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Return on Investment

In many of my food-related posts I present data on the energy inputs needed to produce food relative to the amount of food actually produced, yielding a handy ratio useful in assessing input-output efficiency for these systems. This approach is a particular application of the idea of Return on Investment, often abbreviated as ROI. Since ROI plays an important role in my own strategic planning and in how I analyze systems, I thought I'd explore the concept in greater detail.

CoinReturn on Investment is typically calculated as a ratio with the return an investment is expected to yield over a given timeframe in the numerator and the investments required to deliver that return in the denominator. ROI is most often used in financial circles, where returns and investments are measured in dollars or some other currency. Since the goal of an investment is to generate the largest return possible, ROI can be used to prioritize alternative investments, hopefully singling out those that will offer the greatest overall return.

While the idea of ROI originated in financial circles, anthropologists and ecologists also use the metric. Richard Lee, an anthropologist, used an ROI framework back in the 1960s to study the labor energy indigenous peoples invested to find food, and calculated ratios of food energy return on labor energy invested for their tribes. Ecologists, notably Howard Odum and later Charles Hall, did the same within studies of ecology, and Hall is well known for coining the phrase Energy Return on Investment and its associated acronym EROI while studying the energy cost of producing fuels from fossil energy resources. Today there's a growing literature applying the ROI framework to food production in modern food systems, and I applied it to national data in The Energy Cost of Food and to small farming systems in The Energy Cost of Local Food.

While monetary and energy ROI ratios can be useful metrics, I've come to believe that the ROI framework is much more broadly useful. I'm currently teaching a course on voluntary simplicity, and a recent homework assignment invited students to keep track of every penny they spend over the course of a week and to explore the many types of non-monetary benefits they get from that spending. Does the money spent on dinner with a friend have the added benefit of strengthening that relationship? Does the money spent buying food at a farmers' market have the added benefit of providing access to higher quality food than one can get at a local supermarket? Does supporting farmers' markets pay added dividends by creating a space for people to come together, have conversations they might not otherwise have and support the building of community more generally?

All of these non-monetary benefits are also returns on investment, but in a system measured solely by money they're invisible. We all make decisions on what to spend our money - or other resources like time and effort - and I think we'd all do well to explore the many non-monetary costs and benefits that accompany this spending. Economists increasingly recognize the value of these 'external' costs and benefits within the context of 'full cost accounting', but this is rarely practiced outside academic circles and a few government agencies and non-profits. One of my goals in the voluntary simplicity course I'm teaching is to strengthen my students' intuitive senses of the many non-monetary costs and benefits that tag along with different purchasing habits, so they can better link their purchasing patterns with their values and with the identity they'd like to cultivate.

Let's play with this a bit. Think about the last item you bought. If you only looked at the monetary benefits you got from that purchase, would it deliver a positive ROI? If not, why did you buy it? What other benefits did you get from that purchase that might offset its lack of positive ROI from a strict money standpoint? What other costs might be associated with it that might offset some of those non-monetary benefits? How many hours did you have to work to earn the money you needed to afford that purchase? These are all useful questions, and they can help lead us towards habits that make the best possible use of our time, energy and resources.

What do you think? Leave a comment below.

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