PONZI schemes are news again. But what are they and how should they be regulated, if at all? What about network marketing, pyramid schemes, multilevel marketing, referral selling, scams and chain letters? What’s illegal, what’s not, and what should be?

Parliament’s finance portfolio committee is on the warpath. It had the Financial Services Board in for a briefing on "eradicating Ponzi schemes in the insurance and broker industries". Apparently dissatisfied with this, it now wants an expanded briefing including the Reserve Bank and the Department of Trade and Industry. Others of whom it might think if they fall short, include the registrar of banks, the registrar of insurance, the Treasury, the South African Revenue Service and the Asset Forfeiture Unit, all of whom have been Ponzi police.

It is characteristic of the misguided policies and befuddled discourse over the years that no one thinks of the only department and agency that should be involved — the Department of Justice and the police.

The Financial Services Board told the committee Ponzis are a "fraudulent operation that pays returns to ‘investors’ from their own money or money paid by subsequent ‘investors’". This is a rare accurate definition, the keyword being "fraudulent". Whenever a scam collapses, confused busybodies beat their breasts demanding more laws and policing.

One of the tenacious Ponzi problems is the failure to distinguish consumerism from entrepreneurship. The architects of the Consumer Protection Act, for instance, misguidedly banned business ventures as if entrepreneurs in referral selling and network marketing are consumers, and is if legitimate businesses are scams. The kind of thing they banned, hopefully not deliberately, is a gym offering free months to customers who introduce new members.

There’s an ignominious history of failed measures, the most recent being the Financial Advisory and Intermediary Services Act, which declares service providers "fit and proper", thereby duping victims into complacency. Countless spectacular examples come to mind, each followed by regulatory bluster and bravado. Never another Holiday Magic, thanks to new laws, we were assured. Then came Kubus Milk. Again, we were assured it would be the last. Then Masterbond. The act followed amid assurances that we would never have another Masterbond. Then Tannebaum and Fidentia, the Financial Services Board declaring them "fit and proper".

It’s important to understand why prolific measures and multiple agencies are doomed to failure. First, a failure of law enforcement needs law enforcement, not repetitive prohibitions of the same thing. Second, extended definitions of what’s banned outlaw what should be allowed. Third, new and expanding bureaucratic empires burden us with counterproductive costs and red tape. In short, only police should police. And, as the Financial Services Board implies, nonfraudulent schemes should be allowed.

What exactly does the committee mean by "Ponzi schemes in the insurance and broker industries"? Hopefully not network marketing business opportunities for unemployed low-income people trying to earn an honest income. Regulatory excess plunges dozens of legitimate multilevel schemes such as Sportron, Balltron, Amway, Reeva, Avroy Schlain, Tupperware, U-Care, Clientele, and Sanlam’s Chanel-4-Life into the murky waters of uncertainty.

Ponzis are not inherently fraudulent. As long as no one is deceived into believing that making money is guaranteed or that participants can earn mathematically impossible returns, enterprising people should be left in peace. Schemes rarely "saturate" or "implode", except when banned. Pyramid math of the kind generated when schemes are investigated is as seductive as it is flawed. In the real world, as in all businesses, some participants succeed and others fail. Regulators and observers should remember that "entrepreneur" is French for risk-taker. A dynamic economy needs entrepreneurs, failures included. Economies are Darwinian processes where failure is as essential as success. Laws trying to protect people from failure curtail liberty and prosperity.

• Louw is executive director of the Free Market Foundation.