The Bad Drives out the Good

In economics, there is a saying that bad money will drive out good money, which is referred to as Gresham’s Law. It can be easily understood by thinking about how currency may have been used in the Middle Ages. Think of gold or silver coins; we’ll use gold in our example. When a person wanted to pay $50, he would use $50 worth of gold bullion, which was shaped into a $50 coin. But an enterprising goldsmith had the idea to hollow out the coins, replace the gold with lead, and still use a $50 coin to buy $50 worth of goods. He will then hoard the real gold. As soon as people realise that some coins are gold, while others are gold-plated lead, they will no longer pay with pure gold coins. Those will be hoarded or melted down, while gold-plated coins will be used for payment and stay in circulation.

We can see that bad money drives out the good because people keep what they value, and trade what they can. In this case, what people value is gold, for its inherent value. But besides money, people also value time and energy, skill and effort. This leads me to propose that the bad always drives out the good in any enterprise, including in management and governance. This goes contrary to Adam Smith’s idea of the invisible hand, where each person, working for their own self-interest, inadvertently furthers the good of society.

In management, a part of the idea that the bad drives out the good is the Peter Principle. The principle was developed in public schools in Canada, and it can still be seen at work. It describes the situation where good teachers are promoted to principal. This leaves the mediocre and poor teachers behind, teaching. Good principals are promoted to superintendent, leaving behind the mediocre and poor principals. Good superintendents are promoted to the district administration, leaving behind the mediocre and poor ones. In the case of each individual, he or she is promoted to their level of incompetence. Obviously, hierarchies aren’t sufficiently wide to promote everyone to their level of incompetence, so some positions will continue to be competently staffed. It does explain, though, why middle management is often incompetent.

There are more insidious reasons that bad management drives out good management. One reason is the cost. If five talented managers can very effectively run an organization, three mediocre managers can passably run an organization for far less money. Further, if a manager is tasked with supervising a department, but without producing any real measurables except the work of others, a  very human manager will soon find the least amount of effort it is possible to expend; that is to say, people are lazy. Certainly, harder work could translate into intangibles such as team spirit, morale or the ability to inspire collaboration, but the manager’s job doesn’t normally depend on any of these things, only that the work continue to get done. In this way, laziness drives out productivity, and not just in managers. In fact, people who pride themselves on their productivity are likely to transfer to a different department, or change jobs to a company that still values productivity.

People will also leave a company due to the atmosphere. Imagine a department with two middle managers. One is kind, while the other is mean-spirited. It might not actually take any imagination, since most people have worked with a mean person before. Is that offending person likely to leave the company because of bullying or a negative work environment? It’s far more likely that the kind manager will finally tire of the poisoned atmosphere and leave. The same would likely be true in the case of dishonesty, commandeering or politicking. Nice guys finish last, by taking themselves out of the competition and going somewhere they feel valued.

Bad governance also drives out good governance. Good governance, to me, means representing the needs and desires of shareholders or constituents, and acting on their behalf. It means communicating a vision, providing leadership and guidance. That sounds like a lot of work. I know of people who are willing to put in the time and effort, but there are too few of them. Worse, it doesn’t last. Leaders become complacent, believing that their track record speaks for them, or that relationships from the past don’t need to be refreshed. In this case, fresh energy and enthusiasm need to be injected into the organisation. This is why we change our government every couple elections, even if it just means replacing old faces with new ones. We are really replacing complacency with energy and enthusiasm.

Entropy is a nefarious force that affects all aspects of our world. It means that, in order to progress and grow, or even just to keep an organization functioning, requires constant effort and energy. Anything less will cause the bad to drive out the good until an eventual collapse.