By Nicholas Haberling
A note on the absence:
We (Nick and Lexor) would like to apologize to our unquantifiable following of loyal readers for the delay in closing out the Space Economy series. However, at the heart of this delay is the internal debate over what is to become of Nerd Econ. What people may not realize is that a lot of research goes into the writing of our Sci-Fi analyses, which even under the best of circumstances, can restrict how much content we deliver. Some of you may have noticed that in order to get around this slow content production we tried writing a few opinion pieces (two taken down and one still up) and while those are much easier to write, that’s not what the people want. The people cry out for clone army calculations and Santa factory activity based costing scenarios. Not Nick’s opinion on different approaches to environmentalism. So folks, while it may look all quiet on the western front, we will still push out content as we can. Think of our future posts as like Hardcore History’s bi-annual podcast releases. They are few and far between, but when you get the alert that one is out, it’s just the perfect amount of greatness to hold you over until the next one.
Without further ado:
It was a dark time In July 1978 for Paul Krugman. He was only an Assistant Professor at Yale University without the benefit of a New York Time’s opinion column where he could cast out his thoughts into the void commonly known as the public square. So instead, he set his sights on the greatest void of all. No, not the emptiness one feels in the years between Star Wars films, but that of interstellar space. As an economist who enjoyed science fiction, Dr. Krugman understood that there were key differences between planetary trade in our solar system and interstellar trade. Trade within the solar system would be similar to what already happens on Earth with the balance between opportunity costs, rates of return and a consistent time factor dictating whether the project is pursued or not. Interstellar trade on the other hand introduces a twist. This is where The Theory of Interstellar Trade comes into play.
As Krugman writes, “if interstellar trade is to be at all practical, the spaceships which conducts it must move at speeds which are reasonable fractions of the speed of light… The time taken by the spacecraft to make the round trip will appear less to an observer on the craft than to one remaining on Earth. Since an interstellar voyage is an investment project which must have a positive present value, there is obviously a problem in deciding which transit time to use in the present value calculation” (Krugman, 2-3).
Translation: There are now two potential time variables we can use in our Present Value calculation.
Note: PV = Present Value, FV = Future Value, r = Rate of Return, n = Time
So if our Present Value formula is PV = FV (1/(1+r)^n)
Krugman and the Laws of Physics are telling us that n is no longer a given variable. We must choose between n in “real time” or the intertial frame of time we all inhabit and n’, “space craft time” or the time frame of reference for our interstellar traders.
Why does this happen? I’m not a physicist so I have no idea. I just know it’s pretty common in science fiction books and movies.
So why is this important? Let us look at an example:
The Kaminoans are building a giant army (check our series on them) and are trying to determine who should supply the clone army with weapons. A war-like species that occupies a planet called Earth off the arms of Orion in the Milky Way Galaxy has caught their attention so they have offered a bid. The Kaminoans say they will pay an arms dealer with Kaminoan government bonds worth 500 trillion galactic dollars. Naturally, this bid caught the attention of Weyland-Yutani who has directed their finance department to look into the matter. Everyone is excited at the prospect of bringing in such massive revenues so they hire their most experienced smuggler, Han Solo. Han has already done the math for Weyland-Yutani.
It will take Han and his co-pilot Chewbacca 600 years to travel to Kamino and back to Earth. So he then breaks down how many years it will have felt have passed on the Millennium Falcon. We will say that the Falcon can travel at 95% of the speed of light.
n’ = 600 * square root of 1-(velocity of craft in meters/second)^2/(speed of light in meters/second)^2
n’= 600* square root of 1-( 284,802,835.10)^2/(299792458)^2
n’ = 187.35
Han is then courteous enough to plug that into the Present Value formula for the Weyland-Yutani executives. He assumes the rate of return is 2.89% which is equal to Earth government bonds.
PV = $500 trillion (1/(1+2.89)^187.35)
PV = $2,403,576,051,512
Han himself says that he will need at least one trillion dollars for the delivery, “187.35 years is a long time to be playing Sabacc with this walking carpet.” Despite the seemingly high cost of the operation, the Weyland-Yutani executives are still excited and debate amongst themselves how to best pursue the project.
Then one of the executive assistants asks, “Wouldn’t we use how many years it will take in ‘real time’? The Kaminoan bonds will be redeemable in 600 ‘real time’ years, not whatever it feels like to Han and Chewie on the Falcon.”
The executive assistant continued, “If that’s the case, this project would only have a present value of $18,839,512.”
“Well Corellia doesn’t have much in the way of public schooling so my math could have been a little off…” Han commented.
With this revelation, the executive team at Weyland-Yutani decided such a small contract was not worth their time so they turned to discuss other business matters such as their bio weapons division. Han, though feigning ignorance in interstellar trade calculations, had found his plans foiled. He had intended to deliver only 18.9 million dollars’ worth of Weyland-Yutani weapons as the Kaminoan contract intended. He would have then sold the additional trillions of dollars’ worth of equipment to Jabba the Hutt for a hefty profit.
What this shows is that future interstellar traders will have to be wary about which time variable they use when making their calculations otherwise actual results will be way off from their initial estimates. However, it is likely Krugman’s First Fundamental Theorem of Interstellar Trade will be known across project operations departments, “When trade takes place between two planets in a common inertial frame, the interest costs on goods in transit should be calculated using time measured by clocks in the common frame, and not by clocks in the frame of the trading spacecraft.” (Krugman, 8).
This brings our Space Economy series and second year of Nerd Econ to a close. It has been fun to look at some of the challenges we face before becoming a space faring species as well as what the economic and government situation may look like at the time. It definitely won’t be easy and I imagine if it takes hundreds of years to trade goods between planets, ships will be piloted by drones, not humans and Wookies. But it definitely looks like the future will be bright and exciting (really exciting if those trade ships return with a Xenomorph infestation). Wishing everyone a Merry Christmas and Happy Holidays!