Thursday, January 19, 2012

Pyramid Schemes

A pyramid scheme is a non-sustainable business venture that although it promises participants something of value, doesn't of itself generate any value and instead relies on new entrants to the scheme to provide the value to those already enrolled. So the goal is to recruit new members rather than to generate value, although some business activities may be performed along the way.

Some schemes rely on recruits to sell things like kitchen products or water filters to their friends, and if they recruit their friends as sales people, they get a commission on the sales of people they've recruited. This works pretty well for people at the top of the pyramid, who get a percentage of all the layers below them, but the people at the base of the pyramid make at best a small amount of money, and depending on how the scheme is structured, may even lose money. The reason pyramid schemes don't deliver the promised benefits for the vast majority of participants is because the pyramid needs to grow and each layer is much bigger than the layer above, following a geometric progression. Very quickly, the number of new recruits needed becomes larger than the number of people in the world. But a successful pyramid scheme has to hide its unsustainable nature and the costs to most of its participants behind a compelling business proposition offering prospectively great benefits.

Pyramid schemes came to mind when I heard about the Silvertown Link tunnel. Boris is trying to recruit us: Lots of jobs! Less congestion! Easier, faster journeys! Sounds great - gimme some of that! Except of course one of the benefits - easier, faster journeys - will also mean more journeys. Which will mean that the roads feeding the tunnel will need to be widened to accomodate the tunnel traffic. Which is good! It'll mean more jobs! Less congestion! Easier, faster journeys! Sounds great - gimme some of that! Except, of course, for each of these widened roads, we'll need to widen the roads that feed them, and build new ones, to accommodate all those easier, faster journeys. Good! Yet more jobs! More journeys! Less congestion! Until you run out of land. You can't build any more roads. Then all those journeys aren't easy or fast any more. And there's nowhere to park at the end of your journey. And all the motorists who've paid into this massive pyramid scheme and voted for the politicians who promised them easier, faster journeys, have lost their money and are really no better off - and a lot are worse off if they live by one of the new roads and have to suffer the noise, danger and pollution. The only people who've benefitted are the road-builders (so we got the jobs at least).

As with the kitchen product/water filter schemes, what's amazing is how gullible people are. Decades after it was clear that if you built a new road, it would just require more roads, we still have politicians promising to solve the problems of the roads by...building new roads.

1 comment:

  1. I wonder whether comparison to a Ponzi scheme might have been more apt: a Ponzi scheme pays inmprobably high investment returns to investors by raiding the accounts of other investors. Barlow Clowes was a good early example. Madoff is more recent.

    The Silvertown Tunnel proposal is about as honest as either of these.