The idiotic ideas are all from the social science department and I would put economics in the social sciences department although it has some tinges of reality that remind you of arts and science.
In economics textbooks they teach you Gresham’s Law: Bad money drives out good. But we don’t have any bad money that amounts to anything. We don’t have any coins that are worth a lot, that have precious metals that you can melt down. Nobody cares what the melt-down value of the quarter is in relationship to the dime, so Gresham’s Law is a non-starter in the modern world. Bad money drives out good. But the new form of Gresham’s Law is ungodly important. The new form of Gresham’s Law is brought into play – in economic thought, anyway – in the savings and loans crisis, when it was perfectly obvious that bad lending drives out good. Think of how powerful that model is. Think of the disaster that it creates for everybody. You sit there in your little institution. All of the builders [are not good credits anymore], and you are in the business of lending money to builders. Unless you do the same idiotic thing [as] Joe Blow is doing down the street. Pete Johnson up the street wants to do something a little dumber and the thing just goes to a mighty tide. You’ve got to shrink the business that you love and maybe lay off the employees who have trusted you their careers and so forth or [make] a lot of dumb loans. At Berkshire Hathaway we try and let the place shrink. We never fire anybody, we tell them to go out and play golf. We sure as hell don’t want to make any dumb loans. But that is very hard to do if you sit in a leadership position in society with people you helped recruit, you meet their wives and children and so forth. The bad loans drive out the good.
It isn’t just bad loans. Bad morals drive out the good. If you want to run a check-cashing agency in [a] downtown big city, more than 100 percent of all the profit you could possibly earn can only be earned by flim-flamming people on the finance contracts. So if you aren’t willing to cheat people – basically minorities – more than 100 percent of the profit can’t be earned. Well, if you inherited the business or your idiot son-in-law is in it, you don’t know what else to do. This is what I would call an adult problem and most people solve it in the adult fashion: They learn to tolerate the cheating. But that is not the right answer to people who want to live a larger and better life. But it is a form of Greshem’s Law, the new Gresham’s Law. One that is not taught in economics courses and should be. It is a really serious problem and, of course, it relates deeply to what happened to create the economic crisis. All kinds of people who you would be glad to have marry into your family compared to what you are otherwise going to get did things that were very regrettable under these pressures from the new Gresham’s Law.