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0 sats \ 7 replies \ @jk_14 25 Oct \ parent \ on: MONEY CLASS OF THE DAY: Sir Thomas Gresham and the Economic Law He Didn't Make econ
nah, I will prove to you in a very simple way that I am right, and you are wrong...
- I will borrow from you two ten-dollar banknotes
- I will partially tender one of them on the edge
- I will give you both banknotes back and ask you to buy, e.g. a hot-dog on the street
And which bill will you prefer to get rid of and which one to keep?
I (and most of people) would definitely try to get rid of the Bad Money and keep the Good Money (yes, exactly according to Copernicus' Law)
Whole this topic is as easy as building a flail, in fact.
Let's not overcomplicate such simple things, please... :)
well, no. Would depend on at least three things:
- how picky the lender (i.e., me) am about the quality of the note returned to me
- how picky the hot-dog merchant is about the quality of the note returned to me
- what legal/institutional frameworks surrounds it, i.e., do you go to jail (STRAIGHT TO JAIL!) for peddling a torn note? Are they fiat notes with no use that the Fed replaces for banks when they're broken?
These questions are the point of the surprisingly annoying econ literature on Gresham. Trace it to whoever, but I agree with you that it's a trivial version of the Law of Demand/One Price.
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as I wrote already, don't overcomplicate simple things...
- let's assume you realized that one of banknotes is bad - after I left your office
- let's assume hot-dog merchant will do the most obvious thing - try to do the same, i.e. get rid of it - and in worst case he will need to replace too much used banknots by the way of being in his bank)
and if you wish, we can change this situation for:
I give you two not torn banknotes, but one is very used and another looks like brand new.
Let's not overcomplicate simple things, like:
natural human behaviour
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it becomes a gamble, an entrepreneurial foresight, where you, me, or merchants need to have some projection about likelihood to pass off the bad note. (similar to bitcoin and dollars, for instance, provided the notes could come with discounts).
If I, or the merchant, would rather play it safe -- torn note is broke/fake/possible won't be accepted by the next guy -- they'd opt for the good note or maybe even decline the trade altogether.
that's the opposite of Gresham's law
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torn note is broke/fake/possible won't be accepted by the next guy
I wrote about it above already... Then, for simplicity:
one banknot is acceptable for everyone, but significantly used
second one is like a brand new
and almost everyone will rid of the first one, what is exactly effect of Copernicus' Law, and what is in fact plain, natural human behaviour
(and this is by no means Gresham's Law, simply because Thomas Gresham in A.D. 1526 was a kid or not even born yet)
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Nono, you're missing my point -- and what I think a lot of the Rolnick/Mundell/Selgin debacles was about:
everyone will try to spend the used one, and keep the high-quality one. But the merchant is in the exact same position, with incentives reversed. He would want the brand new one, not the significantly used one.
So there's a negotiation going on, naturally leading to some kind of price discovery (pay premium/discount for pristine quality etc).
The weird think you discuss is when some entity FORCES everyone to accept the two notes at par. (insert good car/bad car analogy)
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But the merchant is in the exact same position
No, he is not in the same position.
I see the content of my wallet only - while he doesn't.
And I give him ten-dollar banknote which I prefer:
so, a used one, but still in acceptable condition for anyone.
He simply doesn't know if I have another ten-dollar banknote (brand new) inside my wallet or not.
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