Resource return on investment under markup pricing

For a sustainable economy, a particularly important consideration is the quantity of resources required to extract the resources on which the economy is based, whether it is seeds retained for planting or petroleum used to extract oil. In the case of energy this is called “energy return on energy investment”, or EROI. More generally, it can be considered “resource return on resource investment”, or RROI.

In conventional economic analysis it is not clear what the relation between EROI, energy price, and macroeconomic outcomes might be. However, it raises immediate concerns within an Ecological Economic framework, in which resources – which may contribute only a small amount to GDP – are viewed as essential to the functioning of the economy. Resources are pictured as sitting at the base of an inverted pyramid, with the rest of the economy balanced on top of them.

This paper shows that when prices are set by markup, a standard Post-Keynesian assumption, then the “inverted pyramid” picture of the economy emerges naturally. It uses this result to develop a computational framework for a “markup economy”, and applies it to the question of the macroeconomic impact of changes in resource prices and resource return on investment. It uses the resulting model to explore several macroeconomic questions, demonstrating that the model is quite useful for exploring the role of natural resources in the macroeconomy. It then shows the main result, that RROI has a surprisingly limited effect on real wages until it reaches quite low values.

Read the article (external link to MPRA)