Maybe the most important work in economics, only we don’t know it yet…
Interstellar Trade Theory!!!! Foundation brought to light
N.B. Paul Krugman is an economist that has really influenced the way that I think about economic theories and the economy and so this is an ode to one of his playful articles that I explored. Krugman also happens to really enjoy “Foundation” by Isaac Asimov which he says inspired his economic career as well and I just happen to be reading “Foundation” now.
Paul Krugman is an influential economist and a Nobel Prize winner in the field. Krugman graduated from M.I.T. with a PhD. in 1977, and in 1978 wrote an article on Interstellar Trade theory. The question he posed was how should we charge interest on goods when they travel at close to the speed of light. (Krugman, 2010)
He focuses on two factors that will make interstellar trade different. First, the time spent traveling will be large, and second, if this trade is possible, spaceships participating in trade must travel at speeds close to the speed of light.
The merchants must calculate whether the present value of revenue is greater than the initial cost of the trip between planets. This theory holds because it accounts for the opportunity cost for the investor to invest in bonds that do not depend on the time elapsed on the ship. Krugman states that if the trade occurs between two planets in a common inertial frame, interest costs should be calculated by time measured by clocks in the frame of the planets, not in the frame of the spaceship.
Since relative prices differ, he analyzes interest rates stating that merchants from both planets could profit if they invested in bonds on the other planet and then shipped their goods back home. To prevent arbitrage, interest rates may be corrected. So, if sentient beings have assets on different planets in the same inertial frame, competition removes the possibility of interest rate arbitrage.
I found that the question was unconventional in the research and even though the method for economic analysis holds true, there are some ridiculous considerations taken into account in his analysis. The question supposes the idea of a reality where there are several planets in the universe with sentient beings that communicate with and do business with each other. Even a serious economist can take inspiration from sci-fi. He later won the Nobel Prize in 2008 for analyzing trade patterns in combination with the location of economic activity (Nobel Prize, 2008) combining the fields of international trade and economic geography (Nobel Prize, 2008). Even so, where those works progressed the field, I find it interesting that Krugman was able to work on this sort of playful work earlier in his career. The influence of his later work, specifically “Increasing returns and economic geography” written in 1991; which analyzes the difference in trade between different countries and laid the framework for international trade being framed in terms of regional economics and economic geography is already to the fore in this research (Krugman, 1991).
He takes conventional economic theories that were prevalent into account for his research such as that interest rate arbitrage between two countries cannot last due to competition. He also builds on prominent work done in the field by Samuelson on factor prices in international trade as well as the Heckscher-Ohlin theorem (Klein, 1996; Samuelson, 1948). Even though he wrote very playful research, the ideas for his Nobel Prize-winning work are available here.
