Classical theory and exhaustible natural resources: Notes on the current debate

The treatment of exhaustible resources in the context of classical theory is currently the object of intense debate. In particular, different views are held as to whether the classical 'normal positions' can adequately deal with the prices for the use of exhaustible resources (royalties), and different procedures have been suggested for determining these distributive variables. This paper undertakes a critical appraisal of the relevant literature and suggests an alternative way of studying royalties within the surplus approach. The first part focuses on the recent models aimed at determining royalties in a classical framework and argues that these formal contributions rely on unwarranted assumptions that considerably reduce the scope of the analysis. The second examines the interplay between resource owners and extraction companies in real-world mineral industries. The historical record indicates that negotiations over royalties have traditionally been regulated by stable conventional arrangements and that the levels of royalty rates have been strongly influenced by a variety of historically determined institutional factors. In view of this evidence, it is finally suggested that royalties might be appropriately determined within classical theory by means of a method analogous to the one adopted for the 'natural' wage rate