How Larry Summers proved Marx was right about everything — (And why this is not necessarily good news)
In honor of Larry Summers’ likely failed attempt to be the first in line to sniff Ben Bernanke’s chairman’s seat at the Federal Reserve Bank, I am going to look at his paper on Gibson’s Paradox. If he is successful in replacing Bernanke as head counterfeiter at the Fed, the paper might hold some clues to his future policy actions. Or, at least that is my theory — we will see what develops.
So what is Gibson’s paradox, and why was Larry Summers interested in it in the 1980s? According to Wiki:
“Gibson’s Paradox is the observation that the rate of interest and the general level of prices are positively correlated”
The alleged paradox at the heart of the positive correlation between prices and interest under a commodity money regime is simple, but has far reaching implications: Unlike the predictions of mainstream economics, the empirical evidence shows that as prices increase, so does the rate of interest; and as they decrease, so does the rate of interest. As Sam Williams explains in a blog post,