On Balance: Martin Weitzman (1942-2019) and Cost Benefit Analysis

 September 13, 2019

By: Bengt Kristrom

Professor Martin Weitzman passed away unexpectedly at the end of August 2019. A substantial number of accounts of his many contributions to economics in general and environmental economics in particular are available, and collectively provide a good overview of his contributions and influence on the profession (see links at the end of this post). In this short note, I want to highlight some aspects of his works that are relevant for applied welfare economics in general and cost-benefit analysis in particular. I single out two stellar contributions that opened up new vistas for research and enriched the literature on welfare measurement.

Perhaps the most direct application of his celebrated “dismal theorem” (Weitzman 2009) is that cost-benefit analysis has little to offer when it comes to global climate policy. Indeed, given the assumptions of his model, comparing benefits and costs provides no useful information to decision-makers in this particular context.

One way of approaching the theorem is to recall that if an event is unlikely but comes at an exorbitant price, the average (or expected) value can still be high. That this average is, in some sense, infinite in his model came as a surprise. The result led Weitzman to question the meaningfulness of comparing benefits and costs for global climate policies, including using existing empirical models that do include uncertainty. The dismal theorem continues to provide substantial food for thought when thinking about how to apply cost-benefit analysis to climate change, but also has bearing on the treatment of uncertainty in cost-benefit-analysis in more general terms.



If the “dismal theorem” speaks to contemporary issues, Weitzman’s 1976 paper on the interpretation of Net National Product (NNP) unravels connections to using national product as a welfare measure, a classic idea in cost-benefit analysis. His objective was to show that there is a sense in which income and wealth are “two sides of the same coin.” He demonstrated in an idealized model that NNP is a measure of sustainability; the extension to include natural resources and the environment is straightforward.

This contribution came to play a pivotal role in a whole literature on “green NNP.” Because we compare alternatives in a cost-benefit analysis and try to find if a given alternative is an improvement, one may argue that Weitzman’s NNP has little to do with cost-benefit analysis. After all, his objective was to find out whether or not NNP itself (not its change) has welfare significance. Be that as it may, the contribution sparked an array of explorations into welfare measurement which, of course, is what cost-benefit analysis is all about.

As Paul Samuelson once said, ”In the long run, the economic scholar works for the only coin worth having – our own applause” (Breit et al. 2014).  I believe that most economists will agree with me when I assert that Professor Weitzman left us as a man who was very rich in the appreciation of his peers. Weitzman explored the hard issues, and so gifted us a treasure trove of groundbreaking contributions. His ideas will long shape the questions that we ask, and how we seek to answer them.

The Society for Benefit-Cost Analysis will return to Professor Weitzman’s ideas and contributions in a special session at its annual conference and meeting in March 2020.

Bengt Kriström is professor of Resource Economics at the Department of Forest Economics at the Swedish University of Agricultural Sciences and a Senior Advisor to the Centre for Environmental and Resource Economics (CERE). He is a member of the Board of the Society for Benefit Cost Analysis.

References

  • Martin Weitzman photo by Claudio Cambon, 2015
  • Bengt Photo by Mona Bona-Bergman
  • Breit, W., R.L. Ransom, and R.M. Solow. 2014. “Paul A. Samuelson: From Economic Wunderkind to Policy Maker,” in The Academic Scribblers: Third Edition. Princeton Legacy Library. Princeton University Press, p. 107.
  • Weitzman, M.L. 2009.  On modeling and interpreting the economics of catastrophic climate change. The Review of Economics and Statistics 91(1):1–19.
  • Weitzman, M.L. 1976. On the welfare significance of national product in a dynamic economy. The Quarterly Journal of Economics 90(1):156-162.

Some Obituaries, Tributes, and Remembrances

New York Times

The Economist

The Crimson

VoxEU/Robert Stavins

Harvard University

Resources for the Future