68 Finance & economics The EconomistSeptember 7th 2019
M
artin weitzman, one of his colleagues observed last year,
was not an economist you would expect to encounter on the
7am plane from Boston to Washington. That was not because the
retired Harvard University professor, who died on August 27th,
lacked influence. On the contrary, his research was cited by policy-
makers around the world. Nor was it because he objected to flying,
although he might have done on the basis of his field, environ-
mental economics. It was because he was a recluse who, according
to many who knew him, preferred thinking in his study to being
with his friends, let alone with politicians. Making intellectual ad-
vances was the most important thing.
But what he made of his time at his desk. He was of a rare breed:
a theorist capable of brilliant abstract reasoning whose work was
nevertheless squarely relevant to essential—and increasingly
pressing—policy choices. In 1974, early in his career, he wrote a pa-
per that became a foundation stone of every course on public eco-
nomics. It posed the question: how should regulators rein in pol-
lution? Should they issue (tradable) pollution permits to firms,
thereby picking a quantity? Or should they tax polluters, thereby
picking a price?
Two sides of the same coin, went existing thinking, which as-
sumed perfect knowledge on the part of bureaucrats. But Mr Weitz-
man assumed that predicting the reaction of prices to a regulated
quantity, and vice versa, is partly guesswork (an assumption that
would be borne out, decades later, when the prices of carbon per-
mits in the European Union’s emissions-trading scheme collapsed
unexpectedly after the financial crisis). Which you should regu-
late depends on the relative costs of mistakes. If getting the quanti-
ty of pollution slightly wrong would be costlier, then quantity
should be pinned down, with prices allowed to work themselves
out. If a slightly errant price can do more damage—say, because the
need to buy expensive permits could put many firms out of busi-
ness—then a tax, fixed at a safe level, is the way to go.
Uncertainty was the theme that ran through Mr Weitzman’s ca-
reer. It was also another reason to avoid that Washington shuttle:
how could an economist ever make a precise recommendation in
such a complex world? He would provide the intellectual machin-
ery for thinking about a problem; others would have to choose the
precise settings. For example, perhaps the biggest debate in envi-
ronmental economics in recent years has concerned discount
rates. By how much should you mark down the environmental
damage of pollution to take account of the fact that it comes most-
ly in the future? Mr Weitzman assumed that the correct discount
rate is itself uncertain. He demonstrated mathematically that
whatever rate is chosen, uncertainty means it should decline over
time. The further you peer into the future, the lower your discount
rate should be. Many governments, including those of Britain,
Denmark, France and Norway, now apply declining discount rates
in their economic analyses, although the debate about the right
starting-point is far from settled.
The latter stages of Mr Weitzman’s career were defined by an as-
sault on what he saw as false precision in predictions of the costs
of climate change. In 2018 William Nordhaus, his longtime col-
league—and rival, although there was no animosity between
them—won the Nobel prize in economics for his work on the costs
and benefits of acting to reduce greenhouse-gas emissions. Mr
Nordhaus carefully prices the potential damage from global
warming using an economic model, discounts it appropriately (he
favours a relatively high rate) and compares the result to the costs
of reducing emissions today. His models suggest that policymak-
ers should implement a carbon tax starting at around $30-40 per
tonne of carbon dioxide and tolerate warming this century of over
3°C, compared with temperatures in pre-industrial times.
Mr Weitzman thought this approach problematic. Climate
change, he argued, does not lend itself easily to cost-benefit analy-
sis. Despite advances in climate science, the sensitivity of global
surface temperature to atmospheric carbon dioxide remains un-
certain. Even if the central case is that a given amount of pollution
produces a manageable eventual rise in temperatures, a cataclys-
mic event, such as global warming of over 6°C, remains worryingly
possible. Cost-benefit analysis, he showed, can break down in
these conditions. His “dismal theorem” proved that with fat-tailed
distributions, and under certain mathematical assumptions
about people’s preferences, society should be willing to pay un-
limited amounts today to avoid catastrophic risk.
The dismal profession
Mr Weitzman acknowledged that this result was detached from re-
ality: “obviously it cannot be taken literally,” he said. Nobody be-
lieves in giving up everything today in the name of future safety.
Atheists are rarely persuaded by Pascal’s wager—the argument that
you should believe in God to avoid the infinite downside risk of
eternal hellfire. But Mr Weitzman thought he had made a deeper
point about the fragility of cost-benefit analysis in the face of ex-
treme risks. “We desperately need more information about what’s
going on in these tails,” he said. “It’s not the median values that are
gonna kill us.”
Mr Weitzman is thought to have taken his own life, the second
celebrated economist to do so this year. His ideas on tail risks
might yet prevail in the profession, despite his apparent passing-
over for the Nobel prize. Certainly campaign groups, such as Brit-
ain’s Extinction Rebellion, increasingly emphasise catastrophic
risk above all else. He died a political moderate and, according to
one colleague’s recollection, was no fan of the Green New Deal, the
plan for fighting climate change proposed by America’s left, which
downplays the role of carbon pricing.
Still, Mr Weitzman was not one to say precisely what should be
done. His domain was that which is not known. 7
Free exchange The uncertainty of genius
The world loses one of its leading environmental economists