Ponzi scheme and all you've got is Amway. (And I'm not even sure about that.)

David N. Welton writes:

Albania's government basically collapsed thanks to a Ponzi scheme:

Ryan Fuller writes:

Hmmm... what about that Ponzi scheme that all US taxpayers are required by law to support? That one where the people getting the benefits are disproportionately numerous compared to the new suckers being added to the system, precipitating its collapse?

I see AARP commercials about fixing Social Security featuring children and I can't help but become furious at those shameless, parasitic old bastards at the AARP.

Using children to promote Social Security is like using blacks to promote slavery. There is a horrible injustice here, and it is absolutely revolting that they use the victims of their evil scheme to promote it.

If Ponzi schemes were supported by a large and well organized voting bloc, they'd probably be heavily subsidized. Another big win for Democracy.

Comments for this entry have been closed
Return to top