I'm no expert on these things; you might checkout www.mlmwatch.com
for more details.
And yes, from what I can tell, the early people in the pyramid make all the bucks, and it takes a while for the essential nature of the scheme to manifest.
As for how it can be working at all--well, people can be gullible. They (we; I'm as guilty of it as anyone else) would love to be rich by working "only a couple of hours a day" or even "making money in our sleep." It's the hopes and fantasies of thousands (millions?) of ordinary people that keep scams like this working.