So You Think You Know Economics

I hope you do, and I think I do – know economics, that is.

But I’ve always thought about economics (how to get the most out of life), here on earth. I haven’t thought about what economics might be like on other planets, on space stations, or on whatever else lies ahead of us in terms of both space and time (pun kind of intended).

Paul Krugman had a fun paper about this written more than forty(!) years ago. The paper is freely available, and you can download it over here, but there is also a Wikipedia article about it, if you would prefer to begin there.

As the Wikipedia article says, the summary of the paper was this:

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.

https://en.wikipedia.org/wiki/The_Theory_of_Interstellar_Trade

The next line in the Wikipedia article is genuinely funny, and that in typical Krugman style:

This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.

https://en.wikipedia.org/wiki/The_Theory_of_Interstellar_Trade

But a much more recent post by Robin Hanson invites us to do a serious analysis of a no-longer-ridiculous subject: how should one think about social analysis of a future that is much more about space travel.

We understand space tech pretty well, and people have been speculating about it for quite a long time. So I’m disappointed to not yet see better social analysis of space futures.
In this post I will therefore try to outline the kind of work that I think should be done, and that seems quite feasible.

https://www.overcomingbias.com/2022/07/space-econ-howto.html

I teach Principles of Economics for a living, but have only very rarely (well ok, almost never) thought about Principles of Economics as it relates to space travel. As Tyler Cowen might say, most of the basic principles will remain the same, and demand curves will slope downwards, but what will actually change?

This is surprisingly hard to think about, because I tend to just assume that economics is always earth bound. And it takes me time to wrap my head around the fact that I’m thinking about economics in a very different context. Robin Hanson helps us overcome this initial hurdle:

Here is the basic approach:
1. Describe how a space society differs from others using economics-adjacent concepts. E.g., “Space econ is more X-like”.
2. For each X, describe in general how X-like economies differ from others, using both historical patterns and basic econ theory.
3. Merge the implications of X-analysis from the different X into a single composite picture of space.

https://www.overcomingbias.com/2022/07/space-econ-howto.html

His first example about X is that of lower density. Or, in plainer English, space is just going to be really far away from everything else. I mean, really far away. What does that mean for an economy, when it is just ridiculously far away from everything else?

Let’s think through this a bit. Can, say, thinking about Neom be similar to thinking about this problem? Or Naypyidaw? Or are we talking about a completely different problem, because of the vast difference in terms of distance? And if you say it is a completely different problem, why do you say so?

Are we talking about travel costs being significantly different? What about the cost of communication (both within that base, and back to Earth)? Which resources become more valuable because this base is s far away, and which resources are valuables “just” because they are scarce on that base? Will, as Robin Hanson points out, lower density mean lower product variety, and what will that imply for this economy? How should one think about Dixit-Stiglitz in this context?

Read the whole thing, of course, but Robin Hanson points out a variety of ways in which space economics is going to be different. I’ll highlight just a few below:

  1. It’s going to be very far way, as we just discussed
  2. It’s going to be much harsher (read science fiction!)
  3. It’s going to be wildly different in terms of resource economics
  4. What about population growth?

As I said, I struggle to think about this just because my mental framework thinks about economics in a very Earthian (yes, this is now a word) context. And that precisely why I enjoyed reading this blogpost so much, because it gives me a very pleasant headache about stuff I thought I knew.

And I hope you’ll spend some time with this very pleasant headache too! 🙂

Update: Shubhneet Arora sends along this recent Krugman column/newsletter, very relevant to this blogpost. Thanks Shubhneet!