The British economist Gresham summarized an economic principle called 'bad money drives out good money.'

Later, people realized that this principle affects much more than just currency; it influences products, talent, organizations, and even the entire ecosystem of an industry.

Today, I'm still not talking about regulation or professional ethics. Instead, I’ll leverage this economic principle that has stood for over 400 years to help everyone, including myself, better understand the deeper implications behind rebates.

Let me share a Chinese story about 'bad money driving out good money,' which has been happening from the Han Dynasty's Wuzhu coins to the Song and Ming-Qing Dynasties.

During the Kangxi and Qianlong eras, similar phenomena occurred. With a change of dynasty, early copper coins generally had a higher copper content and less lead.

But over time, the ratio of copper to lead changes from six copper to four lead to six lead to four copper. If a currency with a certain face value has different intrinsic values, people will find that using early high copper content coins to smelt and make copper items can even sell for more than their face value, leading to better coins being collected, hoarded, and smelted.

Let me give you an example; both are Qianlong Tongbao with the same face value, but you can clearly see one is big, and the other is small.

It's obvious that the copper content of this money must be high. Without discussing the composition, it definitely has a high copper content, while this one is low.

Then I’m willing to keep the bigger one and spend the smaller one. Gradually, I can use the larger one for other purposes, and the money I get will be more.

There were similar phenomena during the Tongzhi era.

For example, one is Tongzhi Tongbao, and the other is Tongzhi Zhongbao. They’re similar in size and weight, but one is stamped with 'ten,' meaning it can be used as ten units. So, I’ll send this one out and keep the other.

As I go to smelt copper items, the market gradually changes. Many high copper content items, or heavier copper items, will gradually exit circulation, resulting in fewer good coins and more bad coins in the market.

This is Gresham's Law; it's not that bad money is better but that the market gives bad money more space to survive.

This phenomenon doesn't only happen in the currency market.

We also find that in traditional train stations, not high-speed rail stations, restaurants closer to the train station tend to have lower value for money.

Because restaurant owners know that customers only come once, they don't need repeat customers, so short-term arbitrage ends up being more profitable than long-term operations.

So when the market rewards short-termism, short-termism will drive out long-termism.

As sales become more focused on commission levels to bribe clients, customers will pay more attention to the amount of rebate, shifting the market's product selection criteria from value assurance to commission value.

#Economics #PersonalThoughtsFromASmallTrader