Monday, January 12, 2009

PONZI SCHEME DIAGRAM

I tried to make a Ponzi scheme bitmap diagram, but it ended up just a confusing mess (just like the real thing), and in the end it is more informative to set it out in the simple list form below.

Here's how to make a Ponzi scheme:

1 Scammer asks scammees to lend him money, promising big returns.
2 10 Scammees give say 100 each = 1000.
3 Scammer gives each 10 at end of year, and keeps 900 for his lifestyle.
4 Scammees are pleased with their 10 (believing it to be in addition to the 100 they gave, which is not now the case, as it has gone to support the scammers lifestyle). Scammees are encouraged to recruit further scammees, who repeat 2,3,4, until no further scammees are recruited, or until the original scammees request their money back.
5 The scam works while it is growing. Just like the "growth economy". When growth stops, the scam collapses. Just like the "growth economy", which has to keep growing in order to work.

Which is insane, because it is impossible to expand forever in a finite space.
This shows what happens if a hamster does not stop growing.


Bernie Madoff has been sent down for the rest of his natural life for his Ponzi scheme.

Hyman Minsky was an economist, one of the rare ones who predicted the Credit Crunch. We should therefore listen to him.
He said some derivatives were Ponzi schemes.

So the whole orthodox economy, the one we live in, is a gigantic Ponzi scheme. (More here).

Greens have been criticising the doctrine of everlasting growth for 30 years, and for having the temerity to assert that it is impossible to expand forever in a finite space. We have been ridiculed and sidelined as a result. 'Twas ever thus.

The orthodox economy is in fact nothing but a dys-economy. Economics must be based on ecology to be valid.

The lunatics have taken over the asylum, and it is the task of our generation to reinstate ecological wisdom in the place of casino capitalism.

Now that you're here, click on the "Ponzi", or "Solving the financial crisis" labels below, to find how Green economics approaches the triple whammy of problems the world is facing up to in our time: Recession, Peak Oil, and Climate Change.

There's loads of other stuff here that you won't get anywhere else. Make yourself at home. All comments get answered.

Don't believe it is possible to stop economic growth? Read Herman Daly on the Opportunity Cost of growth.

11 comments:

blue said...

Thank you so much for the Ponzi schematic. Really, people should know that the scheme ultimately leads to downfall because, unwittingly, it supports the idea that the poor remains poor forever as in the the case of the downliners who will be forever downliners with reference to their "good samaritan" recruiter. No amount of great effort will ever push the downliner any higher than the upliners, so to say.

DocRichard said...

Hi Blue
Thanks for your comment. The free market capitalism has many failings, including the divergence between rich and poor. This leads to suffering, anger and eventually to violence, all of which are not helpful. It is possible (if difficult) to design economic systems where there is a tendency for the fortunes of poor and rich to converge, towards better equity, although true 100% egalitarianism is not possible.
Salamat
Richard

Led said...

Surely free market capitalism is the only way for any fair soceity to live, those who work the hardest and take the risks should benefit the most and those who sit back and do the least deserve the least. for instance SOME people on social welfare are happy to stay there and don't feel they have to work or feel they are owed a living from those who do, To put it bluntly Darwins theory of Evolution (the survival of the fittest) has brought us to where we are today.

DocRichard said...

Hi Led

Thanks for commenting.

You write: "Surely free market capitalism is the only way for any fair society to live".

If by free market we mean a market which is free of any guidance e.g. through taxation policy, then the answer is - Sorry, but No.

First, the free market is an ideal, not a historic reality as far as I know; though I would be interested to be told of any free market that may have taken place.

George Soros talks about free market fundamentalism. It's a good description. Absolute faith in the Invisible Hand of the Market.

The core belief of free market fundamentalism is that self interested men (and a few women), competing and betting against each other for money will produce the best of all possible worlds.

Money is primarily a non-substance which gets a bad press from a lot of philosophers. Free market capitalism has not, will not, and can not produce the best of all possible worlds. We cannot have a sustainable economic system where profit is the bottom line, because that kind of system is inherently unstable, causing not just boom and bust, but also an intolerable and growing divergence between rich and poor, not to mention perpetual erosion and contamination of the biosphere.

In real economics, ecology is the bottom line - ecology in the sense of the the web, the flowing, cyclical system of life.

Therefore the market must be guided by considerations of what we need for our children and grandchildren to lives as happy, if not happier, than our own.

You made other points, which deserve an answer, but this is the key point. The market has to be guided if our present civilisations are going prosper and continue.

weggis said...

The Free market is not an ideal, it is a reality. It is a system which permits some to manipulate and control the market for their own benefit. The law of the jungle, or if you like Darwin’s evolution theory.

There is, in my mind, absolutely no difference in manipulating or controlling the market for the benefit of all. It is merely the difference between greed and benevolence.

DocRichard said...

Hi Weggis
"The Free market is not an ideal, it is a reality".

The free market is an aspiration of the libertarian Right, but no markets to my knowledge have been perfectly free, though I stand to be corrected by a historical example.

"It is a system which permits some to manipulate and control the market for their own benefit. The law of the jungle, or if you like Darwin’s evolution theory".

Yes, it works to the advantage of the few, and the disadvantage of the many.

"There is, in my mind, absolutely no difference in manipulating or controlling the market for the benefit of all. It is merely the difference between greed and benevolence".

Not sure what you mean here. The market needs to be guided so that it works to the benefit of society and environment, by taxation on processes and products which are not helpful to society and environment, and by facilitating those that are helpful.

DocRichard said...

Led said

"those who work the hardest and take the risks should benefit the most and those who sit back and do the least deserve the least".

Which is as it is, in the main, although much hard work (for instance, parenting and caring) is unrewarded financially. As a general rule the true value of an occupation is inversely proportional to its financial remuneration.

"for instance SOME people on social welfare are happy to stay there and don't feel they have to work or feel they are owed a living from those who do"

This is a widespread assumption, but it is not borne out by what has happened in Namibia recently, where a Basic Income Grant (BIG) (arising from the nation's uranium wealth) was distributed to the people. "The introduction of the BIG has led to an increase in economic activity."

Sure, some people are lazy and feckless. 'Twas ever thus. However, the way unemployment benefit is set up in most places is designed to amplify this problem, because you get benefit ON CONDITION THAT you do no work. This creates the poverty and unemployment traps. Here is a simple, practical way of springing those traps, while greening the economy at the same time.

"To put it bluntly Darwins theory of Evolution (the survival of the fittest) has brought us to where we are today".

As a doctor, I work against evolution. Without antibiotics, many children would not reach adulthood. Civilised countries have chosen to place human values above natural selection. This is good; but since this allows the population to grow, and since indefinite population growth in a finite environment is not physically and biologically possible, medicine should be coupled with education about the facts of population growth, and our individual responsibility to stop population growth.

Green Gordon said...

Haha, someone mentioned Social Darwinism. Snore.

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DocRichard said...

Hi Dusty
Thanks for the link. I read "Crime Busters Now is a non-profit organization dedicated to expose and inform citizens NOW of scams and frauds permeating their communities rather than after the deviating harm has been done."
So good luck with your venture. Feel free to leave any important updates ere.

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