Franco Modigliani (18 June 1918 – 25 September 2003) was an Italian-American
economist
An economist is a professional and practitioner in the social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
and the recipient of the 1985
Nobel Memorial Prize in Economics. He was a professor at
University of Illinois at Urbana–Champaign
The University of Illinois Urbana-Champaign (U of I, Illinois, University of Illinois, or UIUC) is a public land-grant research university in Illinois in the twin cities of Champaign and Urbana. It is the flagship institution of the Univer ...
,
Carnegie Mellon University, and
MIT Sloan School of Management
The MIT Sloan School of Management (MIT Sloan or Sloan) is the business school of the Massachusetts Institute of Technology, a private university in Cambridge, Massachusetts.
MIT Sloan offers bachelor's, master's, and doctoral degree programs, ...
.
Early life and education
Modigliani was born on 18 June 1918 in
Rome
, established_title = Founded
, established_date = 753 BC
, founder = King Romulus (legendary)
, image_map = Map of comune of Rome (metropolitan city of Capital Rome, region Lazio, Italy).svg
, map_caption ...
,
Lazio
it, Laziale
, population_note =
, population_blank1_title =
, population_blank1 =
, demographics_type1 =
, demographics1_footnotes =
, demographics1_title1 =
, demographics1_info1 =
, demographics1_title2 ...
,
Italy
Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical ...
, to the
Jewish
Jews ( he, יְהוּדִים, , ) or Jewish people are an ethnoreligious group and nation originating from the Israelites Israelite origins and kingdom: "The first act in the long drama of Jewish history is the age of the Israelites""The ...
family of a
pediatrician father and a voluntary
social worker mother.
["Franco Modigliani" by Daniel B. Klein and Ryan Daza, in]
The Ideological Migration of the Economics Laureates
, ''Econ Journal Watch
''Econ Journal Watch'' is a semiannual peer-reviewed electronic journal established in 2004. It is published by the Fraser Institute. According its website, the journal publishes comments on articles appearing in other economics journals, essays, r ...
'', 10(3), September 2013, pp. 472-293
He entered university at the age of seventeen, enrolling in the faculty of Law at the
Sapienza University of Rome
The Sapienza University of Rome ( it, Sapienza – Università di Roma), also called simply Sapienza or the University of Rome, and formally the Università degli Studi di Roma "La Sapienza", is a public research university located in Rome, Ita ...
.
[Parisi, Daniela (2005) "Five Italian Articles Written by the Young Franco Modigliani (1937–1938)", ''Rivista Internazional di Scienze Sociali'', 113(4), pp. 555–557 (in ]language
Language is a structured system of communication. The structure of a language is its grammar and the free components are its vocabulary. Languages are the primary means by which humans communicate, and may be conveyed through a variety of ...
) In his second year at Sapienza, his submission to a nationwide contest in
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
sponsored by the official
student organization
A student is a person enrolled in a school or other educational institution.
In the United Kingdom and most commonwealth countries, a "student" attends a secondary school or higher (e.g., college or university); those in primary or elementary ...
of the state, won first prize and Modigliani received an award from the hand of
Benito Mussolini.
[Franco Modigliani]
autobiographical notes, Nobel Prize organization website, 1985
He wrote several essays for the fascist magazine ''
Lo Stato'' where he showed an inclination for the fascist ideological currents critical of liberalism.
Among his early works in the Fascist Italy was an article about the organization and management of production in a
socialist
Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes the ...
economy, written in
Italian
Italian(s) may refer to:
* Anything of, from, or related to the people of Italy over the centuries
** Italians, an ethnic group or simply a citizen of the Italian Republic or Italian Kingdom
** Italian language, a Romance language
*** Regional Ita ...
and arguing the case for socialism along lines laid out by earlier
market socialists like
Abba Lerner
Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born American-British economist.
Biography
Born in Novoselytsia, Bessarabia, Russian Empire, Lerner grew up in a Jewish family, which ...
and
Oskar Lange
Oskar Ryszard Lange (27 July 1904 – 2 October 1965) was a Polish economist and diplomat. He is best known for advocating the use of market pricing tools in socialist systems and providing a model of market socialism. He responded to the econo ...
.
[Mongiovi, Gary (2015)]
Franco Modigliani and the Socialist State
", Economics & Finance Department, St. John's, May 2015
But, that early enthusiasm evaporated soon after the passage of
racial laws in Italy. In 1938, Modigliani left Italy for
Paris
Paris () is the Capital city, capital and List of communes in France with over 20,000 inhabitants, most populous city of France, with an estimated population of 2,165,423 residents in 2019 in an area of more than 105 km² (41 sq mi), ma ...
together with his then-girlfriend, Serena Calabi, to join her parents there. After briefly returning to
Rome
, established_title = Founded
, established_date = 753 BC
, founder = King Romulus (legendary)
, image_map = Map of comune of Rome (metropolitan city of Capital Rome, region Lazio, Italy).svg
, map_caption ...
to discuss his ''
laurea
In Italy, the ''laurea'' is the main post-secondary academic degree. The name originally referred literally to the laurel wreath, since ancient times a sign of honor and now worn by Italian students right after their official graduation ceremony ...
'' thesis at the city's university, he obtained his diploma on 22 July 1939, and returned to Paris.
[
The same year, they all immigrated to the United States and he enrolled at the Graduate Faculty of the New School for Social Research. His Ph.D. dissertation, an elaboration and extension of ]John Hicks
Sir John Richards Hicks (8 April 1904 – 20 May 1989) was a British economist. He is considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economi ...
' IS–LM model, was written under the supervision of Jacob Marschak and Abba Lerner
Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born American-British economist.
Biography
Born in Novoselytsia, Bessarabia, Russian Empire, Lerner grew up in a Jewish family, which ...
, in 1944,[The basis of his dissertation subsequently appeared in ''Econometrica''. See Modigliani (1944)] and is considered "ground breaking."
Career
From 1942 to 1944, Modigliani taught at Columbia University
Columbia University (also known as Columbia, and officially as Columbia University in the City of New York) is a private research university in New York City. Established in 1754 as King's College on the grounds of Trinity Church in Manhatt ...
and Bard College
Bard College is a private liberal arts college in Annandale-on-Hudson, New York. The campus overlooks the Hudson River and Catskill Mountains, and is within the Hudson River Historic District—a National Historic Landmark.
Founded in 1860, ...
as an instructor in economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
and statistics. In 1946, he became a naturalized citizen
Naturalization (or naturalisation) is the legal act or process by which a non-citizen of a country may acquire citizenship or nationality of that country. It may be done automatically by a statute, i.e., without any effort on the part of the in ...
of the United States. In 1948, he joined the University of Illinois at Urbana–Champaign
The University of Illinois Urbana-Champaign (U of I, Illinois, University of Illinois, or UIUC) is a public land-grant research university in Illinois in the twin cities of Champaign and Urbana. It is the flagship institution of the Univer ...
faculty. From 1952 to 1962, he was a member of the Carnegie Mellon University faculty.[Professor Franco Modigliani]
obituary, ''The Independent
''The Independent'' is a British online newspaper. It was established in 1986 as a national morning printed paper. Nicknamed the ''Indy'', it began as a broadsheet and changed to tabloid format in 2003. The last printed edition was publish ...
'', 28 September 2003
In 1962, he joined the faculty of MIT
The Massachusetts Institute of Technology (MIT) is a private land-grant research university in Cambridge, Massachusetts. Established in 1861, MIT has played a key role in the development of modern technology and science, and is one of the m ...
, as an Institute Professor
An institute is an organisational body created for a certain purpose. They are often research organisations (research institutes) created to do research on specific topics, or can also be a professional body.
In some countries, institutes can ...
.
Contributions to economic theory
Modigliani, beginning in the 1950s, was an originator of the life-cycle hypothesis
In economics, the life-cycle hypothesis (LCH) is a model that strives to explain the consumption patterns of individuals.
Background
The hypothesis
Implications
Saving and wealth when income and population are stable
The effect of population ...
, which attempts to explain the level of saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recur ...
in the economy. The hypothesis that consumer
A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s aim for a stable level of consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
throughout their lifetime (for example by saving during their working years and then spending during their retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are elderly or incapable of doing their j ...
).
The rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency i ...
hypothesis is considered by economists[Wade-Hands, Douglas (1986) ''Modigliani And Grunberg : A Precursor To Rational Expectations?'', University of Puget Sound] to originate in the paper written by Modigliani and Emile Grunberg in 1954.[Grunberg, E. & Franco Modigliani (1954) "The Predictability of Social Events," '' Journal of Political Economy'', 62, pp. 465-478, December 1954]
When he was a member of the Carnegie Mellon University faculty, he formulated in 1958, along with Merton Miller, the Modigliani–Miller theorem
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy c ...
for corporate finance.[Miller, Merton H. & Franco Modigliani (1958)]
The cost of capital, corporate finance and the theory of investment
, ''The American Economic Review
The ''American Economic Review'' is a monthly peer-reviewed academic journal published by the American Economic Association. First published in 1911, it is considered one of the most prestigious and highly distinguished journals in the field of eco ...
'', Vol. XLVIII, June 1958, #3, pp. 261–297. The article was a revised version of a paper delivered at the annual meeting of the Econometric Society
The Econometric Society is an international society of academic economists interested in applying statistical tools to their field. It is an independent organization with no connections to societies of professional mathematicians or statisticians. ...
in December 1956.[Miller, Merton H. & Franco Modigliani (1963) "Corporate Income Taxes and the Cost of Capital: A Correction", '']The American Economic Review
The ''American Economic Review'' is a monthly peer-reviewed academic journal published by the American Economic Association. First published in 1911, it is considered one of the most prestigious and highly distinguished journals in the field of eco ...
'', Vol. 53, No. 3, June 1963, pp. 433–443 The theorem posits that, under certain assumptions,[The theorem assumes an economic environment with an ]efficient market
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...
and without tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
es, bankruptcy costs, agency costs, and asymmetric information. the value of a firm is not affected by whether it is financed by equity (selling shares) or by debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
(borrowing money), meaning that the debt-to-equity ratio The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage. The two ...
is unimportant for private firms.[
In the early 1960s, his response, co-authored with ]Albert Ando
was a Japanese-born economist.
Biography
He was born in Tokyo, as a member of family running Ando Corporation, a major construction company. He didn't join the family business, and came to the United States after World War II. He received hi ...
, to the 1963 paper of Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and David I. Meiselman
David I. Meiselman (; 1924 – December 3, 2014) was an American economist. Among his contributions to the field of economics are his work on the term structure of interest rates, the foundation today of the implementation of monetary policy by m ...
, initiated the so-called "monetary/fiscal policy debate" among economists, which went on for more than sixty years.
In 1975, Modigliani, in a paper whose co-author was his former student Lucas Papademos
Lucas Demetrios Papademos ( el, Λουκάς Παπαδήμος; born 11 October 1947) is a Greek economist and academic who served as 12th Prime Minister of Greece from November 2011 to May 2012, leading a national unity government in the wake o ...
,[Papademos went on to become Governor of the Bank of Greece from 1994 until 2002, and Prime Minister of Greece from November 2011 to May 2012.] introduced the concept of the "NIRU", the non-inflationary rate of unemployment
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...
,[Subsequently known as the "" (NAIRU)] ostensibly an improvement over the "natural rate of unemployment
The natural rate of unemployment is the name that was given to a key concept in the study of economic activity. Milton Friedman and Edmund Phelps, tackling this 'human' problem in the 1960s, both received the Nobel Memorial Prize in Economic Scien ...
" concept. The terms refer to a level of unemployment below which inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
rises.[Inflation "rises"; it does not "accelerate," as can often be misread from the acronym ]NAIRU
Non-accelerating inflation rate of unemployment (NAIRU) is a theoretical level of unemployment below which inflation would be expected to rise.
In 1997, Modigliani and his granddaughter, Leah Modigliani, developed what is now called the " Modigliani Risk-Adjusted Performance," a measure of the risk-adjusted returns of an investment portfolio
In finance, a portfolio is a collection of investments.
Definition
The term “portfolio” refers to any combination of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors or managed by financial pro ...
that was derived from the Sharpe ratio
In finance, the Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) measures the performance of an investment such as a security or portfolio compared to a risk-free asset, after adjusting for its ...
, adjusted for the risk of the portfolio relative to that of a benchmark, e.g. the "market."
Appointments and awards
In October 1985, Modigliani was awarded the Nobel prize in Economics
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
"for his pioneering analyses of saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recur ...
and of financial market
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial market ...
s."
In 1985, Modigliani received MIT's James R. Killian Faculty Achievement Award. In 1997, he received an '' honoris causa'' degree in Management Engineering from the University of Naples Federico II
The University of Naples Federico II ( it, Università degli Studi di Napoli Federico II) is a public university in Naples, Italy. Founded in 1224, it is the oldest public non-sectarian university in the world, and is now organized into 26 depar ...
in 1997.
Late in his life, Modigliani became a trustee of the Economists for Peace and Security organization, formerly "Economists Allied for Arms Reduction" and was considered an "influential adviser": in the late 1960s, on a contract with the Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, he designed the "MIT-Pennsylvania-Social Science Research Council" model, a tool that "guided monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
in Washington for many decades."[
A collection of Modigliani's papers is housed at Duke University's Rubenstein Library.
]
Criticism
Modigliani's work on fiscal policy came under criticism from followers of Post-Keynesian economics
Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney ...
, who disputed the "Keynesianism" of his viewpoints, pointing out his contribution to the NAIRU
Non-accelerating inflation rate of unemployment (NAIRU) is a theoretical level of unemployment below which inflation would be expected to rise. concept, as well as his general stance on fiscal deficits. The Modigliani-Miller theorem implies that, for a closed economy, state borrowing is merely deferred tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
ation, since state spending can be financed only by " printing money", taxation, or borrowing, and therefore monetary financing of state spending implies the subsequent imposition of a so-called "inflation tax," which ostensibly has the same effect on permanent income as explicit taxation.[See " crowding out effect"]
Nonetheless, they acknowledged his dissenting voice on the issue of unemployment, in which Modigliani concurred early on with heterodox economist
Heterodox economics is any economic thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics.Frederic S. Lee, 2008. "heterodox economics," ''The New Palgrave Dictionary of Economics' ...
s that Europe-wide unemployment in the late 20th century was caused by the lack of demand
In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...
induced by austerity policies.[Demand-driven fiscal policies, as opposed to supply-driven, are a cornerstone of Keynesian and Post-Keynesian economics. For a critique of European economic policies from a modern, Post-Keynesian point of view, see e.g. Mitchell, William (2016) ''Eurozone Dystopia: Groupthink and Denial on a Grand Scale'', Edward Elgar, 2015, ]
Personal life
In 1939, while they were in Paris, Modigliani married Serena Calabi. They had two children, Andre and Sergio Modigliani.
Modigliani died in Cambridge, Massachusetts
Cambridge ( ) is a city in Middlesex County, Massachusetts, United States. As part of the Boston metropolitan area, the cities population of the 2020 U.S. census was 118,403, making it the fourth most populous city in the state, behind Boston ...
, in 2003, while still working at MIT, and teaching until the last months of his life. He was 85.["In March 2003, only few months before his demise, I was at MIT and witnessed Franco odiglianistill teaching with the same enthusiasm another class at the Sloan School of Management" : from Pagano, Marco (2005)]
The Modigliani-Miller Theorems: A Cornerstone of Finance
, Center for Studies in Economics and Finance, May 2005 Serena Modigliani-Calabi, active to the end in progressive politics
Progressivism holds that it is possible to improve human societies through political action. As a political movement, progressivism seeks to advance the human condition through social reform based on purported advancements in science, techn ...
, most notably with the League of Women Voters, and an outspoken believer in participatory democracy
Participatory democracy, participant democracy or participative democracy is a form of government in which citizens participate individually and directly in political decisions and policies that affect their lives, rather than through elected repr ...
,[Chilmarker Serena Modigliani, 91, Escaped Fascism]
, '' Vineyard Gazette'', 9 October 2008 died in 2008.[Serena Calabi]
obituary, ''The Boston Globe
''The Boston Globe'' is an American daily newspaper founded and based in Boston, Massachusetts. The newspaper has won a total of 27 Pulitzer Prizes, and has a total circulation of close to 300,000 print and digital subscribers. ''The Boston Glob ...
'', 24 September 2008
Selected bibliography
Books
*
*
*
*
*
Articles
*
*
See also
* Piero Sraffa
Notes
References
External links
*
Modigliani works
IDEAS/RePEc
*
What influences our likelihood to save?
, Union Bank of Switzerland
Union Bank of Switzerland (UBS) was a Swiss investment bank and financial services company located in Switzerland. The bank, which at the time was the second largest bank in Switzerland, merged with Swiss Bank Corporation in 1998, to become ...
website, with filmed interviews by Franco Modigliani
*
{{DEFAULTSORT:Modigliani, Franco
1918 births
2003 deaths
Nobel laureates in Economics
American Nobel laureates
Italian Nobel laureates
Economists from New York (state)
American business theorists
Italian economists
Italian business theorists
Italian Sephardi Jews
Italian emigrants to the United States
20th-century Italian Jews
Corporate finance theorists
Neo-Keynesian economists
Jewish American social scientists
Carnegie Mellon University faculty
MIT Sloan School of Management faculty
Columbia University faculty
Bard College faculty
The New School alumni
Jews who emigrated to escape Nazism
American Sephardic Jews
Writers from Rome
People from Belmont, Massachusetts
Fellows of the Econometric Society
Presidents of the Econometric Society
Presidents of the American Economic Association
People with acquired American citizenship
Distinguished Fellows of the American Economic Association
Economists from Massachusetts
20th-century American economists
Presidents of the American Finance Association