Chinese / English
James J. Heckman


It’s my great pleasure to be part of the ceremonies of the China Economics Foundation, and particularly the award of it’s 2017 prizes – the China Economics Prizes.  It’s a particular pleasure for me, not just to celebrate my friends in China, but to celebrate two particular laureates, the laureates for the year 2017.

 

Both of whom I know, although for different periods of times and somewhat different contexts. Both Gregory Chow and Xiaohong Chen, have been people with whom I’ve interacted for many years. Over many different venues and settings, we’ve had a chance to talk with each other, interact with each other, and exchange ideas, exchange stories and just live our lives together. So it’s particularly pleasant time for me now and something very enjoyable for me to be able to discuss the contribution of each of the scholars. So in order to proceed in the kind of logical orderly fashion, I’ll start with the senior person in this group, the older person I guess. Gregory Chow, who has been somebody I’ve known since the days I was at Columbia University some more than 46/47 years ago.

 

Gregory and I interacted when he and I were both affiliated with the Columbia Economics Faculty. And since then we’ve interacted in various settings, shortly after he was at Columbia, and the IBM Watson Lab. He took a position in Princeton, I’m a Princeton alum. And so over the years visiting Princeton and just being out in the world and seeing people from Princeton and also just seeing leading econometricians. I’ve been able to keep in touch with him, follow his work and look at his contributions.

 

I first became aware of Gregory’s work when I was a graduate student. I was very interested in life cycle behavior and in economic dynamics. And in particular, Gregory was one of the members of a pioneering group of people put together by (Arnold) Harberger here at the University of Chicago to study the demand for consumer durables and to really understand how dynamic models, dynamic considerations should enter into the analysis of things like refrigerators, housing; consumer durables like automobiles, and for that matter, toasters and radios. Gregory wrote a very famous dissertation on the demand for automobiles, that was very influential for economists of my generation. And he not only provided interesting insights into the automobile markets, but he also provided some numerous valuable insights into the econometrics of modelling dynamic models. And in particular, I think a by-product—I’m not sure, I’ve never really asked him about this.

 

But part of his considerations, being a good Chicago economists and being a good empirical economist, he was interested in testing his models and trying to provide the reader and himself with some ideas about model stability and how well things can be forecast, how well the automobile market could be predicted in future periods, and how stable the empirical relationships were. And I think as a by-product of this and related projects, Gregory developed the famous Chow test which was a test for structural stability. And that was really something quite influential and made to enter into all these econometrics textbooks.    And certainly at the time I was a graduate student, everybody knew the Chow test and people still know the Chow test, and will actually follow his test and look at his test, not only for full-size samples, but under-size samples and for prediction problems. But Gregory did a lot more than that, even though that was a great contribution. Gregory also did an important work, starting (I think) in the late 50s, and staying on through the rest of his life, in looking into economic dynamics. First looking at optimal control. Optimal control policies were very new in Economics in the 1960s. I remember the very first seminar that I heard Gregory gave at Columbia, was exactly on his work on optimal control. He wrote several influential books on the subject, and he was, I believe, the first present of this side of economic dynamics and control. So what happened was he was considering, when economists were still understanding the Bellman equation, tools are now standard, for many economists, including me, this was all a brand new world, and Gregory would exposit it and he would show the values of these tools, dynamic programming tools, dynamic stochastic models, in understanding the macroeconomy, understanding how to control the macroeconomy, how to forecast the macroeconomy.   and then considering various ways to implement practically, empirically,  remember this was 30,40,50 years ago, before computation got to its current level, and dynamic programming problems were still a challenge. But Gregory considered the practical implementation of these tools and actually led the way, not only in theoretical work, but in applied work, a whole series of applied work. He was looking at macro models, looking at dynamic optimal control models, looking at what engineers and economists later-on called feedback control models, that would allow agents to kind of look deeply into the economy, understand and learn from the economy, and control the economy in feedback processes.

 

So Gregory was a major pioneer, this has been a theme of much of his work. For example, he has a book, in the 1990s, I think 30 years after he began working on these optimal control questions. He has a book on using Lagrange Multiplier method for solving dynamic programming problems,   and methods that are clever for considering what are now called robust control problems. Control problems where the agent and whether there will be a government planner or an individual macro planner, would not know all the parameters in the model, or would think that the structure of the economy would somehow misspecified and not known. So the question is how would you be able to control the economy in the circumstance when you have less than perfect information even about the parameters in the model. So Gregory played a very powerful role, a very influential role. And I think it’s a role that’s still very much appreciated, robust control, of course, is very much at the centre of economic theory today. But Gregory’s pioneering work really paved the way for understanding both the importance and applications to economics of the optimal control methods.

 

But if that wasn’t enough, Gregory has many other contributions. Of course we all know that he’s played a major role in understanding, and writing about the Chinese economy, and explaining to the world how the Chinese economy works. He has several influential textbooks and general books of exposition, which greatly influenced the whole discussion of China. China, of course, is a dynamic economy, it’s undergone tremendous transformations in the last 30/35 years. And Gregory’s textbooks have both informed the West and a kind of mainstream Economics outside of China about developments in China, but they’ve also informed the Chinese about mainstream developments in the world Western Economics outside of China. So I believe that Gregory played a very influential role in shaping, understanding the structure of the Chinese economy, and understanding how we, outside of the Chinese economy, could really understand it and follow its trend. The various editions of his book have updated this dynamic story about China’s economic development and the dynamics of the development. Of course he used his tools, the tools of macroeconomic policy, which he pioneered, studies that he’s made of the Chinese macroeconomy, studies that he’s made various kinds of aspects of technical change and monetary policy in the Chinese economy. So he’s done simultaneously studies of the economy, the contemporary Chinese economy, but he’s also explained this, in somewhat easier terms, more accessible terms for Leyman, for individuals who are not primarily experts on the Chinese economy and maybe some individuals who are not even economists, understanding some of the basic tools.

 

So Gregory played a very important role in that regard. But he also played another role which should be mentioned here, which I think is very influential. And it’s had a lasting impact. Not only has Gregory done an important work in a variety of fields and he continues to do important work, illuminating Chinese economy, understanding its dynamic transitions, understanding the quality of its data, understanding macro policies and understanding how different regions are developing, rural and urban, poverty, looking at rates of return to education. So Gregory has done all of these but he’s also done something else. And he helped the transition of the Chinese economy by bringing people from China to the West, certainly starting in the 1980s. A programme that deliberately selected some of the elite young Chinese students who work to study, became, or have become leading economists in the West and also in China. He recruited these students, selected them, sent them around to various leading programmes in North America and Europe. And as a result, contributed in two ways to the study of the Chinese economy. First of all, he’s produced generations, and his influence has reached out over generations of very influential Chinese economists. One of whom is being honored today, Xiaohong Chen, about whom we’ll talk more in a minute. But also he’s explained to the world, he’s brought in to Chinese universities a modern economics and tools of modern economics. And he’s converted economics from being a political subject that was focused only on politics and rhetorics to a technical subject And my understanding was the initial group of people that he recruited were deliberately recruited to be people with strong technical strengths who would do primarily basic scientific and mathematical research that would illuminate the economy and contribute to the whole corpus of the economics. But would also avoid getting into politics and getting into kinds of issues that are sometimes more political economy issues, but represent the kind of point of views that maybe transitive to ours, maybe much less linked to the economic fundamentals. So Gregory has played a very powerful role, not only his work on control theory and the macroeconomy, not only in a series of important paper in econometrics, but he’s done very serious dynamic economic models, and decided and discussed how to implement maximum likelihood models, time series maximum likelihood models, that allow economists to incorporate these insights of optimal control theory, feedback theory, prediction theory into the standard toolkit, but Gregory also provided us with very good example of how to do good quality economics, both at the theoretical level and empirical level.

 

This takes me now, it’s a natural Segway from Gregory’s work and recruiting brilliant Chinese students/economists to study economics in the West to one such example of students that he recruited, namely Xiaohong Chen, who was a brilliant, and highly productive scholar in made career. In the case of Gregory, there is a long life with many achievements. In the case of Xiaohong, there is a relatively short life—she’s been out for 20/25 years, she’s made a career, but she also has a very impressive body of work. And in some ways the body of work overlaps with Gregory’s interest in economic dynamics.

 

Like Gregory, she’s worked on macro time series, she’s worked on the econometrics of learning, the econometrics of financial models, dynamic economic models, but also on a broad range of econometric tools. And in some sense, Xiaohong represents the next generation of economists. She is the very best example of body of work, her work is some of the best examples of what we now think of as called semiparametric and nonparametric econometrics. When econometrics got going back in the 1930s and 1940s-- when Gregory was still a graduate/undergraduate student, understanding linear equation systems was really a big deal, it was important. The linear model provided the economists the initial insights of how the economy would proceed. So linear simultaneous equation models were the tools of the trade. But as economists get better data, and as they probe more deeply into the structure of the economy, they became aware of fundamental nonlinearities in the economy and even some non-linear phenomena where dynamics can be quite dramatic, where there could be phase periods, transitions periods where the whole structure of the economy shifts. And Gregory, of course, contributed to that. But a growing problem in the field of econometrics that came out. I think, the application of these models in the 1980s were the concern that many of the empirical results coming out of these models were artifacts of assuming particular functional forms,making particular assumptions about distributions and were essentially maybe artifacts not to be trusted  there’s still an ongoing discussion in econometrics, some people call it the ‘Credibility Revolution’, some people doubt that the credibility revolution is all that credible but that’s a separate issue. I think what is the case is that the economists became much more aware about the importance of being careful, about distribution and functional form assumptions. So when Xiaohong was a graduate student and in her early years, she was deeply trained in mathematical statistics that took economists to the next frontier, tools that allowed for understanding the structure of the economy, but doing it without imposing a lot of parametric or distributional structure, and therefore allowing much more flexible explorations of the economy. Xiaohong has been a pioneer in applying and developing and extending what is called a nonparametric or semiparametric econometrics. understanding how to build nonparametric or semiparametric models that are more robust, understanding how to test them, understanding how to apply them and extend them to time series settings, with high degrees of nonlinearity and the process generating the stochastic processes of the economy. Xiaohong’s work would continue undebated at this moment, has led to a series of very influential papers that influence the discussion of the econometrics today. For example, if you go through her work on nonparametric instrumental variables, and moment conditions, she has done some fundamental pioneering work. Measurement error, which used to be the problems only in linear models, has now in the hands of Xiaohong and some of her co-authors, become a major subject for investigation in nonlinear settings, empirically nonlinear measurement errors found to be important when validation and reliability studies were conducted. But until Xiaohong came along and some of her co-workers appears, it was not possible to really consider nonlinear measurement error, but Xiaohong’s work has made that possible. And so in a series of studies, not only the measurement error but understanding the sensitivity of estimators, understanding how to pool data from different sources in models that are highly nonlinear, semiparametric and nonparametric, studying models of finance, volatility, understanding how financial markets operate, looking at models of learning, which were essential to the macroeconomy.

 

When Gregory was writing models of adaptive expectations were still quite current, Gregory also worked on rational expectation models, but Xiaohong has gone a little further taking those rational expectation models, challenging them in time, considering them in nonlinear settings and extending the work in a variety of fields, not just in finance and macroeconomic fields, but also with applications of macroeconomics to the theory of firms, and to understanding consumer behavior. Some of her work, for example, in finance, is equally relevant to understanding habit formation, macro finance models as it is in habit formation in micro models of addiction, for example; or micro models of the formation of characters and skills and beliefs. So Xiaohong’s work is a kind of probed very deeply; she’s probed deeply and widely and created a series of toolbox or whole series of tools that economists, including this economists (point at himself), use.   I mean, both of your recipients have used and created tools that I’ve used and many other economists have used. But in particular, Xiaohong now has made a career and developing a very exciting body of work in a number of fields.

 

And in that sense I think that maybe the prize you are giving today might be given again in 20/30 years when Xiaohong is a more senior scholar than she is now. She’s still quite young, still quite productive and still quite active. I hope you will consider maybe giving her a second prize, because I’m confident that in the next 20/30 years, we’ll see a period of productivity that will equal or maybe even excel what Xiaohong has done. What I would argue is that this prize is a very good prize.

 

You’ve given it to two distinguished people, and in some sense you’ve given it in the right order. In the sense that Gregory was the person who was a different generation. He’s still active, still does important work, but he also helped create this generation, to which Xiaohong belongs. He has helped create not just Xiaohong, but a whole body of young, highly-trained, Chinese-origin economists who’ve enriched the whole study of economics around the world, not just in China. So I think we owe a debt of gratitude to both scholars, to Gregory for all his lifetime contributions, and praise and hope for Xiaohong for a brilliant future that will build on a brilliant past.

 

Thank you very much!  

 



◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation