Imagine interstellar trade occurring at the speed of light (or close to light-speed) across galaxies, such as the various constellations pictured below. The economist Paul Krugman imagines just such a science-fiction scenario in a beautiful paper titled “[A] theory of interstellar trade,” which was published in the journal Economic Inquiry in 2010. (An ungated version of his formal paper is available here.) In the paper, Professor Krugman develops a theory of interstellar trade in goods between planets in the same inertial frame and ends up making a remarkable claim: interstellar competition will equalize interest rates across constellations.
There is just one small problem with Krugman’s theoretical analysis: he neglects the crucial role that interstellar contracts and interstellar law must play before any trade could occur across the universe in the first place. Alas, this type of omission is common among economists, even first-rate ones like Krugman. Many economists like to take the existence of a well-ordered legal system and the enforcement of contracts for granted. But trade cannot occur in a (legal) vacuum. Trade and markets require some set of rules and the enforcement of those rules, and it is precisely these essential things that are lacking at the interstellar level!