Reader Charley asks two extremely important questions:
Question one (see his Comment on this post) involves the importance of realizing surplus value in terms of money and the question of the exchange of capital among capitalists.
Question two (see his Comment on this post) involves Gibson’s paradox. Marginalist economic theory claims that there is a natural rate of interest. The American marginalist economist Irving Fisher proposed that market interest rates are a combination of the natural rate of interest plus the expected rate of inflation.
Gibson’s paradox—a term coined by Keynes—notes that under the gold standard the highest rate of interest tends to occur at the peak of the industrial cycle when prices are at their highest. At the peak of the industrial cycle under the gold standard, the expected rate of inflation becomes negative. According to Fisher’s theory, shouldn’t the market rate of interest—the natural rate of interest minus the rate of deflation that can be expected during a cyclical downturn—be at their lowest rather than at their highest?
Similarly, at at the bottom of the cycle when prices have stopped falling or have started to turn upward, interest rates are at their lowest point. According to Fisher’s theory, shouldn’t market rates of interest be at their highest anticipating the rise in prices that will accompany the upturn?
Or, what comes to exactly the same thing, under the gold standard high prices coincide with high interest rates and low prices coincide with low interest rates. In other words, interest rates coincided with the absolute level of prices as opposed to the rate of change in the level of prices that is predicted by Fisher’s theory.
I must thank Charley for referring me to the Summers article, which I will be studying in coming days as my schedule allows.
I will prepare a further response to both of the questions raised by Charley as soon as time allows. They involve questions vital to crisis theory and will allow a further examination of questions that I have raised in my posts.
Other readers are encouraged to send in their own comments on these questions as well.