What’s a Ponzi Scheme: Karl Smith on Truth in Blogging


I think this is interesting for suggesting that there may be two ways of defining a Ponzi scheme.  One is a claim on future income not backed by an investment in an identifiable asset.  The other is simple claims on the future that ultimately can’t be made good.   If find my self thinking by the first definition could the family at least partially once a means of securing one’s old, a claim on the future be a Ponzi scheme.  I suppose not if children are thought of as capital assets.   That fits with capital theory but doesn’t give most people the warm and fuzzies.

Arnold Kling David Henderson revisits his claim that Social Security and Medicare are Ponzi schemes based on a comment by John Seater. John’s point was that Ponzi schemes are necessarily insolvent while Social Security would be solvent if the population was growing fast enough.

Arnold David replies:

It’s not necessarily the case that Ponzi schemes must circle around to the original people who invested in them. If the scheme offered modest enough returns and spread slowly, it could last forever in a country with a growing population. Therefore, Ponzi schemes, contra Seater, could remain solvent.

This actually brings to mind a point much deeper than the Social Security debate; a point that may be fundamental to intellectual disagreement in policy circles.

Arnold is using the term Ponzi scheme and I am certain that he feels its appropriate and meaningful. Yet, as best as I can tell he is stripping of its primary connotation: necessary insolvency and bankruptcy for the participants.

It is tempting at this point to say that Arnold is being “dishonest” about Ponzi schemes and Social Security. This is where lots of intellectual discussion go off the rails/

However, I don’t think “dishonesty” is accurate in the traditional sense. I think Arnold means what he says and is communicating in good faith. Leverage the negative affect of the term Ponzi scheme seems appropriate to him because Social Security and Medicare likewise leave him with negative affect. I am assuming because no investment is induced by the system even though its made to look like a savings system.

Yet the term Ponzi scheme leaves most people with negative affect for entirely different reasons. For most people, the negativity comes from the fact that you cannot win and sooner or later the entire thing must come crashing down.

My points in all of this are several

  1. This type of cross-talk happens all of the time in intellectual disputes and is responsible for a good portion of the disagreement that we think we are having.
  2. Though it can easily escalate to attacks on intellectual honesty there is no bad faith on anyone’s part
  3. It can be cut through with careful and calm reasoning. This is hard to achieve but we should strive for it.

Filed under: Bias and Rationality

Truth in Blogging
Karl Smith
Wed, 29 Jun 2011 17:09:49 GMT

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