Presentation Speech by Professor Herman Wold of the Royal Academy of Sciences

Translation from the Swedish text

Your Majesty, Your Royal Highnesses, Ladies and Gentlemen.

The great economic depression in the early and mid-1930’s marks the beginning of a new epoch in economic politics and economic science. The scourge of unemployment was severe and lasting, until it was swamped by the military build-up before World War II. The gold standard, the firm safeguard of stable prices within a country and in international trade, was abolished in one country after another. All countries started providing more economic information, more statistical data on production volume, prices, wages, unemployment, credit conditions, and much more. The economic world after the war is mirrored in statistical tables, a network of similarities and differences between small nations and superpowers, the East block and the West block, industrialized countries in the North and the Third World in the South.

That a new economic epoch entered with the great depression of the 1930’s is clearly seen in economic science and John Maynard Keynes was the seminal figure. In The General Theory of Employment, his treatise of 1936, Keynes set forth the principles for an economic policy that reduces unemployment by increased public expenditures or reduced taxes. Jan Tinbergen, with Ragnar Frisch the first to receive the Prize in Economic Science in Memory of Alfred Nobel, initiated in the 1930’s his pioneering construction of econometric models. In Tinbergen’s models, economic fluctuations are analyzed in terms of quantitative relations between production, wages, prices, investment and other variables; the new feature was that by means of yearly or quarterly data he could represent the economic development of a country in a coherent system of relations, an economic macromodel. Between the Napoleonic wars and World War I, there were 14 business cycles, with some 6 or 8 years between the peaks. Tinbergen posed the question whether business cycles could be damped by directed changes in suitably selected economic variables.

After World War II, the construction of economic macromodels was revitalized in the United States. The ensuing development of research in this area was rapid and forceful. As the economic boom in the United States after the war was strong and lasting, the analysis focussed not so much on cyclic tendencies in the economic system, but rather on maintaining stable economic growth. The primary task of the economic macromodels thus was to give forecasts for the next few quarters, or the next one or two years, forecasts of production, the price level, unemployment, and much more. In the late 1950’s, there were already several American models which delivered forecasts, and in Washington D.C. the accuracy of the forecasts was subject to systematic comparisons. The increase of economic-statistical source material after the war was good for the economic macromodels. Moreover, the models soon had a new important role as instruments for economic policy making. Forecasts are obtained from the macromodel by using its relations to update its variables quarter by quarter. In the same way, it is possible to calculate the effect of contemplated economic-political measures. For example, if one wishes to push savings by an increase in interest rates, the planned increase is introduced into the model, and then the model calculates the influence of the interest increase on savings and the supply of capital for corporate investment.

Lawrence Klein has long been a leading figure in the construction and application of economic macromodels. His econometric work has a firm and broad basis, and equally broad are his achievements at the research frontier, research on the economic theory of the models, on their data requirements and on statistical techniques. In his Ph.D. thesis in 1944 and in his book The Keynesian Revolution, in 1947, Klein presents the specification and development of Keynes’s ideas which provide the pivotal theoretical foundation of his macromodels. When associated with the “Survey Research Center” at Michigan, Klein collaborated in the development of statistics on consumption and consumer attitudes. As to statistical techniques, Klein’s models are specified as interdependent simultaneous systems of equations, the new and more flexible type of model that was launched by Trygve Haavelmo in 1943. Klein was attracted and inspired by the flexibility of interdependent systems and by the ensuing new problems of statistical method.

Briefly stated: Lawrence Klein has created and established a paradigm for economic macromodels, a general pattern for their theoretical construction and practical application. Klein’s paradigm includes the institutional organization, with a regular procedure for the generation of economic forecasts, with a service system for policy consultations, and with an approach to model adjustment to account for longer run changes in the economic world. As the statistical source material became more abundant, Klein’s models have become larger and more detailed. The richness in detail has been necessary to meet the ever increasing demand for economic forecasts and for estimating the economic-social effects of economic-political measures, an increasing demand from mass media, from consultants and decision makers in corporations and organizations, in administration and politics.

Since 1958, Lawrence Klein has been at the Wharton School at the University of Pennsylvania. His “Wharton model” has formed the basis of one of the largest organizations of its kind, with a large staff and budget. A key feature of Klein’s pioneering work is that he has been a travelling 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.

Professor Klein,

May I ask you to receive the Nobel Memorial Prize in economic sciences from the hands of his Majesty the King.