Martin weitzman’s contributions to environmental economics

Martin weitzman’s contributions to environmental economics

Something special that keeps on giving: The contributions of Martin Weitzman to environmental economics

Environmental economist Martin Weitzman passed on in August. This short intellectual biography and personal remembrance, by his long-time co-host of the Harvard Seminar on Environmental Economics and Policy, outlines how his contributions have advanced the thinking about environmental economists and policymakers on many fundamental issues, including policy instrument choice, discounting, species diversity, and environmental catastrophes. Over the board, the exemplory case of his rigorous and frequently ingenious work set high standards for theorising in environmental economics and thereby served to raise the complete field.

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Martin Weitzman was a treasure – something special that continued giving to the study and policy worlds – for Harvard, for economists all over the world, and for the global intellectual community. His are an economic theorist who addressed a wide group of problems, and as an environmental economist who in the past decade centered on climate change, was unparalleled, and formed the foundation for theoretical and empirical work completed by legions of economists and other scholars all over the world. His contributions to environmental economics specifically were unprecedented, and helped to shape the field for pretty much five decades.

If economic theory is approximately stripping a problem right down to its absolute essentials, and deriving meaningful insights from those essentials, then Weitzman was a master. Again and again, Marty Weitzman demonstrated how careful and rigorous analysis of artfully constructed theoretical models can offer valuable and frequently surprising insights into difficult economic issues with real implications for the look of public policies.

Marty’s contributions have advanced the thinking about environmental economists and policymakers on policy instrument choice, discounting, species diversity, environmental catastrophes, and other fundamental issues. Over the board, the exemplory case of his rigorous and frequently ingenious work set high standards for theorising in environmental economics and thereby served to raise the complete field.

Brief intellectual biography

Born in NEW YORK in 1942, Marty received his BA degree in mathematics and physics from Swarthmore College in 1963, and twelve months later, received an MS degree in statistics and operations research from Stanford University. In 1967, just 3 years after his Stanford degree, he was awarded a PhD degree in economics from the Massachusetts Institute of Technology (MIT), where his dissertation committee chair was Bob Solow. From 1967 to 1972, he taught in the Department of Economics at Yale University, then moved to MIT, where he taught in the Department of Economics until 1989, when he moved to Harvard University. He was a Professor of Economics at Harvard until 2018, when he became a study Professor of Economics.

Economic planning

In the beginning of his research career, Weitzman studied centrally planned economies in a field which has all but disappeared from academic economics – comparative economic systems. It had been during this early amount of his career that Marty’s papers with titles such as for example “Soviet Postwar Economic Growth and Capital Labor Substitution” (1970b) and “Iterative Multi-Level Planning with Production Targets” (1970a) appeared.

An extraordinary product of his interest in how exactly to manage a centrally planned economy efficiently was Marty’s classic paper on “Prices vs. Quantities” (1974). He began this work to handle the question of whether prices or production quotas would result in better outcomes in a centrally planned economy (under conditions of uncertainty), however the paper and the next literature evolved to handle the question of whether a cost instrument or a quantity instrument could be more efficient for environmental regulation.

Although Marty began his first forays into research and writing on environmental and natural resource problems in the 1970s (a few of it developing Marxian views of common property problems), it had been not before 1990s that he turned with such passion and energy to the realm, and produced one important work after another that virtually span the field. That outpouring coincided with the start of my collaboration with Marty, co-hosting the Harvard Seminar on Environmental Economics and Policy (more upon this below).

The share economy

On the way, Weitzman completed important research in macroeconomics and unemployment theory. One product of the – along with a large number of journal articles (inevitably in the most notable periodicals) – was his best-selling 1984 book, The Share Economy – that was eventually translated into seven languages. In this brief (167-page) book, Marty organized his proposal for the way the US economy could possibly be protected from the dual threats of unemployment and inflation with an amazingly simple idea (a hallmark of several of his contributions) – namely, that rather than companies paying workers in manufacturing a set wage, they be paid through something comparable to profit sharing, specifically by paying workers a substantial share of company revenue.

In short, this might provide incentives for companies to keep adding workers provided that, through their work, they put into company revenues. This “novel, seemingly workable arrange for equipping the economy to resist the instabilities” that had plagued it for greater than a decade (Passell 1984) was labelled in the headline of a lead NY Times 1985 editorial, “the very best idea since Keynes”.

Policy instrument choice: Prices versus quantities

For environmental economists, Marty’s most prominent contribution is most likely his classic 1974 article, “Prices vs. Quantities”, which developed the simultaneously simple and powerful insight that – under conditions of uncertainty – the expected relative efficiency of policy instruments predicated on prices (for instance a pollution tax) versus those predicated on quantities (for instance a cap-and-trade system) depends upon the relative slopes of the expected marginal benefit and marginal cost functions.

That work remains the most frequently cited articles in every of environmental economics. It stimulated an enormous literature, an undeniable fact that prompted Richard Newell (Resources for future years) to characterise the task as a “gift that keeps on giving” at a symposium we held at Harvard in October 2018 to mark Marty’s retirement and celebrate his contributions”. Nonetheless, Marty’s 1974 paper reaches the core of analysis of carbon taxes versus carbon cap-and-trade systems to handle climate change (Karp and Traeger 2018, Mideksa and Weitzman 2019, Stavins 2019).

Biodiversity

In the first 1990s, Weitzman taken care of immediately what he sensed may be the unwillingness – or the shortcoming – of ecologists to rank ecologies when it comes to their relative biodiversity, by creating a group of brilliant treatments of how these comparisons could be made quantitatively and rigorously: “On Diversity” (1992), “What things to Preserve: A CREDIT CARD APPLICATOIN of Diversity Theory to Crane Conservation” (1993), “Patterns of Behavior in Biodiversity Preservation” (Metrick and Weitzman 1996), and “The Noah’s Ark Problem” (1998a). At the Harvard symposium, Charlie Kolstad (Stanford University) cited this body of work because of its “significance and importance”.

Discounting

It had been also in the 1990s that Marty became thinking about a central problem of the economic analysis of climate change policies, namely long-term discounting. Given the very long time horizons of the climate change problem, analysis of the expected net present value of alternative policies could be dominated by the decision of discount rate, which – with conventional exponential discounting – will greatly diminish the relative quantitative need for phenomena that are decades or longer later on.

Through careful theoretical analysis, Marty figured rather than constant discount rate working, an interest rate that itself is diminishing as time passes is appropriate, in order that benefits and costs soon would be subject to an average rate, while benefits and costs further later on would be at the mercy of a lower rate.

This important and influential work appeared in some articles, including: “On environmentally friendly Discount Rate’ (1994), “Why the Far-Distant Future Ought to be Discounted at its Lowest Possible Rate” (1998b), and “Gamma Discounting” (2001a). At the Harvard symposium, Larry Goulder (Stanford University) emphasised that work is important “since it affects decisions concerning how much we have to spend money on infrastructure, in mitigation, and in other realms”.

Green national accounting

A topic which has pervaded decades of analysis and commentary in environmentally friendly sphere may be the reality that conventional measures of economic growth, such as for example gross domestic product, aren’t measures of welfare, given that they do not take into account externalities (among other non-market economic phenomena). In 1999, the National Research Council published Nature’s Numbers: Expanding the National Economic Accounts to add the Environment, made by a committee chaired by Bill Nordhaus and including Marty Weitzman (Nordhaus and Kokkelenberg 1999). That was associated with several contributions that Weitzman subsequently designed to the scholarly literature, including: “Does NNP Growth Indicate Welfare Improvement” (Asheim and Weitzman 2001) and “A Contribution to the idea of Welfare Accounting” (2001b).

At the Harvard symposium, Bill Nordhaus emphasized Marty’s contributions in this realm, and launched his keynote presentation, “The Intellectual Footprint of Martin Weitzman in Environmental Economics", by stating that Marty “has changed just how we consider economics and the surroundings”. He figured “those who declare that environmental regulations hurt growth are drastically wrong, because they’re using the incorrect yardstick. Pollution ought to be inside our measures of national output, but with a poor sign, and if we use green national output as our standard, then environmental and safety regulations have increased true economic growth substantially in recent years… Because of this important insight we applaud Martin Weitzman, a radically innovative spirit in economics”.

Fisheries

Some will be surprised to discover that a theorist such as for example Marty Weitzman was as immersed as he was in concerns about real life of natural resource management and environmental protection. One of these originates from his research and outreach in the realm of fisheries management. His modelling of Icelandic commercial fisheries affected thinking and discussion all over the world regarding the usage of taxes and quotas to modify open-access fisheries.

As Maureen Cropper (University of Maryland) said at the Harvard symposium, “that is another example of the usage of a straightforward model and treatment of uncertainty that basically did take up a conversation among fisheries economists”. This application of Weitzman’s previously developed theory of instrument choice was documented in his 2002 paper “Landing Fees vs Harvest Quotas with Uncertain Fish Stocks”.

Fat tails

Recently, Marty made prominent and important contributions to considering long-term climate change policy along with his development of a theory of how positive biophysical feedback loops may lead to uncertainty about the damages of climate change that’s best seen as a a probability distribution of damages with fat tails, for instance a Pareto distribution, rather than conventional Gaussian (normal) distribution. The effect is greater weight being directed at catastrophic (but relatively small probability) outcomes.

Speaking at the Harvard symposium, Bob Pindyck of MIT pointed to Weitzman’s prescient 2007 paper, “Subjective Expectations and Asset-Return Puzzles” as having had a profound influence on Marty’s subsequent modelling of catastrophic climate change. A little subset of the papers Marty published upon this topic include: “On Modeling and Interpreting the Economics of Catastrophic Climate Change” (2009), “Fat-Tailed Uncertainty in the Economics of Climate Change” (2011), and “Fat Tails and the Social Cost of Carbon” (2014b).

Domestic and international climate change policy

Marty Weitzman always sought out topics for his research which were not merely interesting, but also relevant and very important to real-world applications. His recent work exploring alternative policy instruments to handle climate change and his critical examinations of the proper execution of international climate agreements provide telling types of this. It had been in this regard that Jim Stock (Harvard University) credited Weitzman for the “tremendous influence” his ideas experienced on the formulation of public policy all over the world.

Just some of the many papers that may be cited in this context are: “Can Negotiating a Uniform Carbon Price help Internalize the Global Warming Externality” (2014a), “A Voting Architecture for the Governance of Free-Driver Externalities, with Application to Geoengineering” (2015), and “On a global Climate Assembly and the Social Cost of Carbon” (2017). Also, of course, Marty and his former student, Gernot Wagner, wrote a lucid and compelling book, Climate Shock: The Economic Consequences of a Hotter Planet (2015).

Theoretical foundations for empirical analyses

It ought to be emphasised that Marty Weitzman’s theoretical work had not been only very important to other theorists, also for empirical economists. In lots of of the realms described above, his insights were fundamental as the building blocks for sound empirical analysis. As Michael Greenstone (University of Chicago) noted at the Harvard symposium, Marty’s work “takes something you are sort of confused about, and once you read it, you can’t know how on earth you were confused beforehand. It just clarifies things in a manner that is actually beautiful.”

An extraordinary scholar

Marty Weitzman was thus a genuine treasure – a “gift that continued giving” – for both research and policy worlds. His are a theorist on environment broadly and on climate change specifically was unparalleled, and formed the foundation of much theoretical and empirical research completed by others over several decades. His work – from examining price versus quantity instruments in the first 1970s through his examinations within the last couple of years of the implications of fat tails in the probability distribution of possible climate damages – has changed just how economists and others take into account the environment and policies to safeguard it.

His contributions were well recognised. He was elected a Fellow of the Econometric Society in 1976; a Fellow of the American Academy of Arts and Sciences in 1986; 3 x won the annual award for “Publication of Enduring Quality” from the Association of Environmental and Resource Economists; received the 20th Anniversary Prize from Fondazione Eni Enrico Mattei, the Leontief Prize, and the Eric Kempe Prize in 2011; and the John Kenneth Galbraith Award in 2013.

My greatest personal remembrance will be that I learned an immense amount from Marty by co-hosting with him for 26 years the Harvard Seminar on Environmental Economics and Policy. That’s 52 semesters involving a lot more than 400 seminars, each with a definite paper and presentation by a respected scholar from over the US and all over the world. I came across that Marty’s questions and comments were often as insightful as the speaker’s presentation.

Of course, we didn’t always agree. I recall our spirited discussions contrasting Marty’s strong view of the superiority of carbon taxes and my view of the relative symmetry of price and quantity instruments for climate change. Also we’d some long discussions about the 2015 Paris Agreement on climate change, which Marty saw (accurately) for what it lacks, and I saw because of its improvements over the international policy architecture that had preceded it. We disagreed, but were never disagreeable (and I never succeeded in changing his mind!). In general, for three decades, I consistently learned out of this remarkable scholar. He truly was something special that continued giving.

Authors’ note: Thanks are because of Maureen Cropper, Robert Pindyck, and James Stock because of their comments on a previous version of the essay. The author is in charge of all remaining errors.

References

Asheim, G B, and M L Weitzman (2001), “Does NNP Growth Indicate Welfare Improvement?” Economic Letters 73(2): 233-39.

Karp, L, and C Traeger (2018), “Prices versus Quantities Reassessed”, CESifo Working Paper No. 7331.

Metrick, A, and M L Weitzman (1996), “Patterns of Behavior in Endangered Species Preservation”, Land Economics 72(1): 1-16.

Mideksa T, and M L Weitzman (2019), “Prices versus Quantities across Jurisdictions”, Journal of the Association of Environmental and Resource Economists 6(5): 883-891.

NY Times (1985), “Best Idea Since Keynes”, Editorial, March 28, Section A, page 30.

Nordhaus, W D, and E C Kokkelenberg (eds) (1999), Nature’s Numbers: Expanding the National Economic Accounts to add the surroundings, Panel on Integrated Environmental and Economic Accounting, National Academy Press.

Nordhaus, W D (2019), “The Intellectual Footprint of Martin Weitzman in Environmental Economics”, presentation at “Frontiers in Environmental Economics and Policy: A Symposium honoring Martin L. Weitzman”, Harvard Kennedy School, October 11.

Passell, P (1984), “The Editorial Notebook: The Hidden Boon in Profit-Sharing”, NY Times, November 15, Section A, Page 30.

Stavins, R N (2019), “The continuing future of U.S. Carbon-Pricing Policy”, NBER Working Paper No. 25912.

Wagner, G, and M L Weitzman (2015), Climate Shock: The Economic Consequences of a Hotter Planet, Princeton University Press.

Weitzman, M L (1970a), “Iterative Multi-Level Planning with Production Targets”, Econometrica 38(1): 50-65.

Weitzman, M L (1970b), “Soviet Postwar Economic Growth and Capital Labor Substitution”, American Economic Review 60 (4): 676-92.

Weitzman, M L (1974), “Prices vs. Quantities”, Overview of Economic Studies 41(4): 477-91.

Weitzman, M L (1984), The Share Economy, Harvard University Press.

Weitzman, M L (1992), “On Diversity”, Quarterly Journal of Economics 107(2): 363-405.

Weitzman, M L (1993), “What things to Preserve: A CREDIT CARD APPLICATOIN of Diversity Theory to Crane Conservation”, Quarterly Journal of Economics 108(1): 157-83.

Weitzman, M L (1994), “On the ‘Environmental’ Discount Rate”, Journal of Environmental Economics and Management 26: 200-9.

Weitzman, M L (1998a), “The Noah’s Ark Problem”, Econometrica 66(6): 1279-98.

Weitzman, M L (1998b), “Why the Far-Distant Future Ought to be Discounted at its Lowest Possible Rate”, Journal of Environmental Economics and Management 36(3): 201-8.

Weitzman, M L (2001a), “Gamma Discounting”, American Economic Review 91(1): 260-71.

Weitzman, M L (2001b), “A Contribution to the idea of Welfare Accounting”, Scandinavian Journal of Economics 103(1): 1-23.

Weitzman, M L (2002), “Landing Fees vs Harvest Quotas with Uncertain Fish Stocks”, Journal of Environmental Economics and Management 43: 325-38.

Weitzman, M L (2007), “Subjective Expectations and Asset-Return Puzzles”, American Economic Review 97(4): 1102-30.

Weitzman, M L (2009), “On Modeling and Interpreting the Economics of Catastrophic Climate Change”, Overview of Economics and Statistics 91(1): 1-19.

Weitzman, M L (2011), “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change”, Overview of Environmental Economics and Policy 5(2): 275-92.

Weitzman, M L (2014a), “Can Negotiating a Uniform Carbon Price Help Internalize the Global Warming Externality?”, Journal of the Association of Environmental and Resource Economists 1(1/2): 29-49.

Weitzman, M L (2014b), “Fat Tails and the Social Cost of Carbon”, American Economic Review Papers and Proceedings 104(5): 544-6.

Weitzman, M L (2015), “A Voting Architecture for the Governance of Free-Driver Externalities, with Application to Geoengineering”, Scandinavian Journal of Economics 117(4): 1049-68.

Weitzman, M L (2017), “On a global Climate Assembly and the Social Cost of Carbon”, Economica 84(336): 559-86.

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