Resource Return on Investment under Markup Pricing
In the (very) long run, a sustainable economy must rely on renewable resources. Until that time, an economy can be based on either renewable resources alone or a mix of renewable and non-renewable resources, but the particular mix may constrain the types of economic structures that are possible. 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. EROI has drawn attention lately both because the EROI of fossil fuels is falling and because the EROI of some renewable alternatives – especially for liquid fuels – is low compared to fossil fuels. 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. In this paper we show that when prices are set by markup, a standard Post-Keynesian assumption, then the “inverted pyramid” picture of the economy emerges naturally. We use this result to develop a computational framework for a “markup economy”, and apply it to the question of the macroeconomic impact of changes in resource prices and resource return on investment. We use 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. We then show our main result, that RROI has a surprisingly limited effect on real wages until it reaches quite low values.
|Date of creation:||19 Aug 2013|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bak, Per & Chen, Kan & Scheinkman, Jose & Woodford, Michael, 1993.
"Aggregate fluctuations from independent sectoral shocks: self-organized criticality in a model of production and inventory dynamics,"
Elsevier, vol. 47(1), pages 3-30, March.
- Peter Bak & Kan Chen & Jose Scheinkman & Michael Woodford, 1992. "Aggregate Fluctuations from Independent Sectoral Shocks: Self-Organized Criticality in a Model of Production and Inventory Dynamics," NBER Working Papers 4241, National Bureau of Economic Research, Inc.
- Fagnart, Jean-François & Germain, Marc, 2011. "Quantitative versus qualitative growth with recyclable resource," Ecological Economics, Elsevier, vol. 70(5), pages 929-941, March.
- Frank Ackerman, 2001. "Still dead after all these years: interpreting the failure of general equilibrium theory," Journal of Economic Methodology, Taylor & Francis Journals, vol. 9(2), pages 119-139.
- Praetorius, Barbara & Schumacher, Katja, 2009.
"Greenhouse gas mitigation in a carbon constrained world: The role of carbon capture and storage,"
Elsevier, vol. 37(12), pages 5081-5093, December.
- Barbara Praetorius & Katja Schumacher, 2008. "Greenhouse Gas Mitigation in a Carbon Constrained World: The Role of Carbon Capture and Storage," Discussion Papers of DIW Berlin 820, DIW Berlin, German Institute for Economic Research.
- Kronenberg, Tobias, 2010. "Finding common ground between ecological economics and post-Keynesian economics," Ecological Economics, Elsevier, vol. 69(7), pages 1488-1494, May.
- Hoderlein, Stefan, 2011.
"How many consumers are rational?,"
Journal of Econometrics,
Elsevier, vol. 164(2), pages 294-309, October.
- Stefan Hoderlein, 2009. "How Many Consumers are Rational?," Boston College Working Papers in Economics 748, Boston College Department of Economics.
- Stefan Hoderlein, 2009. "How many consumers are rational?," CeMMAP working papers CWP32/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Bohi, Douglas R., 1991. "On the macroeconomic effects of energy price shocks," Resources and Energy, Elsevier, vol. 13(2), pages 145-162, June.
- Arrow, Kenneth J, 1974.
"General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice,"
American Economic Review,
American Economic Association, vol. 64(3), pages 253-272, June.
- Arrow, Kenneth J., 1972. "General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice," Nobel Prize in Economics documents 1972-2, Nobel Prize Committee.
- Cleveland, Cutler J. & Kaufmann, Robert K. & Stern, David I., 2000. "Aggregation and the role of energy in the economy," Ecological Economics, Elsevier, vol. 32(2), pages 301-317, February.
- Donald W. Jones, Paul N. Leiby and Inja K. Paik, 2004. "Oil Price Shocks and the Macroeconomy: What Has Been Learned Since 1996," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-32.
- Keen, Steve, 2003. "Standing on the toes of pygmies:," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 108-116.
- Haibin Wu, 2009. "Entry barriers and markup ratios: evidence from OECD countries," Applied Economics Letters, Taylor & Francis Journals, vol. 16(2), pages 125-130.
- Ayres, Robert U. & van den Bergh, Jeroen C.J.M., 2005. "A theory of economic growth with material/energy resources and dematerialization: Interaction of three growth mechanisms," Ecological Economics, Elsevier, vol. 55(1), pages 96-118, October.
- Hall, Robert E, 1988.
"The Relation between Price and Marginal Cost in U.S. Industry,"
Journal of Political Economy,
University of Chicago Press, vol. 96(5), pages 921-947, October.
- Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
- Kirman, Alan, 1989. "The Intrinsic Limits of Modern Economic Theory: The Emperor Has No Clothes," Economic Journal, Royal Economic Society, vol. 99(395), pages 126-139, Supplemen.
- R. L. Hall & C. J. Hitch, 1939. "Price Theory And Business Behaviour," Oxford Economic Papers, Oxford University Press, vol. 0(1), pages 12-45.
- Jan Fagerberg, 2003.
"Schumpeter and the revival of evolutionary economics: an appraisal of the literature,"
Journal of Evolutionary Economics,
Springer, vol. 13(2), pages 125-159, April.
- Jan Fagerberg, 2003. "Schumpeter and the revival of evolutionary economics: an appraisal of the literature," Working Papers Archives 2003001, Centre for Technology, Innovation and Culture, University of Oslo.
- Judson, D. H., 1989. "The convergence of neo-Ricardian and embodied energy theories of value and price," Ecological Economics, Elsevier, vol. 1(3), pages 261-281, October.
- Lavoie, Marc, 2004. "Post Keynesian consumer theory: Potential synergies with consumer research and economic psychology," Journal of Economic Psychology, Elsevier, vol. 25(5), pages 639-649, October.
- Curtis, Fred, 2009. "Peak globalization: Climate change, oil depletion and global trade," Ecological Economics, Elsevier, vol. 69(2), pages 427-434, December.
- Keane, Michael P & Prasad, Eswar S, 1996.
"The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis,"
The Review of Economics and Statistics,
MIT Press, vol. 78(3), pages 389-400, August.
- Michael P. Keane & Eswar S Prasad, 1995. "The Employment and Wage Effects of Oil Price Changes; A Sectoral Analysis," IMF Working Papers 95/37, International Monetary Fund.
- John Foster, 2005.
"From simplistic to complex systems in economics,"
Cambridge Journal of Economics,
Oxford University Press, vol. 29(6), pages 873-892, November.
- Prof John Foster, 2004. "From Simplistic to Complex Systems in Economics," Discussion Papers Series 335, School of Economics, University of Queensland, Australia.
- Karl-Ernst Schenk, 2006. "Complexity of economic structures and emergent properties," Journal of Evolutionary Economics, Springer, vol. 16(3), pages 231-253, August.
- Byoung Hee Hong & Kyoung Eun Lee & Jae Woo Lee, 2007. "Power Law in Firms Bankruptcy," Papers physics/0701302, arXiv.org.
- Mathieu, Karl-Heinz, 1993. "Bioeconomics and post Keynesian economics: a search for common ground," Ecological Economics, Elsevier, vol. 8(1), pages 11-16, August.
- Cleveland, Cutler J., 2005. "Net energy from the extraction of oil and gas in the United States," Energy, Elsevier, vol. 30(5), pages 769-782.
- Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
- Scheinkman, Jose A & Woodford, Michael, 1994. "Self-Organized Criticality and Economic Fluctuations," American Economic Review, American Economic Association, vol. 84(2), pages 417-421, May.
- Jakob Kapeller & Bernhard Schütz & Stefan Steinerberger, 2013. "The impossibility of rational consumer choice," Journal of Evolutionary Economics, Springer, vol. 23(1), pages 39-60, January.
- Sippel, Reinhard, 1997. "An Experiment on the Pure Theory of Consumer's Behaviour," Economic Journal, Royal Economic Society, vol. 107(444), pages 1431-1444, September.
- Michael Joffe, 2011. "The root cause of economic growth under capitalism," Cambridge Journal of Economics, Oxford University Press, vol. 35(5), pages 873-896.
- Simon, Herbert A., 1984. "On the behavioral and rational foundations of economic dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 5(1), pages 35-55, March.
- Gowdy, John M., 1991. "Bioeconomics and post Keynesian economics: a search for common ground," Ecological Economics, Elsevier, vol. 3(1), pages 77-87, March.
- Li, Gang & Yang, Hongjiao & Sun, Linyan & Ji, Ping & Feng, Lei, 2010. "The evolutionary complexity of complex adaptive supply networks: A simulation and case study," International Journal of Production Economics, Elsevier, vol. 124(2), pages 310-330, April.
- Peter Earl & Tim Wakeley, 2010. "Alternative perspectives on connections in economic systems," Journal of Evolutionary Economics, Springer, vol. 20(2), pages 163-183, April.
- Karolina Safarzyńska & Jeroen Bergh, 2010. "Evolutionary models in economics: a survey of methods and building blocks," Journal of Evolutionary Economics, Springer, vol. 20(3), pages 329-373, June.
- André Bonfrer & Pradeep K. Chintagunta, 2004. "Store Brands: Who Buys Them and What Happens to Retail Prices When They Are Introduced?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 24(2), pages 195-218, March.
- Robert J. Gordon, 1999. "U.S. Economic Growth since 1870: One Big Wave?," American Economic Review, American Economic Association, vol. 89(2), pages 123-128, May.
- Kaufmann, Robert K., 1994. "The relation between marginal product and price in US energy markets : Implications for climate change policy," Energy Economics, Elsevier, vol. 16(2), pages 145-158, April.
- Robert H. Rasche & John A. Tatom, 1977. "Energy resources and potential GNP," Review, Federal Reserve Bank of St. Louis, issue Jun, pages 10-24.
- Pradeep K. Chintagunta, 1993. "Investigating Purchase Incidence, Brand Choice and Purchase Quantity Decisions of Households," Marketing Science, INFORMS, vol. 12(2), pages 184-208. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:49154. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.