Gresham’s Law in Action

The general rule is that if a behaviour serves a practical and competitive purpose, it will take root and continue to be carried out until it has outlived its usefulness or until another superior behaviour replaces it. Because of these organizations and individuals who are only interested in their betterment and interests are more likely to fall under the effects described by Gresham’s Law.

The only way to circumvent this is to establish control points and maintain a check-and-balance system. Otherwise, the bad but beneficial practices would drive out morality and ethics until the organization or individual has become fully corrupted. 

For you to better visualize the effects of this principle, here are some sample scenarios on how bad could drive the good out of a system: 

1. Anna and Rachel are competing for medical technicians who work for the same company by selling a particular brand of anti-depressants. 

Anna employs bribery as one of her primary strategies for making a sale. Though she has several tools under her belt that would help her convince doctors to choose her product, she has observed that bribing them is the most effective and efficient method. As such, she has no qualms about bribing doctors left and right just to reach her monthly sales target. 

On the other hand, Rachel refuses to succumb to unethical practices of selling her product. She relies on her training as a salesperson and the network she has built over the years. Because of this, there are times where she struggles to meet the sales target, stressing her and her team leader as a result. 

If the medical industry itself does not punish fraudulent selling tactics, and the company continues to prioritize profits over ethical business practices, Anna would continue to maintain a sustainable advantage over Rachel. This advantage would further strengthen Anna’s bad behaviour since she will be rewarded with bonuses and promotions.  

Over time, even if checkpoints become established in the system, Anna is not likely going to change her tactics. Instead, she would actively look for ways to continue bribing her way into selling anti-depressants to willing doctors. 

2.During the 2008 financial crisis in the US stock market, experts believe that one of the causes of this meltdown is the sub-prime lending practices of institutions that provide mortgage lending services. Banks have always competed amongst each other over which one of them would be able to attract the number of borrowers. To protect themselves and the market itself, systems and standards are put into place. However, in the process of gaining an advantage over the others, a significant number of banks had allowed their standards to slide down to zero.  

Failing to realize that it would become a losing endeavour in the future, both the lenders and borrowers succumb to the short-term benefits and incentives of sub-par lending practices. Banks allowed less stringent verification of loan applicants, while borrowers become encouraged by the promise of flexible and more manageable interest rates. In the end, due to the disregard for the proven lending and borrowing system, the market crashed—causing the closure of several financial institutions and significant losses for the borrowers. 

3.Mackenzie King, a former Canadian prime minister, discusses the similarities of Gresham’s Law and the Law of Competition, leading him to call the combined effects of both on the market as the “Law of Competing Standard”. 

According to him, the competing standards within the same industry become imbalanced when some companies choose to do underhanded methods to lower their costs, thereby making their commodities or services more attractive to consumers. This can take various forms of unethical practices, such as illegally outsourcing labour into third-world countries, using sub-standard or even harmful materials, or padding products with unnecessary fillers. 

Much like Gresham’s observations about the disappearance of precious metals, the well-meaning intentions of companies to provide products and services that would be useful or helpful to the consumers would eventually become less of a priority to the industry. Instead, material gain would take precedence over quality and good customer service. Consumers might not realize at first the effect of this transition to the worse; Therefore, they would unwittingly strengthen the bad practices of the companies that offer cheaper commodities or services. 

Prime Minister King then concluded that to prevent this from happening, high standards must be established as a basis for the checkpoints that will be applied by the industry to its players. Though it may be hard, he implored the different government agencies and private institutions to aid him in providing a guarantee of value for money to the consumers in general.