The Theory of Intersteller Trade by Paul Krugman

[Tasha]

Some of you may disagree with what he says about our economy and how to fix it.

 

While he was an Assistant professor at Princeton he wrote a paper on interstellar trade. Since this seems to be a topic that people enjoy hashing over. I thought that I would share his paper with you.

 

The Theory of Interstellar Trade.

 

Unfortunately it is a PDF so make sure that you have a reader.

 

Tasha

[Xavier Onassiss]

Re: The Theory of Intersteller Trade by Paul Krugman

 

The only point on which I'm really qualified to disagree with Krugman is at the top of p9 (p11 of the pdf) where he says "Suppose that transportation costs other than interest on goods in transit are negligible..."

 

That supposition is a whopper! Still, it's an interesting paper, which I've had bookmarked since I-don't-know-when. Right next to it on my bookmarks, there's another article which gets into those pesky transportation costs: The $11B Bottle of Wine. This article tries to answer the question of what's actually worth trading when transport costs run into the billions per kilo.

[IndianaJoe3]

Re: The Theory of Intersteller Trade by Paul Krugman

 

This article tries to answer the question of what's actually worth trading when transport costs run into the billions per kilo.

 

If transportation costs are that high you probably aren't going there to begin with.

[Xavier Onassiss]

Re: The Theory of Intersteller Trade by Paul Krugman

 

If transportation costs are that high you probably aren't going there to begin with.

 

Unless of course, there's a commodity which can bring a high-enough price to turn a profit even after the transport costs. Here's where we run into another one of Krugman's big assumptions: "perfect forecasts of prices over indefinite periods." If I could be sure that my cargo of 2525 AD-vintage eiswein from Alpha Mensae will turn a profit when I get to Terra in 2559, I'd probably be able to find some investors and finance the trip....

[dmjalund]

Re: The Theory of Intersteller Trade by Paul Krugman

 

clonization isn't always financially motivated

[LordGhee]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Sorry but all coloization was financially motivated those who want to got to the US for other reasons had to get backing and prove that they could pay out before they could get here.

 

even Ancient cooizations was motived by the greed motive

 

Lord Ghee

[Markdoc]

Re: The Theory of Intersteller Trade by Paul Krugman

 

No, not all colonisation was financially motivated. Many colonies were founded purely for military reasons. New Zealand is a good example: the British government was prepared to write it off, because it was not seen as financially attractive (in fact, by far the vast majority of private colonial attempts went bankrupt). They changed their minds when the French established a colony there. The British government poured funds in to establish a sizable colony right next door to the French one, with the goal of running them out of the area. And in fact, when the French left the British turned off the funding, pretty much.

 

It's more accurate to say that only those colonies that were financially successful survived - the world is littered with the remnants of colonies that were established and then abandoned either because they wee not worth the money required for upkeep, or because their military utility had passed.

 

cheers, Mark

[Markdoc]

Re: The Theory of Intersteller Trade by Paul Krugman

 

I'd rep the two OPs, if I could - the Krugman paper is hysterical. I particularly like "This ... is a serious analysis of a ridiculous subject, which of course is the opposite of what is usual in economics" Though imaginary figure 2 comes close in the hilarity stakes

 

It should be noted that the Krugman paper is not an economic analysis - it's simply an extended joke, as indicated by its dedication: William Proxmire was a US senator strongly opposed to any funding for space research. He does make one serious point: that actual interstellar trade, even under the most generous assumptions, is likely to be impossible simply because of the time/energy constraints.

 

The second post is intended to be a serious analysis. That said, the 11 billion dollar bottle of wine, though it has some interesting ideas, is clearly written by someone who doesn't understand economics or case-study design: he takes trends which are historically exceptional (the rapid growth in world prosperity for example) and extrapolates them far, far out into the future. For example - contrary to his cheery analysis, where he assumes global increases in prosperity of 3% per year more the next half millennium - the trend rate of global increase in wealth has been falling since the early 60's.

 

You'll never get super-expensive wines, for example, because a) wine expires, so prices have a natural cap and the price of the most expensive wines in the world have been falling relative to income for decades (as a result of increasing market size and maturity). Precious works of art are the one thing that I can think of that are directly linked to income in terms of increasing price both because they generally don't age poorly and are by definition limited in number. But they probably can't sustain trade alone: so the conclusion to be drawn from this document is what I noted in the recent discussion: interstellar trade is probably impossible, unless we invent some sort of cheapo FTL drive.

 

cheers, Mark

[Bobby Walker]

Re: The Theory of Intersteller Trade by Paul Krugman

 

But they probably can't sustain trade alone: so the conclusion to be drawn from this document is what I noted in the recent discussion: interstellar trade is probably impossible, unless we invent some sort of cheapo FTL drive.

 

cheers, Mark

 

I would even postulate that it would not only have to be a cheap FTL drive, but that in order to transport perishables, it'd have to be fast and cheap. That would, in most circumstances, be a cornerstone of an interstellar society. Without the ability to move perishables around quickly colony locations would most likely be hampered further.

[The Weapon]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Yeah read this some time ago and loved it.

"It should be noted that, while the subject of this paper is quite 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." LOL.

[The Weapon]

Re: The Theory of Intersteller Trade by Paul Krugman

 

The only point on which I'm really qualified to disagree with Krugman is at the top of p9 (p11 of the pdf) where he says "Suppose that transportation costs other than interest on goods in transit are negligible..."

 

That supposition is a whopper! Still, it's an interesting paper, which I've had bookmarked since I-don't-know-when. Right next to it on my bookmarks, there's another article which gets into those pesky transportation costs: The $11B Bottle of Wine. This article tries to answer the question of what's actually worth trading when transport costs run into the billions per kilo.

 

He only made that supposition to simplify his argument proving that his First Fundamental Theorem of Interstellar Trade holds regardless of what the being does when it gets there/here. The maths is more complicated if you assume non-trivial non-interest costs but they still work. Of course as the article you cite indicates there have to be ridiculously high profit margins for interstellar trade to operate with our current understanding of physics.

A much bigger problem is with his belief that competition will equalize interest rates on planets lightyears apart, which I see as true only in the VERY long term. There may be decades even centuries between one interest rate lowering and the resultant lowering on the other planet. In these time frames arbitage would not neccesarily behave as it does now.

[The Weapon]

Re: The Theory of Intersteller Trade by Paul Krugman

 

I'd rep the two OPs' date=' if I could - the Krugman paper is hysterical. I particularly like "[i']This ... is a serious analysis of a ridiculous subject, which of course is the opposite of what is usual in economics[/i]" Though imaginary figure 2 comes close in the hilarity stakes

 

It should be noted that the Krugman paper is not an economic analysis - it's simply an extended joke, as indicated by its dedication: William Proxmire was a US senator strongly opposed to any funding for space research. He does make one serious point: that actual interstellar trade, even under the most generous assumptions, is likely to be impossible simply because of the time/energy constraints.

 

The second post is intended to be a serious analysis. That said, the 11 billion dollar bottle of wine, though it has some interesting ideas, is clearly written by someone who doesn't understand economics or case-study design: he takes trends which are historically exceptional (the rapid growth in world prosperity for example) and extrapolates them far, far out into the future. For example - contrary to his cheery analysis, where he assumes global increases in prosperity of 3% per year more the next half millennium - the trend rate of global increase in wealth has been falling since the early 60's.

 

You'll never get super-expensive wines, for example, because a) wine expires, so prices have a natural cap and the price of the most expensive wines in the world have been falling relative to income for decades (as a result of increasing market size and maturity). Precious works of art are the one thing that I can think of that are directly linked to income in terms of increasing price both because they generally don't age poorly and are by definition limited in number. But they probably can't sustain trade alone: so the conclusion to be drawn from this document is what I noted in the recent discussion: interstellar trade is probably impossible, unless we invent some sort of cheapo FTL drive.

 

cheers, Mark

 

 

No it's an economic analysis, and a good one. That's what makes it a really, really good joke.

[Badger]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Some of you may disagree with what he says about our economy and how to fix it.

 

While he was an Assistant professor at Princeton he wrote a paper on interstellar trade. Since this seems to be a topic that people enjoy hashing over. I thought that I would share his paper with you.

 

The Theory of Interstellar Trade.

 

Unfortunately it is a PDF so make sure that you have a reader.

 

Tasha

 

Well, disagree with Krugman is putting it mildly. But, it might make for an interesting read when I have time this weekend.

[McCoy]

Re: The Theory of Intersteller Trade by Paul Krugman

 

No' date=' not all colonisation was financially motivated. Many colonies were founded purely for military reasons.[/quote']

But isn't the military continuance of the economy by other means? As far as I can tell armies have historically existed for one or both of two reasons.

1. To take something from someone else
   
2. To prevent someone else from taking something from you
   

Seems financial/economic at its base to me.

[Markdoc]

Re: The Theory of Intersteller Trade by Paul Krugman

 

But isn't the military continuance of the economy by other means? As far as I can tell armies have historically existed for one or both of two reasons.

1. To take something from someone else
   
2. To prevent someone else from taking something from you
   

Seems financial/economic at its base to me.

 

Of course - government/religious actions are often economic at base. However, they often become so detached from their original purpose that they they serve no economic goal, or indeed, sometimes work against economic goals. A few obvious points in case: The French maintaining colonies in the horn of Africa long after their utility had passed: colonies that had never made any economic sense anyway, since the trade they were intended to protect had never eventuated. Likewise, the Brit.s maintaining colonies in northern British East Africa, which were never anything but a drain on the imperial purse. There are plenty of other examples: military colonies were often founded and maintained as flag-flying exercises that served no useful purpose, either military or commercial. They were expressions of pride or combativeness. A lot of the proxy warfare conducted during the cold war was the same - it garnered neither side economic or military benefit. It was simply done to make a political statement.

 

cheers, Mark

[The Weapon]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Of course - government/religious actions are often economic at base. However' date=' they often become so detached from their original purpose that they they serve no economic goal, or indeed, sometimes work [b']against[/b] economic goals. A few obvious points in case: The French maintaining colonies in the horn of Africa long after their utility had passed: colonies that had never made any economic sense anyway, since the trade they were intended to protect had never eventuated. Likewise, the Brit.s maintaining colonies in northern British East Africa, which were never anything but a drain on the imperial purse. There are plenty of other examples: military colonies were often founded and maintained as flag-flying exercises that served no useful purpose, either military or commercial. They were expressions of pride or combativeness. A lot of the proxy warfare conducted during the cold war was the same - it garnered neither side economic or military benefit. It was simply done to make a political statement.

 

cheers, Mark

 

The problem with government is that it's actions don't have to be economic at base. As long as the government can give value to an influencial and politically active group by taking resources from a powerless or inactive (on this subject) group they need not create net value for it to make political sense. For instance tariffs favour those who compete with imports but they take resources from those who buy the goods. Because those who buy the goods don't individually lose out that much the total value taken can be quite high compared to the value the beneficiaries and they won't complain. The beneficiaries are smalller in number but care a lot about the tariff so the government gains support. I'm not sure how many colonies did actually make commercial sense for the government. Of course the colonies had trade coming from them, but would they have had that if the traders had simply gone there without needing to set up an actual colony?

[Markdoc]

Re: The Theory of Intersteller Trade by Paul Krugman

 

The problem with government is that it's actions don't have to be economic at base. As long as the government can give value to an influencial and politically active group by taking resources from a powerless or inactive (on this subject) group they need not create net value for it to make political sense. For instance tariffs favour those who compete with imports but they take resources from those who buy the goods. Because those who buy the goods don't individually lose out that much the total value taken can be quite high compared to the value the beneficiaries and they won't complain. The beneficiaries are smalller in number but care a lot about the tariff so the government gains support. I'm not sure how many colonies did actually make commercial sense for the government. Of course the colonies had trade coming from them' date=' but would they have had that if the traders had simply gone there without needing to set up an actual colony?[/quote']

 

Well, yes, the fact that not all colonies made economic sense was my point, no? Governments (and other, non-governmental actors) are not always driven by economic values.

 

As for the last question, it's a mixed bag.

 

In places where there were valuable resources readily exploited, traders could have made a profit without establishing a colony - and did: whaling and sealing stations are the only examples that spring to mind, but there are probably a few others. Clearly, though, that's the exception, not the rule: such bases accounted for a tiny fraction of global trade.

 

The other case is simple trade: if there are people living somewhere who make or gather stuff you want, then you can simply trade with them. The history of early European colonization in Asia fits this pattern: traders established small bases, rather than colonies, often under the protection of a local ruler. The European governments mostly moved in later, either during times of political unrest, at the request of the corporations who lacked the military might to protect their trading centers from the locals, or in the wake of political unrest when the corporation had shown itself unable to to effectively handle such unrest, or occasionally to bail out bankrupt corporations. In those cases, governments obtained colonies almost by accident and often took on responsibility not very happily.

 

Last of all are the many colonies in Africa, the Americas and the Pacific that were established for flag-flying or military reasons and which only later established the economic mass to make them attractive to traders. I've already mentioned New Zealand, which is a perfect example: rich in fertile land, high quality wood, and fishing with a relatively small, and technologically primitive population. On the face of it, an extremely attractive location for colonisation. Whalers and sealers set up there fairly early on, from bases in Australia, but nobody else showed the slightest interest (in fact, trading corporations in the UK turned down the offer of free monopoly warrants, since those would have required them to set up bases). Even at a time of burgeoning population, land, be it never so fertile, was not very interesting if it's on the other side of the world, and wood and fish could be obtained from closer by. It wasn't until the political decision was made to set up bases for imperial reasons, that the traders showed interest, because now there were colonists to buy goods there.

 

And that's a common pattern - most of the US colonies were the same: they were not, originally, set up as a source of trade goods for the home country: they were primarily seen as a monopoly market for goods from the home country. The prevailing school of political thought in most of Europe at the time was "Mercantilism" - the idea that trade was as much a weapon to be used against enemies, as an economic activity. Prohibitive tariffs, strict import controls and monopolies were standard, and widely-used tools. This view goes all the way back to the reign of Elizabeth the first: in the Discourse of the Common Weal of this Realm of England from 1549, it was written "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them." Screw free trade: the idea of colonies at the time was to try and increase the size of your own realm and its self-sufficiency ... even if economically, that didn't make sense. The Spaniards nearly bankrupted their kingdom, hewing to this policy, spending far more on maintaining their colonies than they were bringing in, in income. Though it was a general idea rather than defined theory, mercantilism favoured strict controls on trade, the outright banning of imports in many cases and very strict laws on who could buy or sell what: one of the things that outraged the colonists leading to the American revolution were laws specifically aimed at preventing industries arising in the Americas that would compete with profitable products from Britain ... and the same kinds of laws (for example, outlawing large-scale domestic cloth production) drove support for Gandhi's peaceful revolution in India a century and a half later. Adam Smith's book was a polemic against mercantilism.

 

It's one of history's odd facts: much of the world's economic growth from about 1600 on was driven by European governments setting up unprofitable outposts: left to their own devices, corporations had shown little interest in expansion beyond defined markets. But had that unprofitable expansion not occurred, it is unlikely European culture would have subsequently expanded to dominate the globe economically the way it did.

 

cheers, Mark

[OddHat]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Choices on the individual level are far from consistently rational. Expecting them to be rational at the group level is pretty damn optimistic.

[Markdoc]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Choices on the individual level are far from consistently rational. Expecting them to be rational at the group level is pretty damn optimistic.

 

Actually, I tend to take the opposite view: people almost always act in a rational fashion. It's just that their priorities are very rarely only economic. In the last election, many middle-class and lower-class americans voted for republican candidates, which based on the last half century's record, is against their own economic interests. I think they are being stupid, but but not irrational. What they did is rational because they chose to act on other grounds (the president is sekrit muslin, I want to send a message to washington, the democrats are attacking our moral fibre, they're going to take our guns ... whatever) I think it's stupid, because to me, none of those issues are as important as the economic ones ... but I freely admit that's my personal preference. Some people might think I'm stupid for valuing a strong economy over the prevention of butseks at all costs. .

 

cheers, Mark

[OddHat]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Actually' date=' I tend to take the opposite view: people almost always act in a rational fashion.[/quote']

 

Whereas my view has become that people tend to act, then rationalize.

[Markdoc]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Whereas my view has become that people tend to act' date=' then rationalize. [/quote']

 

Sure - but they are still acting on what seems to them to be rational grounds. I think those grounds are often so much horse puckey: but that's not irrational - merely stupid.

 

cheers, Mark

[Captain Obvious]

Re: The Theory of Intersteller Trade by Paul Krugman

 

What's a butsek?

[Shadow Hawk]

Re: The Theory of Intersteller Trade by Paul Krugman

 

Actually' date=' I tend to take the opposite view: people almost always act in a rational fashion. It's just that their priorities are very rarely only economic. In the last election, many middle-class and lower-class americans voted for republican candidates, which based on the last half century's record, is against their own economic interests. I think they are being stupid, but but not irrational. What they did is rational because they [b']chose[/b] to act on other grounds (the president is sekrit muslin, I want to send a message to washington, the democrats are attacking our moral fibre, they're going to take our guns ... whatever) I think it's stupid, because to me, none of those issues are as important as the economic ones ... but I freely admit that's my personal preference. Some people might think I'm stupid for valuing a strong economy over the prevention of butseks at all costs. .

 

cheers, Mark

 

While the reasons you gave "(the president is sekrit muslin, I want to send a message to washington, the democrats are attacking our moral fibre, they're going to take our guns ... whatever)" do apply to some, the biggie was "the economy's in the crapper, the Democrats haven't fixed it, let's vote them out". Thereby throwing out of power the party who failed to fix the problem in favor of the party who caused the problem in the first place.

[Markdoc]

Re: The Theory of Intersteller Trade by Paul Krugman

 

While the reasons you gave "(the president is sekrit muslin' date=' I want to send a message to washington, the democrats are attacking our moral fibre, they're going to take our guns [/i']... whatever)" do apply to some, the biggie was "the economy's in the crapper, the Democrats haven't fixed it, let's vote them out". Thereby throwing out of power the party who failed to fix the problem in favor of the party who caused the problem in the first place.

 

I'd cover that under "want to send a message to washington" - the message being "Crowd angry! Crowd smash!" but you're right. Note: I did say it was stupid - but the main reason for differentiating "stupid" and "irrational" is that you can - with some effort - cure stupid, and you can predict how it will act, if you know the rationalizations involved. You can't actually do very much with irrational, in either case.

 

cheers, Mark