Along with a global group of admirers and acolytes, the Wharton School shares in the loss of Lawrence R. Klein, the pioneering economist who died on October 20 at the age of 93.
Klein, whose work with statistical models to predict global economic trends earned him the 1980 Nobel Prize in Economic Sciences, taught at Wharton and the University of Pennsylvania for 33 years before retiring in 1991. Challenging widely accepted notions at the end of World War II that predicted a post-war return to economic depression, Klein used econometric models to show the opposite. An economic expansion, of course, is exactly what happened. His influence would be profound and lasting. “Few, if any, research workers in the empirical field of economic science have had so many successors and such a large impact as Lawrence Klein,” wrote members of the Nobel committee.
Klein constructed the Wharton Econometric Forecasting Model, which was used to forecast fluctuations in national product, exports, investments and consumption, and to study their effect on areas such as taxation, public expenditure and rising oil prices.
“The basic point is that economies are very complex — there are millions of actors — and to understand how they will respond to some change is extremely challenging,” says University of Pennsylvania economics and sociology professor Jere R. Behrman. “His contribution, building in part on the work of others, was developing a manageable way of representing economies and how they would change with different kinds of policy changes.”
“It was definitely new,” notes Wharton emeritus finance professor Marshall E. Blume, who joined Klein at Penn in 1966. “Unlike most people who received the Nobel Prize, he did not receive it for a single paper. He received it for a life’s work in developing these large models.”
“While Klein was by no means the first person to enter the field of economic model building, there is little doubt that his own work has shaped developments in the field quite uniquely and has influenced model builders on a worldwide scale,” wrote R.J. Ball, a professor of economics and econometrics at the London Business School, in a paper prepared for the Nobel committee.
Sharing the Wealth
Klein, known as Lawrie, was also “intensely loyal to Penn,” according to Behrman, who remembers Klein’s affable manner and “nice, subtle sense of humor that was captured in the twinkle of an eye.” Klein helped to set up several institutions within the university, including the highly regarded International Economic Review with Osaka University, and the Penn Institute for Economic Research (PIER), of which he was the first director.
“I think more than most faculty members, he helped set up institutions that already have outlived him in positive ways from the point of view, in particular, of the economics department, but more broadly the university,” notes Behrman. One case in point is the way that Klein structured Wharton Econometric Forecasting Associates (WEFA) — not as a profit-making forecasting firm that would enrich its founders, but as a non-profit. “WEFA would plow back to the university whatever profits it made,” says University of Pennsylvania emeritus economics professor Roberto S. Mariano. “Klein used those proceeds to support the department of economics partly by bringing in people like myself, but also to support summer research, to bring in faculty, and, even more important, to support scholarships and assistantships for graduate students.”
“Few, if any, research workers in the empirical field of economic science have had so many successors and such a large impact as Lawrence Klein.” –The Nobel committee
Further, when WEFA was sold, Klein took his share of the proceeds — $1 million — and put that money back into Project LINK, a co-operative, non-governmental, international research organization now partially administered by the United Nations Department of Economic and Social Affairs. “This really underlines one of his most admirable traits. He was a very generous person,” says Mariano.
The Speed of Information
Klein came to the University of Pennsylvania in 1958 after an early peripatetic academic career. Born in Omaha, Neb., in 1920, he graduated from the University of California, Berkeley, in 1942 with a B.A. in economics, and went on to study with Paul Samuelson at MIT, where he earned his PhD. He built economic models at the University of Chicago, University of Michigan and Oxford University.
In more recent years, Klein was marrying his earlier work in creating models with advances in technology and speed of information. “He was focusing on high frequency economics — how basically to pull in all different economic indicators as they are released in real time,” says Wharton statistics professor Francis X. Diebold. “It might have been quarterly, monthly or weekly, or daily or even higher frequency numbers. He was trying to use all the information coming out in real time to continually refine estimates of where we were in the business cycle, but also to predict.”
A ‘Traveling Man’
In the speech awarding Klein his Nobel Prize, Herman Wold of the Royal Academy of Sciences called Klein a “traveling man who has collaborated actively in the construction of economic macromodels in other countries, other continents. His most recent major achievement is Project LINK, which ties together economic macromodels for different countries, including the Third World and the Communist countries, integrating the models to a total system with aim to increase our understanding of international economic relationships, and to improve the forecasts of international trade, capital movements, and other parallels in space to the economic fluctuations in time.”
According to Mariano, Klein’s work with Project LINK was so significant that it should have earned him another Nobel Prize. “It created a stage for international dialogue among different ideologies. It provided a forum for disciplined discussion coming from different views on how world economic issues could be addressed and resolved. He actually brought into such a forum countries like the [former] USSR and China, and certainly up to his dying moment he talked about how important it was to bring Africa into the discussion.”
Even with all his achievements, Klein wore his honors lightly, colleagues note. “He was the most humble guy you could ever meet,” says Diebold. “Intensely serious and focused, but at the same time kind, gentle and quiet — he was quite unique in that regard.”
“Certainly, anyone who wanted forecasting for understanding how the economy would work would call him,” notes Blume. However, “he would never tell you that. Someone from the White house might have called him several times, but he would never tell you.”
Politicians did call. He was an advisor to Eugene McCarthy in the 1968 presidential election. And in the 1970s, Klein was tapped by President Jimmy Carter to assemble and develop positions on 15 economic campaign issues such as inflation, housing and consumer protection. In 1976, Klein told People magazine: “If you are a technician and are asked for help, it is a social obligation of citizenship to give it.”