This complaint about an important problem is expressed in a way that confuses me; it's not clear whom the "should" formulation is advising and about what. (By contrast, when I wrote Effective Altruism is Self-Recommending, I think it was clear who I was advising (people persuaded that EA was creditable and effective) and what the advice was (don't count claims that you will do X as evidence that someone has done X, check whether job 1 got completed adequately before using it as a track record for job 2).
The process you're describing seems to involve type errors about credit, and corruption of the currency. Making these upstream problems more explicit could help people avoid being suckered by them.
Money IS a form of creditability; it's evidence that you had the capacities needed to get the money, and in relatively just societies it's evidence that you did something for money that would otherwise have earned you a corresponding amount of gratitude.[1]
In the case of financial creditworthiness, using money or other liquid assets as collateral seems unobjectionable, so it seems like the problem is in the currency conversion between money and nonfinancial credit. But staking money on claims is proepistemic.
The difference between staking money on one's claims, and what you describe, is the difference between making bets or offering insurance - effectively buying credence for specific propositions - and buying a vaguer sort of credibility. A less vague way to describe this is the difference between buying insurance and bribing a third party evaluator.
So there's one piece of usable advice: check whether someone's bribed the third party evaluators you're relying on.
But we shouldn't expect that sort of problem to persist in an otherwise just system. So we need to explain why and how corruption is persistently subsidized, as I've tried to begin to do in There Is a War, The Debtors' Revolt, and The Domestic Product, which advance the claim that much of the political dark matter of the 20th century is explained by correlated defaults as a mechanism for debtors to extract from creditors.
Thank you for the comment! I have found much of your writing helpful when thinking about these things.
it's not clear whom the "should" formulation is advising and about what.
The "should" is aimed in a relatively broad sense at people who care about how well societies and groups of people function. I am also not super happy with the title, which is approximately the only place where I use "should". If you have better title suggestions, I would actually greatly appreciate that.
and buying a vaguer sort of credibility
I am not actually trying to talk that much about a "vaguer sort of credibility". I am trying to talk about the specific case of "whatever causes other people to then extend you a greater line of credit[1] in whatever resource you used up to cause them to do so". This is pretty concrete. In the case of FTX, it was the case that FTX found many opportunities to translate their agency and money into more people giving them more deposits, which they could then use to get more deposits.
I was indeed hoping to avoid a broader treatment of trustworthiness by focusing on the specific case of creditworthiness, as I think the former is a lot trickier and less well-defined. I use the former still a few times, which is maybe a mistake, but largely in an attempt at helping people understand that creditworthiness extends into more domains than just dollars.
So there's one piece of usable advice: check whether someone's bribed the third party evaluators you're relying on.
Yep, I agree this is helpful, but does fail to cover the Theranos and FTX cases, where I don't think anyone was expecting the presence of a third-party evaluator, but nevertheless especially the FTX case seems like a central example of a dynamic I characterize in my post.
so it seems like the problem is in the currency conversion between money and nonfinancial credit
No, I argue the issue is specifically in the currency conversion between any asset, and creditworthiness for that asset. In the case of money, it's specifically the conversion between money and financial credit. The very basic mechanism I am trying to point to is that if you are in a situation where you can borrow a dollar, then spend that dollar, and end up now in a position to borrow more than one additional dollar, and you can do that over and over again, then bad things are going to happen[2].
ETA: I have updated the OP with a substantial number of new paragraphs and edits trying to make my point clearer. Copied here to save you re-reading the whole post:
The key vulnerability that is being exploited in the above is that there was some way to spend a dollar of resources into the ability to control more than a dollar of stewardship over other people's resources, and to do so repeatedly. When this becomes possible, at least some individuals will see the opportunity to leverage up on other people's resources, bet them big, and hope they get to walk away with the winnings (and, if they lose, leave the empty bag to the people whose resources they borrowed).
The emphasis here is on spend. To distinguish what is going on here from marketing expenses, or simply producing valuable assets which can now serve as collateral for greater loans, we are focusing on situations where resources are used to purchase pure perceived creditworthiness, without assets or knowledge or skills that produce genuinely higher expected future returns for investors and creditors in the future.
This of course makes this all a fundamentally deceptive exercise, because the reason why you extend someone a line of credit, or invest in someone, or deposit your funds with someone, is because you expect to make returns on what you gave them. But in many cases an adversary can spend money more effectively on distorting your beliefs about future returns they can provide, than they can by doing things that produce genuinely higher returns, and when the cost to doing so becomes cheaper than the additional resources they can such extract, you have a positive feedback loop.
Postscript.
Another aspect of this whole dynamic, which is related to yesterday's post about paranoia, is that this is one of the most common ways in which you end up with actors exercising strong direct optimization pressure on your beliefs, and which can cause you end up in environments where paranoia is the appropriate response. Of course there is often resources to be gained by duping and deceiving others, but the case of a creditworthiness bubble you have two things that rarely happen at the same time:
- A feedback loop in which someone is gaining more and more resources
- The control over those resources is very highly sensitive to people believing false things about their expected future returns
This produces actors who need very tightly control over what other people believe about them and say about them, and where the consequences of failing to do so are catastrophic, which produces a much greater willingness to spend large amounts of resources achieve those aims.
In addition to that, in many of these cases, the personal costs to the scheme falling apart have long since become insensitive to the size of the damage. It is genuinely unclear what Sam Bankman Fried or Elizabeth Holmes could have done to not end up in prison for decades by the time they ended up in their overleveraged positions, and trying to somehow keep things going for longer and hope for a big market surge, was from a purely selfish perspective possibly the best thing for them to do. Society does not punish you with more than prison or death, even if you caused much more harm than one person's life, and so by the time you are in the middle of something like this, trying to de-incentivize this kind of behavior is very hard.
Ok, but how is this different from "marketing"?
Marketing, as a broad term for "distributing information about you and your organization widely" can certainly be used for this purpose! But it is not centrally what marketing is used for.
The normal context of marketing is to pay someone to get information about your product out to potential buyers. They then use that information to evaluate whether their product is worth more than its cost to them, and they offer you a trade if they do think so. In this world, marketing solved a real problem, and marketing spending genuinely increased your future expected returns, and creates lots of surplus value in the world.
Of course, if you are a business like FTX, you might run marketing campaigns for your product that emphasize its nature as a safe space to deposit your funds. This is specifically targeting your creditworthiness as a receiver of those deposits, which you can then use to attract more deposits. This only becomes an issue when you are not using the fees you collect on the deposits to do this, but the deposits itself, since that is when the purchase becomes a pure purchase of perceived creditworthiness, and not a genuine signal that you can maintain positive returns for the people who gave you their money.
Hopefully this clarifies my models here a bit more. I think in writing these sections I have clarified my model a bit more myself, which has been helpful.
"Line of credit" a bit more broadly defined to here include any transfer of resources under someone else's stewardship, which includes e.g. deposits and investments
And this is specifically talking about the situation where you did not end up with assets you could just use as the collateral for the next creditor, but where you spent/lost/burned the money in order to convince the next creditor. Of course many assets are intangible, which makes distinguishing e.g. legitimate marketing use-cases and adversarial attacks on creditworthiness tricky to distinguish.
Thanks for trying to highlight the changes, but I'm a bit confused by this response.
"Whatever causes other people to then extend you a greater line of credit in whatever resource you used up to cause them to do so" seems to me straightforwardly vaguer than credence in a specific propositional claim, such as an insurance claim.
FTX seems to have straightforwardly bribed third parties with independent reputations to testify to its creditworthiness in ads. The case with Theranos is only slightly subtler, but to name a couple clear examples, Bill Frist and Henry Kissinger had independent reputations that they lent Theranos in exchange for anticipated financial gain.
You say you tried to narrow the scope to "creditworthiness" rather than "trustworthiness," but I don't know what that means. I guess an example of trust that isn't credit in the relevant sense might be loyalty; the examples you gave all involved some sort of system of more or less explicit accounting in which somewhat quantifiable progress can be made, which isn't how loyalty works. I think I was also assuming the narrower definition; can you point to some specific way in which I seem to be responding irrelevantly by wrongly assuming the broader definition?
As you point out, "many assets," such as the ones in the academic example, are intangible, so it's not clear that your "no collateral" qualifier helps much; whether there's an intangible asset or verified capacity corresponding to the promise is exactly the controversy at issue.
Overall your reply seems substantially unresponsive; the level of disconnect is such that it's not clear to me what I could even say to get a better response.
You say you tried to narrow the scope to "creditworthiness" rather than "trustworthiness," but I don't know what that means.
By creditworthiness, in this post, I mean the literal degree to which you are happy to transfer some specific resource that you own into someone else's stewardship with the expectation that you will get them back (or make a positive return in-expectation). Creditworthiness is here specific to a resource that is transferrable. Dollars are the most obvious case. Social capital sometimes can also be modelled this way, though it gets more tricky. Creditworthiness does not need to extend into trustworthiness in general.
For example, as investors face very limited liability for investing in fradulent institutions, seeing someone willing to break the law (or be generally untrustworthy) can sometimes increase expected returns! In those situations creditworthiness (which I here try to measure in expectations of good stewardship or expected future profit) and trustworthiness (which would be measured in a broader propensity to not fuck people over) come strongly apart.
whether there's an intangible asset or verified capacity corresponding to the promise is exactly the controversy at issue.
I think I am confused what "controversy" you are talking about here. I agree with you that in-practice, the line here is very hard to identify (as one would expect in a high-level adversarial information game).
My main aim with this post is largely to create a model that explains some situations where in-retrospect there is IMO little uncertainty that something of this shape went wrong.
Like, the specific sentence I objected to was: "so it seems like the problem is in the currency conversion between money and nonfinancial credit".
And I think in the model and situations I outline, I am confused how you could end up with this impression? Like, I think the central dynamic with FTX was their ability to translate money[1] into more financial credit (in the form of customer deposits). Yes, there might have been some nonfinancial credit intermediary steps, and of course they also did lots of other things that are worth analyzing, but the thing that produced a positive feedback loop is the step where they could convert funds in their stewardship into more creditworthiness, which resulted in them getting more and more assets in their custody.
Trying to think harder about what you were saying, I thought your objection might be that there are too many legitimate cases in which you of course want to translate assets under your management into more assets under your management, i.e. by producing assets that are more valuable than the resources you were given stewardship over. So I tried to clarify that I was talking about a dynamic where you spend/irrecoverably lose resources to increase perceived creditworthiness, not where you make good use of resources that actually increase future expected returns.
Bribing third-party evaluators is of course an example of what I am talking about, but it strikes me as too narrow, and most importantly it doesn't capture the central feedback loop of this creditworthiness bubble that I think explains many of the relevant dynamics that I go into in my new last section. Yes, I agree you should pay attention to someone bribing third-party evaluators, but even in that situation, one of the key variable that determines how bad it is to bribe third-party evaluators is whether by bribing the third party evaluator with a dollar, you end up with more than one additional dollar under your stewardship. That returns ratio really matters and is what I am trying to draw attention to, and I am not sure whether you are objecting to is as a thing, or just don't find it interesting, or have some other objection.
Broadly construed here to include cryptocurrency
Young organizations that want to succeed are usually unknown, so logically, they will beenfit from buying attention. If the leadership is product rather than marketing focused, engaging a professional firm is a sign of additional credibility isn't it?
An alternative to paying for creditworthiness would be reputation within a small community. Seems like a breeding ground for collusion through an 'old boys network'. Military bureaucracies are notorious for this kind of corruption, mutual participation in conflict as a way of developing cohesion keeps outsiders out, and motivates protecting insiders from outside scrutiny.
Buy my attention and hire the best auditors you can find, early please.
so logically, they will beenfit from buying attention.
Totally! I think I will add a section to the FAQ that's something like "so are you saying all marketing spending is bad?". Because I am really not centrally talking about "marketing". Marketing is usually good! Getting information about your product out to more people who need to hear it genuinel increases your future returns and makes you legitimately a better investment target.
The thing I am talking about is marketing, or persuasion, or pressure, specifically targeted at the "creditworthiness" dimension. FTX Marketing that propagated the information that they are the most trustworthy cryptoexchange, Theranos media campaigns that tried to squash any doubt about their product working, Enron's payouts to shareholders combined with the explicit assurance that future investors would receive the same, those are not straightforward marketing actions, they are expenditures narrowly aimed at increasing specifically creditworthiness, not increasing expected future realized returns. Marketing is usually the latter and so totally fine!
I think it would be helpful to list information that you can spread via marketing that isn't about credit-wrothiness.
These are all different from
Did you read the relevant section of the FAQ I added? I could list more examples, but I feel like that section is relatively clear.
Yeah. For my taste your paragraph is still written on a slightly higher level abstraction than what is helpful for people who have never actually done any marketing of things before (i.e. says "The normal context of marketing is to pay someone to get information about your product out to potential buyers" but doesn't follow up with "For instance, how big your product is, or what shops they can buy it in"). But it is just a matter of taste.
It isn't obvious to me that "credit worthiness for sale" is bad on net. There are the high publicity cases of people committing fraud by way of purchasing creditworthiness in some respect, but there are also (and I'd guess more wide-spread less exciting) legitimate purchases of creditworthiness.
For example, it might not optimal for very competent newer investors/inventors/organizations slowly get capital investment or other support. If you think of the marketing campaigns, sponsorships, etc. as a bond to show they believe in their performance, and believe their purchase will pay off from success, then it is somewhat less concerning and also valuable to do some amount of sponsorship/marketing.
Someone very close to me is a very competent real estate investor, who has had exceptional returns (and I believe exceptional risk adjusted returns) much higher than what most other real estate operators are making for their investments. It is not efficient for him to slowly get investors while others who have had longer to collect investors get more capital for lower returning projects, it makes sense for him to "buy creditworthiness" in a sense, selling some of his share of his investments to entice people to refer investors to him.
Buying creditworthiness allows competent new entrants to get investors/support grow quicker than they otherwise would. Scams will exist, but that is honestly part of the creative destruction of the market (not that they shouldn't be rooted out). Those that don't do their due diligence will have a smaller say in how capital is allocated.
I totally agree that marginal sales of creditworthiness are often totally fine. A system does not become badly exploitable just because on some occasion someone can buy some creditworthiness (and indeed, as I try to describe in some of the FAQ, there are often legitimate coordination problems that can be solved with money, which should increase expected future returns, and as such legitimately increase your creditworthiness, which can look like direct purchases of perceived creditworthiness, but actually increase your underlying creditworthiness in a way that makes it fine).
The issue is when you can keep pressing the perceived creditworthiness buy button without actually increasing future expected total returns, and when you can do so a lot of times even as you grow.
Buying creditworthiness allows competent new entrants to get investors/support grow quicker than they otherwise would.
I think you are conflating here, as I try to clarify in the previous part of this comment, the concept of "buying creditworthiness" and "marketing". Marketing is not centrally about buying creditworthiness (though a bit of it is). It's mostly about information exchange. Referral programs are about incentivizing people to cause important information about opportunities to be exchanged, not for people to vouch for you. Referral programs are totally fine, unless they extend into misleading people about your actual creditworthiness.
Relevant Patio11 tweet: https://x.com/patio11/status/1933975792721207316
I think the so-called Bitcoin treasury companies have just reinvented exchange tokens: there is an asset with X real world utility but not naturally leverageable. It should flow to place in world where most leverage is bolted onto it; immediately incentive compatible. Repeat 100x
And then “Holy %}*]^ how did so much of it end up in a place with grossly deficient risk management?!”
(I understand that MicroStrategy is the opposite of leveraged exposure from the common shareholder’s perspective but if someone with hands on keyboard believes they are allowed leverage if they hold more exchange tokens then the model happens regardless of whether that is true.)
(See, for example, the trading fund which believed that the more FTT it held the more cash it could licitly borrow from an affiliated entity’s depositors to deploy against many interesting aims. They were wrong about that, obviously.)
Most large-scale fraud follows basically the same story:
1. Some trader or executive gets in a position where they can use a bunch of other people's resources (either via borrowing them, or being given custody over them)
2. They spend some of those resources to increase their perceived creditworthiness/trustworthiness
3. They use this to gain control over more resources
4. They use those additional resources to buy more creditworthiness, which they then use to get more resources, and so on
5. Eventually some market shock or similar event causes people to re-evaluate the creditworthiness of the trader or executive, at which point the whole thing collapses and their debts get called in (often in the literal form of a margin call, sometimes in the form of a criminal conviction)[1]
The exact mechanism by which each one of those steps is achieved is different from case to case, but the overall result is the same. Everyone is sad, and society updates how we evaluate the trustworthiness of others.
Going through a few concrete examples:
FTX
Enron
Theranos
Some other case-studies which are left as an exercise for the reader: WeWork, Wirecard, Lehman Brothers, Ponzi, Madoff, and many cases of academic fraud including Amy Cuddy and "power posing".
The key vulnerability that is being exploited in the examples above is there being some way to spend a dollar worth of resources into the ability to control more than a dollar of stewardship over other people's resources. When this is possibly at a large scale, at least some individuals will see the opportunity to leverage up on other people's resources, bet them big, and hope they get to walk away with the winnings (and, if they lose, leave the empty bag to the people whose resources they borrowed).
The emphasis here is on spend. To distinguish what is going on from marketing expenses, or simply producing valuable assets which can now serve as collateral for greater loans, I am focusing on situations where resources are used to purchase pure perceived creditworthiness, without assets or knowledge or skills that produce genuinely higher expected future returns for investors and creditors in the future.
This of course makes this all a fundamentally deceptive exercise, because the reason why you extend someone a line of credit, or invest in someone, or deposit your funds with someone, is because you expect to make returns on what you gave them. But in many cases an adversary can spend money more effectively on distorting your beliefs about future returns they can provide, than they can by doing things that produce genuinely higher returns, and when the cost to doing so becomes cheaper than the additional resources they can such extract, you have a positive feedback loop.
This phenomenon extends beyond the realm of large scale fraud. The Stanford president resigning after decades of academic fraud leveraged into one of the most powerful positions in academia is one such interesting case.
Early in his career Tessier-Lavigne published a number of high-profile papers in neuroscience journals. These papers already contained significant data issues and were probably fradulent but this was not discovered until much later.
Similarly, a common corporate story is someone squeezing short-term profits out of some assets they are managing while (unbeknownst to upper management) lowering long-run returns (also known as "milking an asset"). Then, being hailed as a success they move on to a bigger project where they can repeat the same playbook, having used up less than a dollar of the resources under their stewardship to end up with more than an additional dollar of resources under their control.
Excerpts from the book Moral Mazes summarizing this dynamic:
Both Covenant Corporation and Weft Corporation, for instance, place a great premium on a division’s or a subsidiary’s return on assets (ROA); managers who can successfully squeeze assets are first in line, for instance, for the handsome rewards allotted through bonus programs. One good way for business managers to increase their ROA is to reduce assets while maintaining sales. Usually, managers will do everything they can to hold down expenditures in order to decrease the asset base at the end of a quarter or especially at the end of the fiscal year. The most common way of doing this is by deferring capital expenditures, everything from maintenance to innovative investments, as long as possible. Done over a short period, this is called “starving a plant”; done over a longer period, it is called “milking a plant.”
[...]
For instance, I could negotiate a contract that might have a phrase that would trigger considerable harm to the company in the event of the occurrence of some set of circumstances. The chances are that no one would ever know. But if something did happen and the company got into trouble, and I had moved on from that job to another, it would never be traced to me. The problem would be that of the guy who presently has responsibility. And it would be his headache. There’s no tracking system in the corporation. Some managers argue that outrunning mistakes is the real meaning of “being on the fast track,” the real key to managerial success. The same lawyer continues: In fact, one way of looking at success patterns in the corporation is that the people who are in high positions have never been in one place long enough for their problems to catch up with them. They outrun their mistakes. That’s why to be successful in a business organization, you have to move quickly.
[...]
At the very top of organizations, one does not so much continue to outrun mistakes as tough them out with sheer brazenness. In such ways, bureaucracies may be thought of, in C. Wright Mills’s phrase, as vast systems of organized irresponsibility.
Now, the issue is of course that there are many different ways people evaluate track records and many different chains in the great web of reputational deference. Most resources can somehow be traded for other resources, and so it's hard to guarantee that pure perceived creditworthiness itself is never for sale. Or more generally, the process that allocates creditworthiness is often much dumber than the most competent individuals, and in the resulting information warfare, it's hard to guarantee that nobody can be duped out of more than one dollar worth of stuff with less than one dollar worth of investment.
That said, paying attention to the specific mechanism of "purchased creditworthiness" is IMO often good enough to catch a non-trivial fraction of social dysfunction, shut down fraud early on before it gets too big, and be helpful for staying away from things that will likely explode in violent and destructive ways later on.
Some maybe non-obvious heuristics I have for determining whether someone might actually be leveraged up on a bunch of creditworthiness purchases and is likely to explode in the future:
Don't trust young organizations that hire PR agencies. PR agencies are the obvious mechanism by which you can translate money into reputation. As such, spending on PR agencies is a pretty huge flag! Not everyone who works with PR agencies is doing illegitimate things, but especially if an organization has not yet done anything else legible that isn't traceable to their PR agency or other splashy PR efforts, it should be an obvious red flag.
Charity is a breeding ground for this kind of scheme. Many charities are good! Nevertheless, a lot of charities do just use most of their money to do more marketing to get more money, with basically no feedback loop that is routed through actually helping anyone. The absence of needing to provide market value make the fundraising feedback loops here particularly tempting.
Pay a lot of attention if an organization is quickly ramping up their PR spending. If an organization becomes overleveraged like this the value of maintaining creditworthiness becomes greater and greater. Often also the cost of purchasing additional dollars of creditworthiness goes up over time as the most credulous creditors have been exhausted, or suspicion mounts. This means many organizations in the throes of a cycle like this will ramp up their spending on PR a lot.
Beware of organizations that have many accolades for being "the most trustworthy" or "the most innovative" or "the most revolutionary". On a competitive level, organizations that optimize for appearing trustworthy are often doing so because they have no other business proposition to optimize for. Of course, most of the time the most trustworthy institutions are indeed trustworthy, but seeing an organization that is a big outlier in its perceived trustworthiness, or where the actions of the CEO seem centrally oriented around optimizing for trustworthiness or reputation, often indicates this kind of runaway leveraged game.
At the institutional design level, the lesson here is "don't sell creditworthiness". If you, either on an individual, community, or institutional level have a vulnerability where someone can use resources under their stewardship in a way that results them being extended a bigger line of credit, without actually increasing future expected returns or more security for the assets under stewardship, someone will probably find some way to exploit that at some point.
This can often be quite tricky! As one example of where this kind of vulnerability can come in but is often hard to spot: Mutual reputation protection alliances are one of the most common ways in which creditworthiness ends up for sale: "A powerful potential ally with many resources approaches you with an offer: I say good things about you, you say good things about me, everyone is happy".
Of course, what you are doing when agreeing to this deal is to fuck over everyone who was using your word to determine who is creditworthy. Often this enables exactly the kind of runaway dynamic explained in this post playing out in social capital instead of dollars.
As is common for adversarial situations like this, I doubt there is a generic silver bullet that solves this problem. Ultimately every credit allocation mechanism will have vulnerabilities, and those vulnerabilities will be easier to exploit from a position of greater trust and reputation. All we can do for now is to be vigilant, see when the mechanisms go wrong, and try to build incrementally more robust mechanisms and institutions for determining creditworthiness.
Another aspect of this whole dynamic, which is related to yesterday's post about paranoia, is that this is one of the most common ways in which you end up with actors exercising strong direct optimization pressure on your beliefs, and which can cause you end up in environments where paranoia is the appropriate response. Of course there is often resources to be gained by duping and deceiving others, but the case of a creditworthiness bubble you have two things that rarely happen at the same time:
This produces actors who need very tightly control over what other people believe about them and say about them, and where the consequences of failing to do so are catastrophic, which produces a much greater willingness to spend large amounts of resources achieve those aims.
In addition to that, in many of these cases, the personal costs to the scheme falling apart have long since become insensitive to the size of the damage. It is genuinely unclear what Sam Bankman Fried or Elizabeth Holmes could have done to not end up in prison for decades by the time they ended up in their overleveraged positions, and trying to somehow keep things going for longer and hope for a big market surge, was from a purely selfish perspective possibly the best thing for them to do. Society does not punish you with more than prison or death, even if you caused much more harm than one person's life, and so by the time you are in the middle of something like this, trying to de-incentivize this kind of behavior is very hard.
OK, but shouldn't I be happy if I give money to a charity that can raise more than a dollar from other people if I give it a dollar?
I like to think through this case via the lens of public good funding. Public goods are legitimately often underfunded, because the benefits are diffuse, and it's hard to coordinate to all pay into the commons appropriately.
In those cases, you can provide real surplus value by using money to raise more money from other people if ultimately the total funds you raised are less valuable than the benefit you produce to society via the real services you (eventually) provide.
Because coordination problems loom large in public goods funding, good public goods projects often look like a creditworthiness-purchasing-scheme early on, but actually provide real value by solving a difficult coordination problem among public good funders, using those funds.
Does this really always collapse? I feel like sometimes it just happens, and everything is fine and normal?
In some situations, creditworthiness and trustworthiness are evaluated in an environment that has a lot of Keynesian beauty contest nature. I.e. a large amount of resources and power accrues to whoever people think will be the most popular target for those resources. Coups and more broadly political elections tend to have a lot of this nature, especially when conducted using insane voting systems like first-past-the-post voting.
In those situations someone's creditworthiness might genuinely increase the more investment they have attracted, as the fact that they have attracted more investment is indeed a very strong predictor of their likelihood to be the receiver of the Keynesian beauty contest price. This still often explodes and causes lots of issues, but in a way that seems more fundamental to the dynamics of Keynesian beauty contests than any inherent deception going on.
In the cases of military control or elections, the key thing that resolves the inherent instability and overleveraged nature of this situation is that in filling the role of leader, a truly important and difficult coordination problem will have been solved, and from that position all the people who invested in the winner can be made whole. This is not the case if you are e.g. running a straightforward ponzi scheme with no payout on the horizon.
How is this different from just Ponzi schemes?
Ponzi schemes are just one instance of this general dynamic. Yes, Ponzi schemes rely on being able to purchase more than one dollar of creditworthiness for less than one dollar, in the form of paying out your early investors and promising your later investors the same. But many other situations I list above are not the same as Ponzi schemes. I certainly wouldn't call the Stanford President situation a straightforward "Ponzi scheme" and also don't really think it fits what happened with FTX or Theranos.
I think the broader category is more useful for making a broader range of accurate predictions about the world.
Ok, but how is this different from "marketing"?
Marketing, as a broad term for "distributing information about you and your organization widely" can certainly be used for this purpose! But it is not centrally what marketing is used for.
The normal context of marketing is to pay someone to get information about your product out to potential buyers. They then use that information to evaluate whether their product is worth more than its cost to them, and they offer you a trade if they do think so. In this world, marketing solved a real problem, and marketing spending genuinely increased your future expected returns, and creates lots of surplus value in the world.
Of course, if you are a business like FTX, you might run marketing campaigns for your product that emphasize its nature as a safe space to deposit your funds. This is specifically targeting your creditworthiness as a receiver of those deposits, which you can then use to attract more deposits. This only becomes an issue when you are not using the fees you collect on the deposits to do this, but the deposits itself, since that is when the purchase becomes a pure purchase of perceived creditworthiness, and not a genuine signal that you can maintain positive returns for the people who gave you their money.
In some rare cases the scheme might also never fully collapse, but simply result in someone more permanently taking ownership over the resources the others have given them stewardship over. See the FAQ for some of my thoughts on this.