A Depression boyhood in Omaha
Lawrence Robert Klein was born in Omaha, Nebraska, on September 14, 1920, the middle of three children of Leo Byron Klein and Blanche (Monheit) Klein, both born in the American Midwest. He went through Omaha’s public schools, which, he later said, gave him a sound grounding in mathematics, English, foreign languages and history.
The defining experience of his youth was the Great Depression. “Although I was not aware of it at the time,” he wrote in his Nobel autobiography, “the experience of growing up during the Great Depression was to have a profound impact on my intellectual and professional career.” Mass unemployment, collapsing farm prices and bank failures were the economic facts of his childhood, and the question of how to understand and prevent such disasters ran through his whole working life.
From calculus to Samuelson’s first student
Klein discovered higher mathematics at Los Angeles City College and then went to the University of California, Berkeley, where he earned his bachelor’s degree in economics in 1942. There he was surprised to learn that a professional society and journal, Econometrica, existed for exactly what he wanted to do: combine economic theory, mathematics and statistics. He entered the field, as he put it, with great enthusiasm.
He went on to the Massachusetts Institute of Technology, where he became the first doctoral student of the young Paul Samuelson, later a Nobel laureate himself, and received his PhD in 1944. In 1947 he published The Keynesian Revolution, an account of John Maynard Keynes’s new theory of how total spending determines output and employment.
The first models of a whole economy
After MIT, Klein joined the Cowles Commission for Research in Economics at the University of Chicago, then the world centre of mathematical economics. Its director, Jacob Marschak, gave him a daunting assignment: revive the Dutch economist Jan Tinbergen’s early attempts to build a statistical model of the United States economy. Klein built a system of equations describing consumption, investment, wages, prices and output, estimated from historical data, that could be used to forecast and to test the effects of government policy.
His models soon passed a famous test. As the Second World War ended, many economists expected the country to slide back into depression once military spending stopped. Klein’s model pointed the other way: pent-up demand for consumer goods and the purchasing power of returning soldiers would keep the economy growing. He was right. He also correctly forecast a mild recession at the end of the Korean War. In the summer of 1947 he helped build the first of a series of econometric models for the Canadian government, and he then spent a year in Norway and Europe with leading econometricians including Ragnar Frisch and Tinbergen.
Michigan, McCarthyism and Oxford
At the University of Michigan, where he also studied saving behaviour using George Katona’s surveys of consumer finances, Klein and his student Arthur Goldberger built the Klein–Goldberger model, one of the most influential early models of the American economy. But in 1954 it became public that Klein had briefly joined the Communist Party in the 1940s, and in the climate of the McCarthy era he was denied tenure.
He moved to Oxford, where for four years he worked on British household savings surveys and, with James Ball, built an econometric model of the United Kingdom. In 1958 he returned to the United States to join the University of Pennsylvania, which remained his professional home for the rest of his life. In 1959 he received the John Bates Clark Medal, awarded to an American economist under forty judged to have made a significant contribution to economic knowledge.
The Wharton models and forecasting for everyone
At Penn, Klein built the Wharton Econometric Forecasting Model, smaller than some rivals but with a strong reputation for analysing business conditions. It was used to forecast national output, exports, investment and consumption, and to estimate how changes in taxes, government spending or oil prices would ripple through the economy. He also helped lead the Brookings–SSRC project, a large team effort in the 1960s to build a detailed model for forecasting the short-term course of the US economy.
To pay for research and students, Klein began in the early 1960s to sell econometric forecasts to private and public buyers, ploughing the money back into student support and the economics department. The enterprise grew into Wharton Econometric Forecasting Associates, became a non-profit corporation and was eventually sold, with the proceeds going into Penn’s research and teaching budgets. It helped launch the commercial economic forecasting industry, and its clients included major corporations such as General Electric and IBM.
Linking the world’s economies
In 1968 Klein and colleagues created Project LINK, an international effort to connect the economic models of many countries so that a shock in one, such as a jump in oil prices, could be traced through trade and capital flows to the others. It was the first serious attempt at a global economic model. LINK grew to include most industrial countries, socialist economies and developing nations, and the Nobel committee noted that it had encouraged model-building in many of the participating countries. In 1989 the LINK system moved from Penn to the United Nations Secretariat in New York, where Klein remained its intellectual leader until his death and the project continued until 2020.
Klein worked on models for Japan, Israel, Mexico and many other countries. From 1979 he helped open scholarly exchange with China, organising with Lawrence Lau a summer workshop on econometrics at the Summer Palace in Beijing and later advising China’s State Information Center.
He also built lasting institutions for the profession. After a first visit to Japan in 1960 to work on a joint model-building project at Osaka University, he founded the International Economic Review with Michio Morishima and Shinichi Ichimura as a joint publication of Osaka and Penn. In the 2000s, with his colleague Suleyman Ozmucur, he examined the reliability of China’s official growth statistics and concluded that, by their methods, the figures were not biased, and with Chinese visiting scholars he estimated cost-of-living indexes suggesting that Chinese inflation had been overstated. With other colleagues he used repeated input-output tables to measure how computer hardware and software raised American productivity in the 1980s and 1990s.
How his models changed economic policy
In awarding him the 1980 prize in economic sciences, the Royal Swedish Academy of Sciences said that, thanks to Klein, econometric model-building had attained widespread, not to say universal, use, in public administration, political organisations and large enterprises as well as universities, and that few if any researchers in empirical economics had had so many successors. Harvard’s Martin Feldstein said Klein was the first to create the statistical models that embodied Keynesian economics, tools still used by the Federal Reserve and other central banks.
Today every major central bank and finance ministry uses large statistical models of the economy to forecast growth and inflation and to test the likely effects of interest-rate and budget decisions. The methods have changed, and economists such as Christopher Sims sharply criticised the assumptions behind the big structural models of Klein’s generation. In his last decades Klein himself turned to high-frequency models that use the latest weekly and monthly data to estimate how the economy is doing in the current quarter, producing regular forecasts for the United States, China and Russia.
Family, faith and public service
Klein was of Jewish descent and is counted among the Jewish Nobel laureates by the Jewish Virtual Library. He did not write publicly about religious practice, but he had long ties to Israel: he lectured at the Hebrew University of Jerusalem, served on the board of its Falk Institute for Economic Research, and sat on boards of other Israeli scholarly and academic institutions. At the Cowles Commission he met and married Sonia Adelson, his second wife; they had four children, Hannah, Rebecca, Rachel and Jonathan.
He valued public service without seeking office. In 1976 he coordinated Jimmy Carter’s economic task force but declined to join the administration. After the Cold War he was an early chairman of Economists Against the Arms Race, later Economists for Peace and Security, and he served on the Human Rights Committee of the National Academy of Sciences.
Later years and legacy
Klein taught at Penn until 1991 and kept supervising dissertations and running research long after. Colleagues recalled that he mentored more graduate students and directed more doctoral theses each year than anyone else in the department, and in 1993 he founded the Penn Institute for Economic Research. He died at his home in Gladwyne, Pennsylvania, on October 20, 2013, at the age of 93.
Before Klein, forecasting the economy was largely a matter of judgement and rules of thumb. He showed that it could be done systematically, with explicit equations, real data and a record that could be checked, and that the same models could be used to ask what a tax cut, a spending programme or an oil shock would do. Governments, central banks and businesses around the world still work in the tradition he founded.
He received honorary professorships from more than thirty universities around the world and was a member of the National Academy of Sciences, the American Philosophical Society and the American Academy of Arts and Sciences, and a corresponding member of the British Academy. Yet colleagues remembered him less for honours than for generosity: a teacher who led Penn’s graduate economics programme for more than twenty years, still taught undergraduates in the honours programme, and kept improving his forecasting methods into his nineties, convinced that people had misjudged how accurate careful economic forecasting could be.
Sources & further reading
Lawrence R. Klein, Biographical, NobelPrize.org · Press release: The Prize in Economics 1980, NobelPrize.org · Death: Lawrence Klein, Nobel Laureate in Economics, Penn Almanac · Lawrence Klein, Jewish Virtual Library · Lawrence Klein, Wikipedia · Researched from the sources above and checked against them. Spotted an error? Tell us.
A life of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.