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The Theory of Interstellar Trade

March 12th, 2008

Although I frequently disagree with Krugman’s approach to politics, he is a brilliant economist. Here is a funny paper he wrote on “The Theory of Interstellar Trade” (via slashdot):

Abstract: This paper extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest rates on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are proved… This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.”

The two “useless” but fundamental theorems are: (1) return on investment is calculated in the home inertial timeframe, not the voyagers timeframe and (2) interest rates on two planets separated by light years should still be the same.

Two comments on these theorems. First, the first one implies that the profits on interstellar trade must be enormous, because there is so much time elapsed to make a return trip. And this is not including any of the “real” costs, like fuel, building the ship or paying people to go on a voyage where all their loved ones will be gone.

Second, I think the second theorem may be wrong. If the interest rates *have* to be identical, does that mean that there is action at distance? In other words, should it be possible to infer what the interest rate on Trantor is based on the current interest rate on Earth? Of course, I could be wrong since I don’t really understand special relatively very well (nor instellar trade theory for that mattter).

It’s sad to know that even if the engineering hurdles could be crossed, financial theory poses serious barriers as well to interstellar trade. Sigh.

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