Gresham’s Law is traditionally thought of when thinking about currencies. The saying goes that “bad money chases out good money.” This phenomenon occurs when there are two forms of money with different values, but their face value is the same. While the money with lesser value will be used for transactions, the more valuable money is held onto until it disappears from circulation. Think of if the two options for money were plain old rocks or gold and both options were given the same face value. This means you could pay for ice cream with five rocks or five pieces of gold. You would probably go out and find all the rocks you could and pay for all your goods with them, all while hoarding any gold you have away. Soon invaluable rocks would be in heavy circulation, while the more valuable gold would cease to be exchanged.
Bad money chasing out good money has been observed since the ancient Greeks. This Law got its name though more recently when a Scottish economist used the term in the 1800’s, attributing the observation to a British financier, Sir Thomas Gresham, who also noted this pattern. The United State’s saw this between 1792 and 1834 when they adopted a bimetallic monetary system that would accept both gold and silver. The gold was the “good money” and was undervalued and quickly drained from the circulation, while the silver, which was the overvalued, “bad money,” was left in use.
But we don’t need a history book to see real life examples of this happening around us – another common example occurs with college classes. If we think of the face value of a class being the grade you earn at the end of the term and the real value being what you learned, then bad classes chase out good classes. Often people seek out “easy A” classes, while avoiding more challenging courses. In this case, it might not necessarily be a “bad” or “good” class, but if a class ends up becoming a letter on your transcript at the end of the semester, then maybe we are overvaluing those easier courses and undervaluing those harder courses. Of course we would like to believe graduate schools, potential employers, our parents, or anyone else who might be looking at our transcript would assign more value to that upper level math course than the introduction course, but it all boils down into your GPA with the same weight. I have seen this on my own campus. “Advanced Empirical Methods in Economics” only had four people enrolled in it last semester, while other course had higher numbers, showing us that potentially more valuable classes were taken less often because their face value in the end was the same. Tastes and preferences can also play a role when students enroll in classes, but many students are aiming to do as little as possible for the best grades which, when we think about it, is pretty efficient in some ways.