To answer this question, it’s important to nail down what’s an intrinsic property of a MLM, and what is largely associated with MLM.
Given a company that sells a physical product, people involved can be divided into five categories (this list isn’t exhaustive, but serves the purpose of this answer):
Management: the people who organize the whole endeavor
Manufacturing: the people who actually make the product
Recruiting: the people who find people to hire into the business
Sales: the people who find customers, convince them to buy, and arrange for them to receive the product
Customers: the people who buy the product
In an ideal situation, all of these people are benefitting from the arrangement. Everyone is contributing something of value, and everyone is receiving something of value. There’s a valid business reason for every role in the business. Each category provides value to the other categories, rather than existing for its own sake.
However, in an MLM, these roles get fuzzy. One of the most definitional properties of an MLM is the nature of the recruiter category. In a normal company, recruiters exist mostly to serve the other categories: hiring salespeople, manufacturers, and management. A company does need to get recruiters somehow, so of course recruiters will occasionally hire more recruiters, but it is not the focus of their job. In an MLM, however, recruiting other recruiters is the primary focus of recruiters. This causes recruitment to be a self-perpetuating activity, with recruiters making money from other recruiters “downstream”, rather than providing external value.
And why is this? Well, in most companies, there’s an HR department whose job it is to find new employees, and they may be paid based on how well they get new employees, but their wages aren’t directly tied to their hires’ performance. They don’t get paid on their “downstream”. The “downstream” concept is particular to MLM, pyramid schemes, and the like. And this is where the “multiple level” comes in. With a normal company, recruiters provide clear business value that is only a few steps removed from external revenue. If someone recruits a salesperson, and the salesperson sells product, it’s clear what value the recruiter is providing. If someone recruits a recruiter who recruits a recruiter who recruits a recruiter, it quickly becomes fuzzy just what value that person is adding. The more levels, the easier it is to obscuring the question of whether anyone is providing value.
Another property that MLM tend to have is the mixing of customers and salespeople; salespeople buy their products in advance, making them customers as well. This isn’t as definitional as the previous point; a system that doesn’t require anyone to pay anything up front but has multiple levels could technically still be called a “MLM”, but in practice this is how MLM generally work. And this is where a lot of the problems with MLM come from. While ideally a company’s revenue will ultimately come from providing to customers, with a MLM there is a revenue stream from people who are paying money not for realized value, but for hoped-for future value, which makes it easier for a company to survive without providing any actual social value.
Thus the MLM becomes a closed system, with people buying the product so they can sell it to new recruits, who then have to recruit new people to sell it to. A property that is not technically a part of the definition of MLM, but which tends to emerge from the business model, is that it’s more profitable to sell a large “starter kit” to a new recruit than to sell individual items one at a time to actual customers, and so once that is an option, it’s where most of the focus goes.
So how are MLM unethical? They tend to gravitate towards sales being generated from new members giving money to old members, rather than creating value for an end user, their multiple levels obscure this lack of outside value, and their incentive system treats this money being passed around within the system as “revenue”, and rewards people for increasing it. Once initial buy-ins are considered “revenue”, and people are rewarded for increasing revenue, there becomes a huge incentive to recruit new people without regard for their interests, and to build a system that facilitates taking advantage of recruits as much as possible, and the multiple levels help those most adept at this rise to the top while allowing for a diffusion of responsibility.
Could an ethical business use MLM? Possibly, but the advantages of an MLM are most applicable to an unethical business. An ethical business wants to strongly tie employee remuneration to end user value, rather than obscure the relationship with multiple levels. A legitimate company that is making its money from actual customers will want to get directly to getting salespeople to sell to those customers, rather than recruiting recruiters to recruit recruiters to eventually get around to actually selling to customers.