Maybe they judge on technique and if you make "close enough" hits?? <shrugs> I don't know...

There are some martial arts schools which don't have ANY kind of physical contact (like mine! ) -- but some purport to teach their students how to attack with their mystical "chi energy." You know when you're playing make believe, and you pretend of have powers like Force Push etc. -- that's what these guys do, only that to them, it's not make believe! And the instructor charges his students money for membership and lessons where he claims to demonstrate using these mystical powers on his students!

I know a guy who told me about one such school he witnessed. During the lesson the teacher would use Energy Attacks to repel his students. He'd make a gesture, and the opposing student would 'fly' back and fall over. Whenever he asked any of the students if they could do such moves, they would say, "Oh no, it takes years and years to develop this technique!" -- and when he asked the teacher if he could demonstrate an energy push on him, he said, "Oh no, I might accidentally injure or kill you. My students have been trained to withstand my attacks." (so... how did they survive the initial training when they were beginners?)

Even if we were to assume that these techniques are real... it takes like a lifetime to develop it apparently. In the mean time you're spending thousands of dollars on membership, lesson fees, gradings etc. -- wouldn't it be cheaper to buy a can of mace or a taser? Or take up jogging so if you do see an attack coming from long distance you can leg it!

The entire point of learning hand-to-hand self defence is because IRL an attack that you're going to need to defend yourself against is going to be one that you couldn't run away from (because running away is always your first option!) -- like say someone unexpectedly grabs you from behind. Force push? You'll both fly over wouldn't you? (and if he has you in something like a bear hug, then you can't lift your hands up to do the magic gesture...)

Imagine one of these Chi Energy fighters against a BJJ fighter. *sigh* If you go back and look at the history of these non contact "Chi attack" schools, they came from this period where snobby aristocrats watched soldiers and peasants doing cool martial arts moves and taking down opponents... and they wanted to be able to do the same thing, but they didn't want to you know... break a sweat or get physical! So they invented the religious concept of Chi (re: Daoism) and created this martial art where they can supposedly use The Force^Chi to fight and take down opponents just like those awesome Shaolin Monks... only that they don't need to get hot and sweaty in training!

So... non-contact sparring has its roots in upper class aristocrats. But of course, back in those days most of those people would never interact with commoners (if anyone attacked them it was up to their bodyguards who actually trained in sweat and blood to defend them! (then the aristocrat would probably take the credit)). But nowadays seeing regular folks train in non-contact with the intention of learning self defence is more disappointing, because of course, if these people DO ever get attacked IRL... odds won't be favourable for them.

As for a pyramid scheme... I'm not sure. A pyramid scheme is meant to be an "unsustainable business model," yet commercially speaking GKR is extremely successful considering that it's like the single most commonly practised martial arts style in Australia. There are many martial arts schools like this in Australia and around the world -- absolute commercial successes, but teaching questionable self defence techniques. These questionable schools are often referred as "McDojos" (i.e. commercial success over quality) and their arts are sometimes called "Bullshido."

http://en.wikipedia.org/wiki/Martial..._arts_industry
Asian martial arts experienced a surge of popularity in the west during the 1970s, and the rising demand resulted in numerous low quality or fraudulent schools. Fueled by fictional depictions in martial arts movies, this led to the "ninja craze" of the 1980s United States.[23] The rank system introduced for judo in the 1880s proved commercially viable, and "colored belt" systems were adopted in many martial arts degree mills (also known as "McDojos"; parodied in Penn & Teller: Bullshit! episode "Martial Arts", June 2010).
http://mcdojo-faq.tripod.com/

I find that the best martial arts schools tend to be rather obscure. Even in that "Kill Arman" episode in China, when he went to the Shaolin Temple it was all McDojo Bullshido rubbish... the only way he could learn authentic Shaolin Kung Fu was to go to this obscure out of the way school which also doubled as an orphanage and had no running water! I knew a guy who did something similar -- he trained in this small village in the middle of nowhere in rural China where nobody spoke a word of English and children would gather round pointing and laughing at him because they'd never seen a white man before! But boy did he learn to kick some serious butt while he was there!