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November 10, 2013

"The Theory of Interstellar Trade" — by Paul Krugman (1978)

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Yes, it was written by the very same Nobel Prize-winning economist 35 years ago.

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Below, excerpts from a October 26, 2013 article in The Economist about Krugman's paper.

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Starships... are a fantastical subject. Yet when engineers design them, they try to be as rigorous as possible. After all, the laws of physics apply to a starship just as much as they apply to bridges or motorbikes.

It is not just scientists who enjoy technically rigorous speculation, though. Economists have investigated interstellar travel as well. One of the best-known papers was written by Paul Krugman, a trade theorist, in 1978, in between his duties as an "oppressed assistant professor." "The Theory of Interstellar Trade" describes itself as "a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics."

Dr. Krugman, a science-fiction fan, ponders how trade might work between two widely separated planets, Earth and Trantor. Such trade will be affected by relativity theory, which shows that beings on Earth (or Trantor) will see time pass at a different speed from those who are on board cargo ships moving between the two. This could make it hard to calculate the net present value of a shipment. And the fact that messages can move at best at the speed of light (and cargoes more slowly still) might do odd things to the ability to arbitrage between the economies of the two worlds.

After working through the maths, Dr Krugman came up with two fundamental theorems of interstellar trade. The first is that interest costs on travelling goods should be calculated using clocks on planets, not ships. This is because the opportunity cost of trade — buying a bond on Earth (or Trantor), say — is calculated using planet-bound clocks, regardless of what relativity does to a businessman travelling alongside his cargo.

The second theorem states that, though long travel times mean prices on trading planets will never reach parity, interest rates will. If they differed, then investors could buy bonds on the more attractive planet, driving its rates back to parity with those on its trading partner.

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So ladies and gentlemen, start your ion drives and let's light this candle: while you're en route, you'll have plenty of time to read and ponder Krugman's paper, which you can find in its entirety right here.

November 10, 2013 at 08:01 PM | Permalink


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