The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1980

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Nobel Prize Award Ceremony

• Award Ceremony Speech

Lawrence R. Klein

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Lawrence R. Klein

Born: 14 September 1920, Omaha, NE, USA

Affiliation at the time of the award: University of Pennsylvania, Philadelphia, PA, USA

Prize motivation: "for the creation of econometric models and the application to the analysis of economic fluctuations and economic policies"

Field: Macroeconometrics

Contribution: Analysis of the effects of macroeconomic policy by econometric model building. He also made important contributions in developing fore-casting techniques.

Autobiography

Leo Byron Klein and Blanche (Monheit) Klein, both of whom were born in the American Middle West, had three children. I, Lawrence Klein, was born in Omaha, Nebraska, as were my elder brother and younger sister. My early education was in the public school system of Omaha, where, retrospectively, I realize that my high school training served me in good stead for the basic subjects of mathematics, English, foreign languages and history.

Although I was not aware of it at the time, the experience of growing up during the Great Depression was to have a profound impact on my intellectual and professional career. Collegiate life subsequently gave me a basis for understanding this experience and to develop some analytical skills for dealing with the important economic aspects of this era, as well as the exciting times that were to come - World War II, postwar reconstruction, and expansion.

An early fascination with higher mathematics at the university level blossomed into speculative thinking that could provide a basis for dealing with economic issues. The teachings of the mathematics faculty at Los Angeles City College provided me with great stimulus, and the onset of World War II, with all the associated disturbances leading up to it, made a tremendous impression on my thoughts about socio-politico-economic interrelationships.

The completion of my undergraduate training at the University of California (Berkeley) provided just the needed touches of rigor at advanced levels in both economics and mathematics. My teachers there gave me great encouragement and challenge. It came as a surprise to find that a professional society and journal (Econometrica) were flourishing, and I entered this area of study with great enthusiasm.

The next two steps in my training and professional development were, however, fundamental. A chance to study at M.I.T. under the rising star of the period - Paul A. Samuelson - was an unforgettable experience. I successfully vied for his time and attention which were instrumental in giving me a good grasp of economics and mathematical ways of dealing with significant problems of the subject. After I completed my dissertation under Paul Samuelson, the next major step was a decision to join the econometrics team at the Cowles Commission of the University of Chicago, where the director, Jacob Marschak, gave me the challenging assignment of reviving Jan Tinbergen's early attempts at econometric model building for the United States.

At Chicago, I was in the midst of a veritable galaxy of stars: Trygve Haavelmo, Tjalling Koopmans, Theodore Anderson, Leonid Hurwicz, Herman Rubin, Kenneth Arrow, Don Patinkin, Herman Chernoff, and Herbert Simon, among others. I completed my first of a series of macroeconometric models, solidified my understanding of econometrics, learned (through endless discussion) about the functioning of the economy, and got started on several theoretical paths such as aggregation, demand systems, and prediction.

At the Cowles Commission, I met and married Sonia Adelson (my second marriage). We were anxious to visit Europe right after World War II and left for Norway in October, 1947, to spend an academic year with Ragnar Frisch and Trygve Haavelmo. On the way from Chicago, I spent the summer of 1947 in Ottawa, helping to build the first of a series of econometric models for the Canadian government. During 1948, I had the opportunity of visiting economists in Sweden (Herman Wold, Erik Lundberg, Erik Lindahl, and Ragnar Bentzel), on the Continent (Jan Tinbergen), and in England (Richard Stone). I also had stimulating contact with Poul Norregaard-Rasmussen, who was visiting Oslo, and with Jorgen Pedersen of Aarhus. When I returned to America in the Autumn, 1948, I joined the staff of the National Bureau of Economic Research at the invitation of Arthur Burns, on a post doctoral grant and was able to make some econometric studies of production functions that opened up approaches that have stood the test of time. I became interested, at that time, in the possibility of estimating the effects of wealth, especially liquid assets, on saving behavior and joined the staff of the Survey Research Center, University of Michigan (jointly with the National Bureau of Economic Research for another year) to exploit the data that were being produced by George Katona's surveys of consumer finances. My colleague, James Morgan, worked on similar problems and gave good insight to me. At Michigan, I restarted my work on macroeconometric model building and prepared, with my student, Arthur Goldberger, the model known as the Klein-Goldberger Model which evolved into a series of generations of the Michigan Model.

After four years at Michigan, I went to Oxford, at the suggestion of Frank Burchardt of the Institute of Statistics, to work on the data from the Oxford Savings Surveys and also to build a model of the U.K. During a four year stay at Oxford, I got started on some studies in theoretical econometrics dealing with methods of statistical inference.

Finally, I returned to America to join the faculty of the University of Pennsylvania, which has been my professional home ever since 1958. There I initiated a series of models that were to become known as the Wharton Models. They continue to develop. During my years at Pennsylvania, I have traveled widely, working on modeling projects for many countries - Japan, Israel, and Mexico, in particular. I have also supervised a number of dissertations that became sustained modeling efforts for many developing and developed countries.

During the early 1960s, I decided to supplement research support for quantitative economic studies at Pennsylvania by selling econometric forecasts to private and public sector buyers. The funds derived from these sales were then plowed back into student support and more general financing of a broader research effort in the Economics Department at Pennsylvania. This enterprise grew, over the years, into the status of a nonprofit corporation and ultimately was sold to a private publishing company to function as a for-profit corporation. The funds from the sale were put into research and general teaching budgets at the university. Wharton Econometric Forecasting Associates, Inc., is now a growing enterprise with many model and other econometric facilities.

After my first visit to Japan, in 1960, to work on a joint model building project at Osaka University, I maintained a continuing interest in the country and the entire Far East. On many occasions, I returned for conferences, lecturing, or extension of original econometric studies. Jointly with Michio Morishima and Shinichi Ichimura, I started International Economic Review which serves as a combined publishing effort of Osaka University and the University of Pennsylvania.

A committee of the Social Science Research Council (Economic Stability - later adding "Growth" to the title) looked into the question, in 1959, of building a superior short-run econometric model of the United States. I participated fully in that venture as a principal investigator, and the project continued for more than 10 years. While no working model survived this research decade, many new results and procedures were uncovered that shaped my whole course of research for some time to come. The parallel development with the series of Wharton models continued and benefitted from the transferenee of research results from the SSRC project, which had, meanwhile, moved to the Brookings Institution.

The SSRC committee turned attention from team research for building a model of the United States to doing one for world trade in order to investigate the international transmission mechanism. Project LINK was created at a meeting at Stanford in 1968. I shared responsibilities as principal investigator with Bert Hickman of Stanford, Rudolf Rhomberg of the International Monetary Fund and Aaron Gordon of the University of California. That project became an international cooperative venture, with the central coordinating facility and software located at the University of Pennsylvania. Project LINK is still thriving after more than a decade by adding new countries, new economic processes and a longer time horizon. As in the case of the Brookings-SSRC Model Project for the U.S., Project LINK created a great deal of related and incremental research by enabling countries to initiate econometric model building projects, by extending "best practice" research to various centers, and by showing official international bodies how to interrelate different parts of the world economy.

Visits to Israel to lecture at Hebrew University and to Vienna to lecture at the Institute for Advanced Studies laid the foundations for repeated return visits, in the former case as a board member of the Falk Institute for Research in Economics, and in the latter, as a member of the Scientific Advisory Board of the Institute for Advanced Studies. I have had additional reasons for visiting Austria to participate on the research program of the International Institute of Applied Systems Analysis.

My latest research efforts have been devoted to bringing new participants into the LINK Project, modeling the centrally-planned economies of the world (especially the U.S.S.R.), introducing modern econometrics into the People's Republic of China, and expanding the activities of the Wharton Econometric Forecasting Associates where I presently serve as a professional consultant.

Over the years, I have often consulted with public officials on economic matters, both domestic and foreign, including international bodies. On several occasions I have provided public testimony at hearings but I have remained in academia and have not taken permanent positions in government. From my student days, the concept of public service and the relationship of theoretical economics or econometrics to real world problems has appealed to me, and I have tried to follow the footsteps of my teachers in practicing economics in this way.

My wife and I have four children - Hannah, following a scientific career as a Ph.D. geneticist; Rebecca, as a teacher; Rachel, as an editor; and Jonathan, as a computer programmer.

From Nobel Lectures, Economics 1969-1980, Editor Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992

This autobiography/biography was written at the time of the award and first published in the book series Les Prix Nobel. It was later edited and republished in Nobel Lectures. To cite this document, always state the source as shown above.

Addendum, May 2005

Since my becoming a Laureate in 1980, shortly after my 60th birthday, I continued regular teaching activities at Pennsylvania until the end of the academic year 1990-91. In my emeritus status, I supervised many doctoral dissertations, both at Pennsylvania and other universities, as well as supervised study of pre-doctoral students. Ongoing research activities and semiannual meetings of Project LINK have been maintained on an enlarged basis at the United Nations and the University of Toronto.

I have retained my personal research base of activities at the University of Pennsylvania and several consulting/forecast assignments at Wharton Econometrics, which became a private organization with the acronym WEFA and later merged into Global Insight. That work continues in the form of special projects. For many years I served on the Jury for the annual award of Premio Jaime Primero in Spain. Laureates from economics and other fields play prominent roles. Of course there are numerous other occasions every year that bring many Laureates together for serious discussions and lectures. Shortly before 1980, reform got under way in China. My involvement in leading a team of US economists to establish scholarly relations with Chinese colleagues and their institutions attracted my attention. With Lawrence Lau of Stanford, I organized a summer workshop in econometrics at the Summer Palace in Beijing. That effect blossomed into repeated visits to China, where I became a consultant to the State Information Center. From 1979-80 onwards, extensive scholarly exchange has been maintained with China, watching, interpreting, and trying to help the economy flourish. More than 25 years later, this scholarly exchange, both in China and at Pennsylvania has been extremely rewarding.

Soviet, and later, Russian reform have been equally interesting and challenging, during a transition period, in the form of doctoral research supervision. Much of this effect has grown into new attempts at econometric model building which are coming into fruition in the early 21st century. The econometric methods that have been so important for the study of macroeconomic performance in market economies have turned out to be equally revealing for the study of the two giant transition economies, decades later.

My personal research goal since 1980 has been to improve the forecast ability of quantitative methods in economics. At the beginning of this approach, data were comparatively scarce in sectoral coverage and in frequency. This has changed drastically in the information age. The joint use of modern computer hardware and the enormous availability of data point to the need for fresh research into the subject of accuracy of econometric forecasting.

I have always believed that people have misjudged the accuracy of economic forecasting and I lectured on that subject at the centennial gathering of Laureates in 2001, in Stockholm. During the 1980s and 1990s, I researched and applied methods of high frequency economic forecasting, to be used by themselves, and for objective establishment of initial conditions for longer range forecasts from structural dynamic models that carry forward the pioneering contributions of Jan Tinbergen. It is my firm belief that the only satisfactory test of economics is the ability to predict, and in crucial predictive situations such as reconversion after World War II, the settlement of the Korean War, the settlement of the Vietnam War, the abrupt economic policy switch of the Nixon Administration in August 1972, the oil shock of 1973 (forecast of a world-wide succession by LINK), the recession of 1990. In these crucial periods, econometric models outperformed other approaches, yet there is considerable room for improvement, and that is precisely what is being examined in development of high-frequency models that aim to forecast the economy, every week, every fortnight, or every month, depending on the degree of fineness of the information flow. My present research deals directly with weekly forecasting for the United States, fortnightly forecasting for China, and monthly forecasting for Russia. I have consulted on model building for Hong Kong, Japan, Mexico, and Thailand, but not in connection with regularly repeated applications.

In the case of China, I and my colleague, Suleyman Ozmucur, joined the debate about the accuracy of China's (ex post) estimates of their growth rates. We concluded, by the methods that we used, that China's GDP figures were not biased; the research preceded the worldwide amazement and conviction that China was growing too fast. Also, with the help of two visiting scholars from China's State Information Center, Ms Liping Tao and Mr Huiqing Gao, in summer 2004, I estimated urban and rural linear expenditure systems, from which we estimated "true" cost of living indexes, concluding that China's inflation rate was overstated by more than 1.0%, thus implying that China's growth rate had been even stronger than people realized.

Other research activities have included studies of US productivity growth in the 1980s and 1990s through the use of repeated input-output tables, from which it was possible, with the help of colleagues, Vijaya Duggal and Cynthia Saltzman, to estimate separate effects of increasing returns to scale, IT hardware, IT software in specific industries.

In 1990, after the end of the Cold War, a new society was launched, Economists Against the Arms Race, and I was an early Chairman of that organization, originally known as ECAAR. It reached international scope and, under various name changes, has remained committed to opposition to arms races, support of conflict resolution, arms control, and the analysis of effect of war on economic performance.

When I retired from full-time active teaching in 1991, I occasionally taught classes at the Osaka International University, Ritsumeikan University, and Reitaku University in Japan. I continued to serve as referee for some peer review journals and edited some collections of economic works, Project LINK and a memorial volume for a colleague, Albert Ando, in addition to making separate contributions for chapters in memorial volumes for others.

In this period since 1980, I have watched 7 and 1 grandchildren grow and develop. One considerably gifted grandson was swept away by a tidal wave at age ten, but I try to get as much satisfaction as possible in tracking the growth and development of others, one of whom followed in some footsteps as a postgraduate student at Oxford and Pennsylvania. My direct issues have become professor of genetics, professor of linguistics, author, and systems analyst. My wife and I follow the lives of children, spouses, and their issue with the greatest of interest.

In addition to teaching and research analysis in an academic setting since becoming a Laureate, I have served on several boards or committees, one for a profit making corporation and several for nonprofit entities, especially scholarly organizations. Two nonprofit assignments were for the Finance Committee and the Human Rights Committee of the National Academy of Sciences (US), various committees of the American Philosophical Society, and some for Israeli scholarly or academic institutions. These assignments for work in the nonprofit sectors have been intellectually rewarding - well worth the efforts.

One particular for-profit board has been with W P Carey & Co, an investment banking company engaging in sale-leaseback real estate operations as a means of providing liquid financial capital to US and some foreign companies. The W P Carey Foundation, a separate nonprofit organization makes charitable contributions and general philanthropic awards that are financed by the earnings that W P Carey has derived from his business operations. These activities have taught me a great deal about financial business activities as well as worthy philanthropic operations. I have earned and learned, on the board activities of W P Carey & Co in addition to providing advice for the company on macroeconomic issues that affect large companies. In this respect, I gained a great deal of knowledge about providing useful economic advice in business decision making.