Mental Model in Economics: Gresham’s Law

The principle of bad elements driving out the good elements from a system over time is what constitutes Gresham’s Law. 

Historical Background 

As a financier during the Tudor reign in England, Sir Thomas Gresham explained that forged coins could replace the real coins as the instigators of forgery hoarded the latter and let the rest of the population use the fake currency for transactions. Without any form of verification or checkpoints, no one but the culprits could immediately recognize the differences between the two types of coins.  

The exact origin of this mental model, however, is contested by experts on cognitive science and mental models. Some believe that the concept behind Gresham’s Law has been proposed earlier by Nicolaus Copernicus around forty years before Sir Thomas Gresham did. The latter only managed to be more successful in drawing the attention of more people into the existence of the problems caused by a bad coinage. As such, selected literature about this mental model refers to the principle as the Gresham-Copernicus’ Law. 

Still, there are researchers who believe that the earliest record of this issue about the circulation of fake currency is from Aristophanes, a playwright from ancient Greece. One of his plays highlights the similarities between the decay of great politicians with the introduction of bad coins into society.  

In the modern days, the problem with fake currency has mostly been effectively addressed by banks and financial institutions. However, the problems that this situation causes remain significant enough to merit the legacy of Gresham’s Law. The conclusion of Aristophanes’ play is reflected in the way humans succumb to the pressures of their peers and society as a whole.

If a person adopts a destructive behaviour, it is almost impossible to drive out that behaviour as long as the person believes that he or she gets some sort of survival advantage or benefit out of the said behaviour. In this way, Gresham’s Law bears similarities with the principle of evolution by natural selection—wherein organisms that possess qualities that allow them to survive live on, while those that don’t die out. 

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