The Theory of Interstellar Trade

krugman by klara pernicova

The Theory of Interstellar Trade‘ is a paper written in 1978 by economist Paul Krugman. The paper was first published in 2010 in the journal ‘Economic Inquiry.’ He described the paper as something he wrote to cheer himself up when he was an oppressed assistant professor, caught up in the academic rat race.

Krugman analyzed the question of how interest rates on goods in transit should 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.

Krugman emphasized that in spite of its farcical subject matter, the economic analysis in the paper is correctly done. In his own words, ‘while the subject of this paper is silly, the analysis actually does make sense. This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.’ ‘It ended up saying that it actually doesn’t matter how much time elapses on the spaceship, it’s the time that elapses in the frame of reference of the people doing the investing that matters, which is of course obvious if you think about it for a second, but I was able to have some fun, and among other things put in a diagram of Minkowski spacetime, which has an imaginary time axis … which was a blank page, because, after all, it’s just imaginary. So I was having some fun.’

Responding to the paper, economist Tyler Cowen speculated on how time travel affects time preference discounting. ‘My own puzzling focuses on the determinants of real interest rates, given how time dilation changes the meaning of time preference. As you approach the speed of light you move into the future relative to more stationary observers. So can you not leave a penny in a savings account, take a very rapid spaceflight, and come back to earth ‘many years later’ as a billionaire? Hardly any time has passed for you. In essence we are abolishing time preference, or at least allowing people to lower their time preference by spending money on fuel. I believe that in such worlds the real interest rate cannot exceed the costs at which more fuel can ‘propel you into the future through time dilation.”

Assume you have a spaceship that can approach lightspeed and thus you can make, say 1000 years, seem like 10 years. If you can gain the time value of money 100x faster, that effectively makes the interest rate 100x higher for you. Thus time preference is meaningless. This is a problem for economic theory. Krugman’s solution is to force the interest rate to correspond to the cost of making the trip.

One Comment to “The Theory of Interstellar Trade”

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