Gresham's Law: How Bad Overtakes Good

The bad drives out good. Gresham’s law states that “bad money drives out good”. It can be extended to pretty much anything. In Sir Thomas Gresham’s day, “good money” was any coin that had little difference between its nominal and commodity value. Meaning the metal that the coin is made of — often gold or silver — was of equal value to what the face of the coin told you. Although when it comes to Gresham’s law as a mental model, we can extend the concept to mean much more: bad drives out good.

Any time there are two competing versions of something, bad drives out good. More valuable, less valuable. Good behavior, bad behavior. Good morals, bad morals. You and I have to keep fighting this tendency to let go of the good in exchange for worse. Inferior practices, products, and behaviors displace superior ones when they coexist under similar conditions. This is because what we would consider “bad” is the easier, cheaper, or more immediately rewarding alternative. Thus it ultimately crowds out the “good”.

The key concept here is coexistence. Two competing versions have to be present under the same set of rules. In such a predicament, the less costly or effort-intensive — but inferior — option often dominates. The law illustrates how convenience and/or lower costs outweigh quality. In the workplace, for instance, shortcuts and unethical practices often proliferate if they provide fast gains. Even if they undermine long-term performance. The effect is even stronger where lower standards are tolerated. In a business where unethical behavior (e.g. manipulating customers) is rewarded or goes unpunished, such behavior becomes the norm.

Real-life examples of Gresham’s law:

• Currency and Money: historically, when governments issued coins with the same face value but different metal content, the coins made with low-quality metals (”bad money”) tended to circulate more widely. People hoarded those made of precious metals (”good money”). This phenomenon led to the predominance of “bad money” in day-to-day transactions.

• Corporate: in some organizations, if cutting corners results in short-term gains, these practices can become widespread. The company’s integrity and reputation are thus undermined. Over time, the employees suffer from low morale, the customers get lower quality products, and the firm bleeds it’s reputation as good behavior is crowded out.

• Academic Integrity: in an environment where academic dishonesty or shortcuts in research are overlooked to quickly pass publications, such practices become the norm. Overall quality of scholarship and knowledge advancement declines. Flawed studies proliferate and spread like a virus. People start to trust scientific research less for a reason.

• Product Markets: in a competitive market, if companies discover that lowering production costs by compromising on quality allows them to undercut competitors, inferior products become the norm. Consumers ultimately are left with low-quality goods. Innovation stagnates as companies hone in on making things cheaper rather than better.

How you might use Gresham’s law as a mental model: (1) find the bad money — if you feel you are in a situation where less valuable or lower-quality options and behaviors are displacing superior ones, ask “Is the ease of this choice undermining the overall system?”; (2) throw it under the microscope — introduce standards of quality and ethics, such as benchmarks, audits, and accountability measures in your business to prevent the spread of subpar practices; (3) check everyone’s wallet — make the trade-off between quality and convenience visible to every stakeholder, showing them how short-term gains (e.g. lower quality materials for product manufacturing) lead to long-term losses (e.g. low customer retention due to substandard product); (4) declare war on Gresham — incentivize quality and innovation over quantity and convenience, even if this means more effort or higher upfront cost.