Instructions on the Dreamhost Wiki don't quite work because much of the pre-installed Ruby stuff is too old. First it is necessary to install an updated version of RubyGems as explained here. Then tere are still problems with gem versions. The final trick is to install ALL ruby gems in your home directory. The GEM_PATH must be changed to refer to a local directory only.
From .bash_profile:
export PATH=$HOME/bin:$PATH
export RUBYLIB="$HOME/lib:$RUBYLIB"
export GEM_PATH=$HOME/.gems
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