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Economics Lecture Seven (view source)

Revision as of 18:44, October 17, 2009

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→‎Gresham's Law: a start
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== Gresham's Law ==
 
== Gresham's Law ==
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In Economics we often learn powerful concepts that seem surprising at first, or which we would not think of otherwise.  Opportunity cost is one.  The Coase theorem is another.  The law of Miminishing Marginal Utility is a third.  Returns to scale is a fourth.  The list seems never-ending, and perhaps a student in this course will discovery a new Economics insight that will be taught to future students.
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Here is another surprising discovery in Economics:  "bad money drives out good."  If there are two types of money in an economy, then people will prefer using the weaker type when they buy goods and will want to save or hoard the better type.  Before long the weaker, or "bad", form of money dominates the marketplace as everyone tries to get rid of it.  The better form of money is saved up and rarely makes it to the market.
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Imagine if people used both gold, which is a strong form of money, and paper dollars, which is weaker than gold because it loses value in inflation.  Which would they use when buying groceries or other goods?  People would prefer to pay with the weaker dollars and save the gold at home.  Everyone would prefer to use the weaker money in transactions.  A visitor from a foreign country would seem mostly dollars in circulation, and very little gold.  Hence the "bad money drives out the good."  Cheap money tends to drive the better money out of circulation in the market.
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In 19th century America, both silver and gold were accepted currency (as in 19th century America).  But silver was a weaker form of money, and thus people preferred to buy things in silver rather than gold.  People wanted to save the gold for themselves and get rid of the silver.  The result is that the cheaper currency (silver) would be used more often in market transactions, and the gold is driven out of the market.  "Bad money drives out good."
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This law is named after Sir Thomas Gresham, who was the Master of the Mint under Queen Elizabeth I in the 1500s.
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===Applied beyond Economics===
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Recall back to the beginning of this course when I mentioned that
    
<discuss [[Gresham's Law]], and ask if good discussion can drive out bad?  E.g., start discussing the Bible and watch atheists disappear.>
 
<discuss [[Gresham's Law]], and ask if good discussion can drive out bad?  E.g., start discussing the Bible and watch atheists disappear.>
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