Franco Modigliani

Last updated
Franco Modigliani
Franco Modigliani.jpg
Modigliani in 2000
Born(1918-06-18)18 June 1918
Died25 September 2003(2003-09-25) (aged 85)
Citizenship
  • Italy
  • United States
Field Financial economics
Alma mater The New School (PhD)
Sapienza University of Rome (Laurea)
Doctoral
advisor
Jacob Marschak
Doctoral
students
Albert Ando
Robert Shiller
Mario Draghi
Lucas Papademos
Influences J. M. Keynes, Jacob Marschak
Contributions Modigliani–Miller theorem
Life-cycle hypothesis
MPS model

Franco Modigliani (18 June 1918 25 September 2003) [1] was an Italian-American economist and the recipient of the 1985 Nobel Memorial Prize in Economics. He was a professor at University of Illinois at Urbana–Champaign, Carnegie Mellon University, and MIT Sloan School of Management.

Contents

Early life and education

Modigliani was born on 18 June 1918 in Rome, Lazio, Italy, to the Jewish family of a pediatrician father and a voluntary social worker mother. [2]

He entered university at the age of seventeen, enrolling in the faculty of Law at the Sapienza University of Rome. [3] In his second year at Sapienza, his submission to a nationwide contest in economics sponsored by the official student organization of the state, won first prize and Modigliani received an award from the hand of Benito Mussolini. [2] [4] He wrote several essays for the fascist magazine "The State", where he showed an inclination for the fascist ideological currents critical of liberalism. [5] Among his early works in fascist Italy was an article about the organization and management of production in a socialist economy, written in Italian and arguing the case for socialism along lines laid out by earlier market socialists like Abba Lerner and Oskar Lange. [6]

But, that early enthusiasm evaporated soon after the passage of racial laws in Italy. In 1938, Modigliani left Italy for Paris together with his then-girlfriend, Serena Calabi, to join her parents there. After briefly returning to Rome to discuss his laurea thesis at the city's university, he obtained his diploma on 22 July 1939, and returned to Paris. [4]

The same year, they all emigrated 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' IS–LM model, was written under the supervision of Jacob Marschak and Abba Lerner, in 1944, [note 1] and is considered "ground breaking." [6]

Career

From 1942 to 1944, Modigliani taught at Columbia University and Bard College as an instructor in economics and statistics. In 1946, he became a naturalized citizen of the United States. In 1948, he joined the University of Illinois at Urbana–Champaign faculty. From 1952 to 1962, he was a member of the Carnegie Mellon University faculty. [7]

In 1962, he joined the faculty of MIT, as an Institute Professor. [7]

Contributions to economic theory

Modigliani, beginning in the 1950s, was an originator [8] of the life-cycle hypothesis, which attempts to explain the level of saving in the economy. [9] The hypothesis that consumers aim for a stable level of consumption throughout their lifetime (for example by saving during their working years and then spending during their retirement).

The rational expectations hypothesis is considered by economists [10] to originate in the [11] paper written by Modigliani and Emile Grunberg in 1954. [12] [13]

When he was a member of the Carnegie Mellon University faculty, he formulated in 1958, along with Merton Miller, the Modigliani–Miller theorem for corporate finance. [14] [15] The theorem posits that, under certain assumptions, [note 2] the value of a firm is not affected by whether it is financed by equity (selling shares) or by debt (borrowing money), meaning that the debt-to-equity ratio is unimportant for private firms. [14] [15]

In the early 1960s, his response, [16] co-authored with Albert Ando, to the 1963 paper [17] of Milton Friedman and David I. Meiselman, initiated the so-called "monetary/fiscal policy debate" among economists, which went on for more than sixty years.[ citation needed ]

In 1975, Modigliani, in a paper [18] whose co-author was his former student Lucas Papademos, [note 3] introduced the concept of the "NIRU", the non-inflationary rate of unemployment, [note 4] ostensibly an improvement over the "natural rate of unemployment" concept. [19] The terms refer to a level of unemployment below which inflation rises. [note 5]

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 that was derived from the Sharpe ratio, adjusted for the risk of the portfolio relative to that of a benchmark, e.g. the "market." [20]

Appointments and awards

In October 1985, Modigliani was awarded the Nobel prize in Economics "for his pioneering analyses of saving and of financial markets." [21]

In 1985, Modigliani received MIT's James R. Killian Faculty Achievement Award. [22] In 1997, he received an honoris causa degree in Management Engineering from the University of Naples Federico II in 1997.

Late in his life, Modigliani became a trustee of the Economists for Peace and Security organization, formerly "Economists Allied for Arms Reduction" [23] and was considered an "influential adviser": in the late 1960s, on a contract with the Federal Reserve, he designed the "MIT-Pennsylvania-Social Science Research Council" model, a tool that "guided monetary policy in Washington for many decades." [7]

A collection of Modigliani's papers is housed at Duke University's Rubenstein Library. [24]

Criticism

Modigliani's work on fiscal policy came under criticism from followers of Post-Keynesian economics, who disputed the "Keynesianism" of his viewpoints, pointing out his contribution to the NAIRU concept, [25] as well as his general stance on fiscal deficits. [26] The Modigliani-Miller theorem implies that, for a closed economy, state borrowing is merely deferred taxation, 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. [note 6] [27]

Nonetheless, they acknowledged his dissenting voice on the issue of unemployment, in which Modigliani concurred early on [28] with heterodox economists that Europe-wide unemployment in the late 20th century was caused by the lack of demand induced by austerity policies. [29] [note 7]

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, in 2003, while still working at MIT, and teaching until the last months of his life. He was 85. [30] Serena Modigliani-Calabi, active to the end in progressive politics, most notably with the League of Women Voters, and an outspoken believer in participatory democracy, [31] died in 2008. [32]

Selected bibliography

Books

Articles

See also

Notes

  1. The basis of his dissertation subsequently appeared in Econometrica. See Modigliani (1944)
  2. The theorem assumes an economic environment with an efficient market and without taxes, bankruptcy costs, agency costs, and asymmetric information.
  3. 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.
  4. Subsequently known as the "non-accelerating inflation rate of unemployment" (NAIRU)
  5. Inflation "rises"; it does not "accelerate," as can often be misread from the acronym NAIRU
  6. See "crowding out effect"
  7. 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, ISBN   978-1784716653

Related Research Articles

Keynesian economics Group of macroeconomic theories

Keynesian economics are the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. Instead, it is influenced by a host of factors – sometimes behaving erratically – affecting production, employment, and inflation.

Macroeconomics Study of an economy as a whole

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability. This includes regional, national, and global economies. According to a 2018 assessment by economists Emi Nakamura and Jón Steinsson, economic "evidence regarding the consequences of different macroeconomic policies is still highly imperfect and open to serious criticism."

Monetarism School of thought in monetary economics

Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy.

Full employment is a situation in which there is no cyclical or deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may remain. For instance, workers who are "between jobs" for short periods of time as they search for better employment are not counted against full employment, as such unemployment is frictional rather than cyclical. An economy with full employment might also have unemployment or underemployment where part-time workers cannot find jobs appropriate to their skill level, as such unemployment is considered structural rather than cyclical. Full employment marks the point past which expansionary fiscal and/or monetary policy cannot reduce unemployment any further without causing inflation.

New Keynesian economics

New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroeconomics.

This aims to be a complete article list of economics topics:

Fischer Black

Fischer Sheffey Black was an American economist, best known as one of the authors of the famous Black–Scholes equation.

Phillips curve Single-equation economic model relating wages to unemployment

The Phillips curve is a single-equation economic model, named after William Phillips, hypothesizing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy. Stated simply, decreased unemployment, in an economy will correlate with higher rates of wage rises. Phillips did not himself state there was any relationship between employment and inflation; this notion was a trivial deduction from his statistical findings. Paul Samuelson and Robert Solow made the connection explicit and subsequently Milton Friedman and Edmund Phelps put the theoretical structure in place. In so doing, Friedman was to successfully predict the imminent collapse of Phillips' a-theoretic correlation.

Thomas J. Sargent American economist

Thomas John Sargent is an American economist and the W.R. Berkley Professor of Economics and Business at New York University. He specializes in the fields of macroeconomics, monetary economics, and time series econometrics. As of 2020, he ranks as the 29th most cited economist in the world. He was awarded the Nobel Memorial Prize in Economics in 2011 together with Christopher A. Sims for their "empirical research on cause and effect in the macroeconomy".

Edmund Phelps

Edmund Strother Phelps is an American economist and the recipient of the 2006 Nobel Memorial Prize in Economic Sciences.

Abba P. Lerner

Abraham "Abba" Ptachya Lerner was a Russian-born British economist.

Lucas Papademos

Lucas Demetrios Papademos is a Greek economist who served as Prime Minister of Greece from November 2011 to May 2012, leading a provisional government in the wake of the Greek debt crisis. He previously served as Vice President of the European Central Bank from 2002 to 2010 and Governor of the Bank of Greece from 1994 to 2002.

Alvin Hansen

Alvin Harvey Hansen was an American economist who taught at the University of Minnesota and was later a chair professor of economics at Harvard University. Often referred to as "the American Keynes", he was a widely read popular author on economic issues, and an influential advisor to the government on economic policy. Hansen helped create the Council of Economic Advisors and the Social Security system. He is best remembered today for introducing Keynesian economics in the United States in the 1930s and 40s.

The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a post-World War II academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Keynes with neoclassical economics. Being Keynesian in the short run and neoclassical in the long run, neoclassical synthesis allowed the economy to adjust via fiscal and monetary policies in the short run whilst predicting that equilibrium in the long run will be reached without state intervention. The synthesis, formulated by a group of economists, dominated economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 1960s and 1970s.

Jordi Galí

Jordi Galí is a Spanish macroeconomist who is regarded as one of the main figures in New Keynesian macroeconomics today. He is currently the director of the Centre de Recerca en Economia Internacional at Universitat Pompeu Fabra and a Research Professor at the Barcelona Graduate School of Economics. After obtaining his doctorate from MIT in 1989 under the supervision of Olivier Blanchard, he held faculty positions at Columbia University and New York University before moving to Barcelona.

NAIRU Level of unemployment below which inflation would be expected to rise

Non-accelerating inflation rate of unemployment (NAIRU) is a theoretical level of unemployment below which inflation would be expected to rise. It was first introduced as NIRU by Franco Modigliani and Lucas Papademos in 1975, as an improvement over the "natural rate of unemployment" concept, which was proposed earlier by Milton Friedman.

History of macroeconomic thought Aspect of history

Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.

<i>Full Employment Abandoned</i> 2008 book by William Mitchell & Joan Muysken

Full Employment Abandoned: Shifting Sands and Policy Failures is a book on macroeconomic issues, written by economists William Mitchell & Joan Muysken and first published in 2008.

In economics, non-accelerating inflation buffer employment ratio (NAIBER) refers to a systemic proposal for an in-built inflation control mechanism devised by economists Bill Mitchell and Warren Mosler, and advocated by Modern Money Theory as replacement for NAIRU. The concept of NAIBER is related to the idea of a job guarantee aimed to create full employment and price stability, by having the state promise to hire unemployed workers as an employer of last resort (ELR).

The monetary/fiscal policy debate, otherwise known as the Ando–Modigliani/Friedman–Meiselman debate, was the exchange of viewpoints about the comparative efficiency of monetary policies and fiscal policies that originated with a work co-authored by Milton Friedman and David I. Meiselman and first published in 1963, as part of studies submitted to the Commission on Money and Credit.

References

  1. Adams, Richard (1 October 2003). "Franco Modigliani". The Guardian . Retrieved 18 August 2021.
  2. 1 2 "Franco Modigliani" by Daniel B. Klein and Ryan Daza, in "The Ideological Migration of the Economics Laureates", Econ Journal Watch , 10(3), September 2013, pp. 472-293
  3. 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)
  4. 1 2 Franco Modigliani, autobiographical notes, Nobel Prize organization website, 1985
  5. Luca Michelini, Il nazional-fascismo economico del giovane Franco Modigliani, Firenze, Firenze University Press, 2019
  6. 1 2 Mongiovi, Gary (2015) "Franco Modigliani and the Socialist State", Economics & Finance Department, St. John's, May 2015
  7. 1 2 3 Professor Franco Modigliani, obituary, The Independent , 28 September 2003
  8. Modigliani, Franco & Richard H. Brumberg (1954) "Utility analysis and the Consumption Function: An Interpretation of Cross-Section Data", Kenneth K. Kurihara (editor) Post-Keynesian Economics, New Brunswick: Rutgers University Press, 1954, pp. 388–436
  9. Modigliani, Franco (1966). "The Life Cycle Hypothesis of Saving, the Demand for Wealth and the Supply of Capital". Social Research . 33 (2): 160–217. JSTOR   40969831.
  10. Wade-Hands, Douglas (1986) Modigliani And Grunberg : A Precursor To Rational Expectations?, University of Puget Sound
  11. Visco, Ignazio (1984) "Price expectations in rising inflation", Contributions to economic analysis, Volume 152, North-Holland, 1984, ISBN   0444868364, ISBN   9780444868367
  12. Grunberg, E. & Franco Modigliani (1954) "The Predictability of Social Events," Journal of Political Economy , 62, pp. 465-478,December, 1954
  13. Breit, William; Spencer, Roger W. (1990). Lives of the Laureates: Ten Nobel Economists. Massachusetts: MIT Press. ISBN   978-0262023085.
  14. 1 2 Miller, Merton H. & Franco Modigliani (1958) "The cost of capital, corporate finance and the theory of investment", The American Economic Review , 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 in December 1956.
  15. 1 2 Miller, Merton H. & Franco Modigliani (1963) "Corporate Income Taxes and the Cost of Capital: A Correction", The American Economic Review , Vol. 53, No. 3, June 1963, pp. 433–443
  16. Ando, Albert & Franco Modigliani (1965) "The relative stability of monetary velocity and the investment multiplier", The American Economic Review , 55.4, pp. 693–728
  17. Friedman, Milton & David I. Meiselman (1963) "The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897–1958", Stabilization Policies: A Series of Research Studies Prepared for the Commission on Money and Credit by E. C. Brown et al, Englewood Cliffs, NJ: Prentice-Hall: 1963, pp. 165–268
  18. Modigliani, Franco; Papademos, Lucas (1975). "Targets for Monetary Policy in the Coming Year" (PDF). Brookings Papers on Economic Activity . 1975 (1): 141–165. doi:10.2307/2534063. JSTOR   2534063.
  19. Coe, David T. "Nominal Wages. The NAIRU and Wage Flexibility" (PDF). Organisation for Economic Co-operation and Development.
  20. Modigliani, Franco & Leah Modigliani (1997) "Risk-Adjusted Performance", The Journal of Portfolio Management , Winter 1997, 23 (2), pp. 45–54
  21. Press Release, Nobel Prize Organisation, 15 October 1985
  22. Fabozzi, Frank J.; Frank J. Jones; Franco Modigliani (2010). Foundations of Financial Markets and Institutions. Pearson Education, Inc. pp. Dedication. ISBN   978-0-13-613531-9.
  23. The Newsletter for Economists Allied for Arms Reduction , Vol. 12, 1, April 2000
  24. "Franco Modigliani Papers, 1936–2005 and undated, bulk 1970s–2003". Rubenstein Library, Duke University.
  25. Mitchell, William (2016) "The Modigliani controversy: The break with Keynesian thinking", 21 January 2016
  26. E.g. Modigliani Andre & Franco Modigliani (1987) "The Growth of the Federal Deficit and the pole of public attitudes", Public Opinion Quarterly , Volume 51, University of Chicago Press, pp. :459-480
  27. Blejer, Mario I.Adrienne Cheasty (1993) "How to measure the fiscal deficit : analytical and methodological issues", Washington, DC : International Monetary Fund
  28. Modigliani, Franco (2000) "Europe’s Economic Problems", Carpe Oeconomiam Papers in Economics, 3rd Monetary and Finance Lecture, Freiburg, 6 April 2000
  29. Mitchell, William (2011) "Lies, damned lies, and statistics", 13 July 2011
  30. "In March 2003, only few months before his demise, I was at MIT and witnessed Franco [Modigliani] still 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
  31. "Chilmarker Serena Modigliani, 91, Escaped Fascism", Vineyard Gazette , 9 October 2008
  32. Serena Calabi obituary, The Boston Globe , 24 September 2008
Awards
Preceded by
Richard Stone
Laureate of the Nobel Memorial Prize in Economics
1985
Succeeded by
James M. Buchanan Jr.