Space: The Next Great Market Opportunity

Kristin Hayes: You and Molly Macauley wrote a letter to Science in 1986 on the economics of the US space program, which was quite forward looking. How did the issue of the economics of space first come on your radar? (Apologies for the pun.)

Michael Toman: We'll just rocket ahead, no matter how bad the puns get.

Molly joined RFF in 1983, and I was part of the group that helped recruit her. I mention that because Molly actually came to RFF with a fully formed idea of how to think about economics in the context of space. Her PhD dissertation was about looking at the orbit around the Earth where a satellite stays in the same relative position the whole time—it's called the geosynchronous orbit, and it's where all the big communications satellites used to park in order to send telephone signals and faxes and other information across long distances. She had this stuff already figured out to a considerable extent when she came to RFF.

The thing that drew her to RFF was that this orbit is basically a natural resource. That was the first really big insight into how this fits together with what had been the mainstream of RFF work on forests, water resources, and energy—which had been one of my topics. Something out there has value (location is everything, as they say in real estate); where you parked your satellite really mattered in terms of the value you could get from having it up there.

Molly's insight (and I was glad to jump in and try to help her push it forward) was that orbits, space, room in the International Space Station (ISS) for experiments—all these things were valuable and scarce, which is exactly what we talk about with natural resources.

The next insight was that it doesn't automatically follow that the government should be producing space missions, or even necessarily regulating them—that we should start thinking about whether we really need one large, vertically integrated monopoly planning missions, building spacecraft, and launching rockets.

Starting from then would be when I would pinpoint the interest that Molly had in advancing this idea—that this is something we need to think about in the same way we think about a lot of other resource-related topics.

How do the economics of outer space differ from the economics of other resources?

Here's an analogy. If fish aren't easily caught in location A, you can move your fishing trawler over to location B, and you can probably catch better fish there; there's a lot of flexibility in that situation. The thing that's really unique about space resources is that they are something for which there's no realistic substitute. The geosynchronous orbit is the only geosynchronous orbit, and the only thing you can do to try to put more stuff in there is figure out how to pack the satellites more closely together.

Now, more recently, people have started to work on using little satellites that fly around like gnats instead of just one big satellite in the geosynchronous orbit. But, for a long time, that particular orbit was the only game in town. It was as if you could only catch the fish in that one place, which meant that if you used up all the fish, then that was it—if you used up the geosynchronous orbit, you were done.

For most of the history of NASA, it’s been a vertically integrated system—but it seems like that's changing with the advent of SpaceX. What can you tell us about the mix of public and private interests in space exploration?

We started talking about these things in the 1980s, and I think it hit a pinnacle with the SpaceX launch [the first private shuttle launch involving a crew of astronauts, who rode the Endeavour to the ISS on May 30]. Do we always need NASA to write the contract and specifications for the rocket, bid it out to a large aerospace contractor, get it built, put the people and experiments on it, launch it, and retrieve it? What we were learning—even in the ’80s and well into the ’90s—is that the answer is no.

But there was always this thought: are we willing to trust a non-NASA entity to build and launch missions, when we're going to have human beings on board? And that was the big breakthrough with SpaceX.

We now see that, with a mission where standards of safety have to be met, we don't need NASA to do it. We do not need a government entity to be in charge of the safety of astronauts. NASA was still very involved in the SpaceX launch, of course, because SpaceX used the NASA launch facilities and telemetry and all that, but we can now see that the movement of things and people can be outsourced to a private company.

In other cases, we need the government to have a large role. But even then, we can talk about a public-private partnership. For example: the ISS. It's hugely expensive and multinational, and it would be hard to imagine any company on the face of the Earth, even with the deepest of deep pockets, being willing to put that much money down to build something of that nature, when the demand for it is so unknown.

If I go out as a venture capitalist and build the ISS for some huge amount of money, trying to recoup that cost by renting shelf space there for biology experiments—that's a big ask. So, what we've seen with the ISS is that it’s more like a public good, something that you really look to the government to provide, because the private sector can't do a good job of it, for various reasons. It's natural that the government would be involved in doing that.

One of the things that Molly talked about and wrote a couple of papers about was: When you've got room in a space shuttle or on the ISS for experiments, how do you decide which experiments to send up, how long they should run, and what you do after that?

Well, one of the things that we've done with radio frequencies for a long time is have auctions. People bid for room in the radio frequency to operate cell phones, or emergency warning systems, or television, or anything like that. Molly advocated that it was sensible to think about having (at least partly) market-like mechanisms to allocate the space. Let people bid to have the space. Part of the problem is that some of these experiments are basic science, and we can't do a good job by having just one private company supply basic science, any more than we can have one company supply a space station.

But if you just randomize access on a first-come-first-served basis, you may be allocating the space in a very, very inefficient way.

You’ve mentioned the ISS as something unlikely for even a very deep-pocketed company to create. What about the launch facilities themselves? Can you imagine a private entity building another Cape Canaveral, or will these types of resources stay nationalized?

I'm not actually sure about that, but I don't see any barriers that can't be overcome. I think it's pure economics.

As long as the launch facilities are there, being maintained and paid for through the NASA budget—with taxpayer money, by the way—the economics probably favor continuing to launch with existing resources. Should the government decide that it wants to get out of the launch business entirely, somebody would figure out how to privately finance and construct an alternative launch pad. But I think, right now, there's no real reason to do that, partly because we're essentially subsidizing all those private-sector launches with the launch facility paid for by the government.

But even with private launches, you still have to coordinate with NASA and the US Department of Defense, because any time a rocket goes up from the Earth into space, these folks need to know about it. You're never going to be able to step away entirely from an interface with the government. You certainly don't want your friendly little communications satellite launch to be seen as a Russian nuclear-tipped missile.

Who is involved in setting space policy right now? As an economist, how do you think about governance mechanisms for shared resources in outer space?

Right now on the ISS, we have top-down coordination among the principal actors that were involved in building and staffing the station. So, you have the big actors who are dividing up the time slots and the real-estate slots—kind of like a timeshare system for a vacation—and they've got a certain amount that they're allocating through some sort of handshake agreement that I'm sure works very well, because it's been going on for a long time. It's essentially being worked out by a lot of scientists, engineers, and, ultimately, the political leaderships of the various countries involved. And that's probably not going to change anytime soon.

It would be interesting if the major partners in the ISS decided, "We're going to make 20 percent of the time and real estate available for experiments by anybody all over the world, but they’ll have to pay to get it." And then they could have the kind of auction I mentioned. This sort of thing could emerge, but I suspect we're still a ways off before we get that far into a more decentralized, incentive-based approach with the ISS.

In terms of the regulation of space activities within the United States, various entities are involved—NASA, the National Oceanic and Atmospheric Administration, the US Department of Defense. In terms of national security and public safety, you're not allowed to drop the first stage of a rocket in a large city, for example. These kinds of things are written in regulations in very large books that basically set up performance standards. Rockets and escape plans have to have certain characteristics. And the issue of how well those regulations work is something that's never really been evaluated. In fact, it would probably be really hard to evaluate the effectiveness of these regulations.

I think in any regulation system the United States could have—even one that’s more decentralized—you could count on certain things being involved. For national security, you would have to make sure you knew what was being launched and that it was being tracked. Basic safety: nobody wants a mission to blow up on the pad or to land in the middle of Manhattan. But the ways that people meet those standards might be more flexible.

And the last thing to mention here, because people often forget it, is that the part of outer space concerned with international telecommunications has an international regulatory body housed in Geneva. This is the body that says, "You can't park your satellites too close together. If you're going to use this frequency for cellular phones, you have to make sure you're not causing too much interference." This body is what keeps the geosynchronous orbit from getting too junked up.

We’ve been talking about geosynchronous orbit and the growing number of satellites in that orbit. One of the issues that Molly looked at in her career was space debris. Do we need to start thinking about preserving the environmental health of outer space, the way we think about pollution and preserving natural resources here on Earth?

Absolutely. That's definitely what Molly was thinking about before her untimely death a few years ago. The big problem with space junk, as with problems like air pollution and polluted groundwater, is its legacy.

Space junk is, in some ways, a lot like air pollution. It comes from a number of different sources, and there’s a lot of it up there. It's not like you can just tell Mr. Brown or Mrs. Black, "Get your junk out of there," because it's all just floating around. These are big hunks of metal, plastic, and, in some cases, even spent nuclear engines.

So, the question is: How do we manage pollution in outer space?

One thing you can do is keep beefing up your vehicles with thicker armor, so even if you start colliding with space junk, your vehicle won't get too damaged. What makes space economics more complicated is that, just to go into orbit and complete a mission, you've got to be dodging a bunch of junk. This makes the risk of failure higher and the return on investment lower.

I don't think we yet have a grasp on that. If you took another area that was very much represented in Molly's research over the years—recycling—you could try to develop some notion, as SpaceX now does with its first launch stage, that when you put something up, there's a standard of care—that when you launch something, you're also going to figure out how to get it back down. The problem is, that’s going to make things a lot more expensive—but it would prevent the congestion up there from becoming totally unmanageable. Working on this problem just by navigating better around the space junk or thickening shuttle armor—at some point, you're going to run out of that ability. Are we going to send up big spacecraft to try to collect this stuff?

If you put up a satellite and you know you're going to use it for six years, you could add a little thruster, so that at the end of the mission, you can turn on the thruster one more time and push the satellite out of orbit, so it burns up in the atmosphere. This wouldn’t be difficult.

We're going to have to start building environmental responsibility into the way we use space. Because—like on Earth—when you're allowed to have adverse effects on other people and not pay for those adverse effects, the situation creates negative incentives for the positive use of a resource.

Before we close, I have one more question for you. Let’s say money were no object. (I'm going to take the economics of space exploration out of the equation for just a second.) Would you go into space? How would you feel about flying up there, yourself?

In a heartbeat. Molly and I both dreamed, at times, of being able to go up someday. It would be a joy for me to go; I would love it.

I know we all have different visions about what happens after we leave the Earth, but if there is anyone in this world who I hope is among the stars, it’s Molly.

I would love to see somebody name a comet after her someday: Comet Macauley.