Microeconomics Question from Walter E. Williams:
"Gresham's law states: "Bad goods drive out the good (goods)." However, we see good wine and bad wine, bad books and good books, bad women and good women; and bad economics professors and good ones. Reconcile Gresham's law with the evidence above."
"That good and bad coin cannot circulate together" - Gresham, 1558 Letter to Queen Elizabeth I on her taking the throne
- This statement suggests that when two coins are fixed by an exchange rate the overvalued coin will not be given up in exchange, rather it will be held in possession until all the lower valued coins are spent. Imagine a gold coin which has been "clipped" (meaning the edges have been filed), or "sweated" (the tactic of putting several coins in a bag and shaking until the inevitable clinking enough small bits of precious metal from the coins to be worth the process). These coins would have less weight, but still be accepted for payment of taxes or other items at a fixed rate. The full weight coins could either be melted down and sold for the specie, or they could be exchanged with someone willing to appreciate the full weight price of the coin. So Gresham points out that people have a tendency to hold onto coins, or melt them to recover the specie, when the state debases the value while holding the statutory value constant.
- Williams stated in class that he believes the opposite about Gresham's law. The money which has been debased is good for exchange because it is overrvalued in terms of what you can get for it in the market and not for what its intrinsic value might be. This makes the bad's (intrinsically) good for exchange.
- In the sense of the question I believe that we are meant to understand that the price ratio fixes exchange between items of different quality. Selgin discusses the evolution of the concept of Gresham's law to mean that low quality should not persist in a market. Clearly in William's meaning is the idea that willingness to pay (or ability to pay) will make lower quality goods more attractive.
- In the sense of Wine, a certain market will be drinking the best quality wine while the rest of us will purchase $10 bottles of wine and be quite happy (thank you). The mere presence of "bad" wine is a good.
- For books, assuming W.E.W. books are of a quite high variety, those who do not have the requisite understanding of economics (or the willingness to subscribe to his worldview) would not value those as much as books of a different character (maybe trashy novels). These other books are widely available at a lower price for those who would just like something to read.
- As far as women, I think it is meant only in terms of dating, that good women will be more likely to be asked to accompany rich men to more high priced meals while "lower quality" women may not get as many offers. For anything more than that the analysis is multi-layered and simply provocative. A "low quality" woman is unlikely to sit alone on a Friday night regardless because there will always be a reserve market of women waiting to be asked out to a nice restaurant should a man wish to change his quality preference. This "bad" is "good" from the man who needs a date perspective.
- A good professor will be available for good students. Assuming there is consensus that good professors reside in the schools with high admission criteria. A bad (good) professor will always be available for students at less discriminating universities or junior colleges where people are less sensitive to the quality of the professor.
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