Critics of multilevel marketing businesses like Amway and Herbalife make bold claims. Bill Ackman, an institutional investment manager who tried to take down Herbalife, once said of the company, which purportedly sells nutritional supplements, “the customers are fictitious, the business opportunity is a scam.” MLMs are called pyramid schemes, their sellers likened to the snake-oil salesman of yore. The critics’ line goes that these companies have tricked their customers into thinking they are distributors, while in fact they are rewarded for buying products they cannot sell by bringing in other dupes who are similarly encouraged to buy products they cannot sell—a pyramid where the buyers multiply at the bottom and the money stays at the top. Studies of hundreds of companies have shown that 99 percent of people who participate in MLMs do not make any money at all.

Yet some MLMs are publicly traded, worth millions of dollars, and have thousands of members. Some have been around for nearly 70 years. Ackman’s high-profile crusade against Herbalife eventually flamed out, and the company is still going strong. Folksy ol’ value-investing Warren Buffett owns an MLM. The MLM lobbying group, the Direct Selling Association, walks arm in arm with representatives of economic titans like Uber and Amazon. So, are they massive scams or legitimate endeavors? Bridget Read’s thorough history of the industry, Little Bosses Everywhere: How the Pyramid Scheme Shaped America, bolsters the critics’ position. MLMs, she writes, “may constitute one of the most devastating, long-running scams in modern history.” Her contribution lies in explaining how they’ve been able to do it: through the all-American business traditions of weaseling out of regulation, buying political influence, and exploiting the culture’s belief that every individual is a capitalist success story just waiting to happen.

An MLM is a Frankenstein’s monster of two (or possibly three—more on that later) types of businesses, all stitched together. The first business is that of direct sales. This is a simple business. People sell products, door-to-door perhaps, or to friends at parties.

The second business is that of recruitment. This is not a simple business. In many MLMs, members pay to join and then get paid when they bring in other people or when those other people purchase products. There are required monthly purchases, tiers for sellers, and percentages galore. A top seller, for example, might get a 25 percent commission when their downlines (the people they recruit) purchase inventory. Those downlines might earn a, say, 13 percent commission from purchases made by their downlines, who might in turn sell to others at a, say, 3 percent commission. Sometimes sellers get a commission based on the number of products everyone in their downlines sells, or a larger discount on their own purchases based on the number of people they recruit. This has the whiff of a confidence scheme, with early entrants cashing out on newcomers, who in turn hope to make a mint from the people coming in after them. One major accusation against MLMs is that people only make money on recruitment, not selling the product. Intuitively, this makes sense. How often have you seen a non-Amway-affiliated person using Amway’s signature Glister toothpaste or slamming one of its XS Tamarindo flavored energy drinks? Or heard of a non-Herbalife seller drinking an Herbalife shake?

One key to understanding MLMs is to understand their predecessor: the traveling sales business. In the first half of the twentieth century, the door-to-door salesperson held a distinctly low position in the popular imagination. They were thought of as pestering, pushy annoyances—one town in Wyoming even banned them. In 1938, Fortune remarked that direct selling was a “hideous ordeal of rebuffs and humiliations through day after day of lugging around a line of merchandise that most people put off buying as long as possible.” Academic psychologists noted that salespersons had what were considered “lower grades of selling jobs.” Direct-selling companies like Fuller Brush coached their representatives in false cheer to counter the misery of being perpetually unwanted: When someone asked a Fuller Brush man how he was doing, he was required to say, “Fine and Dandy!” regardless of whether he was fine or dandy. One particularly zealous branch of the organization required every telephone conversation to begin and end with the phrase, and for it to conclude every letter. No one was fooled. A series of Saturday Evening Post cartoons in the 1920s lampooned the Fuller Brush man; in one, he tries to sell his wares to a dog that has just chased him up a tree.

That combination of pity and disgust culminated in Arthur Miller’s enormously popular, Pulitzer Prize–winning play The Death of a Salesman, from 1949. It is the story of a doddering, senile traveling salesman who is so delusional that he thinks killing himself for the life insurance money is a great way to kick-start his son’s career. The popular recognition of Miller’s........

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