Note: The published comments of Dr. Lasdwun N. Luzes may be found on the FTC website: https://www.regulations.gov/comment/FTC-2022-0020-0028
The published comment is also archived HERE.
The recent report by staff of the FTC Consumer Protection Bureau related to a proposed rule on MLM “Earnings Claims” confirms the economic analysis of Dr. Lasdwun N. Luzes that such a rule would be useless and unworkable. Dr. Luzes is the author of the ground-breaking booklet, In Defense of the Pyramid Scheme.
Dr. Luzes argues that multi-level marketing (MLM) is an obvious pyramid scheme, and that pyramid schemes are now conventional businesses and should be legalized. He points to other areas of the economy also based on “robbing Peter to Pay Paul”, including crypto, real estate flipping, the banking system, the stock market, consumer credit, and the federal budget.
In the case of MLM, which he views as the most obvious pyramid scheme directly affecting the most people, the extreme loss rates, he has shown, are consistent with trends in the general economy today for the rate of “losers.” In his view, “deception” in a MLM pyramid scheme is not different or worse than blatant lies told every day in general advertising and in political campaigns. Most importantly, he notes that pyramid schemes are extremely lucrative for founders and top recruiters, and so pyramid schemes are very good businesses.
Dr. Luzes points out that more than 40 years ago, the FTC legalized the MLM “business model”, which is definitively a pyramid scheme, and the FTC has consistently endorsed the MLM pyramid as it grew to global proportions. In all that time, the FTC never monitored loss rates or deceptive “earnings” claims. Yet, the FTC also, on rare occasion, prosecutes an MLM as a “pyramid scheme”. Dr. Luzes believes the FTC should drop the pretense and just openly support pyramid schemes as businesses, which it is doing anyway in practice.
The FTC report confirms that a workable, enforceable “rule” on MLM “earnings claims” is impossible, as Dr. Luzes has explained. After studying “data” from 70 MLMs – which they characterized as incomplete, sometimes incomprehensible and inaccurate – the FTC staff was led, as Dr. Luzes predicted, to an erroneous and misleading “conclusion,” portending a useless, misleading “rule.”
The “take-away” of the report is that the vast majority of MLM participants earn “less than a thousand dollars in a year.” This is like saying “not many” people win lotteries, or “most people live less than 200 years.” It misrepresents reality. The FTC “conclusion” erroneously implies most recruits gain, or could gain, some “earnings”, up to $1,000, per year. In fact, almost no one gains even one-cent in net profit. It also implies most MLM recruits continue for a year or more. Most new recruits quit and are replaced within a year, every year, making “annual” data invalid.
In plain language, as Dr. Luzes explains in his provocative book, there are no “earnings” in MLM. There are financial gains for those at the extreme top, owners, founders, and early recruiters, based on the losses of all others, That is the nature of the pyramid scheme “business.” The losses for new recruits are “by design,” and can never change. So, there is nothing to “regulate.” A “rule” on “earnings claims” is a pretense that there are “earnings.”
MLM’s unique “business model” – consistently endorsed by the FTC since 1979 – is based on the “endless chain”. This model, as Dr. Luzes eloquently explains in his book, permits MLMs – only MLMs – to make the electrifying promise of “unlimited income potential” for all recruits, regardless when they are enrolled or how many others are already enrolled. This FTC-approved “plan” authorizes MLMs to claim to be “the greatest income opportunity in the world,” even if data show more than a 99% loss rate, every year. Because MLM is based on the metaphysical concept of “infinite expansion,” it can claim it is not bound by markets or math. Recruits are told they succeed with “belief” (as long as they also pay and recruit).
In his book, Dr. Luzes shows that what MLMs actually promote is not “earnings,” but the “opportunity” to be part of an “endless” money-chain that “transfers” money, the opposite of “earnings.” Promises and claims of an “unlimited opportunity” could never be regulated.
Dr. Luzes further backed his recommendations by citing the FTC’s official view that “earnings claims” by MLMs don’t have to be true. He quotes what the FTC wrote about MLM earnings claims in 1979 when it legalized the MLM “endless recruiting chain” model:
“References to the achievement of one’s dreams, having everything one always wanted, etc. are primarily inspirational and motivational; to the extent that they dangle the likelihood of financial security and material success before the potential distributor, they constitute vague ‘puffs’ which few people, if any, would take literally.”
Dr. Luzes also notes, since an “earnings claims rule” would imply systemic deception, it insults and discredits all the FTC officials who now work or may in the future work for MLMs or MLM law firms or for the Direct Selling Association.
Robert FitzPatrick (copyright 2024)
