Franco Modigliani

Template:Short description Template:Infobox economist

Franco Modigliani (Template:IPAc-en; {{#invoke:IPA|main}}; 18 June 1918 – 25 September 2003)<ref>Template:Cite news</ref> 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.

Early life and educationEdit

Modigliani was born on 18 June 1918 in Rome to the Jewish family of a pediatrician father and a voluntary social worker mother.<ref name=klein>"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</ref>

He entered university at the age of seventeen, enrolling in the faculty of Law at the Sapienza University of Rome.<ref name=parisi>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)</ref> 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.<ref name=klein /><ref name=auto>Franco Modigliani, autobiographical notes, Nobel Prize organization website, 1985</ref> He wrote several essays for the fascist magazine Lo Stato<ref>Template:Cite book</ref> where he showed an inclination for the fascist ideological currents critical of liberalism.<ref>Luca Michelini, Il nazional-fascismo economico del giovane Franco Modigliani, Firenze, Firenze University Press, 2019</ref>

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.<ref name=advisor>Mongiovi, Gary (2015) "Franco Modigliani and the Socialist State Template:Webarchive", Economics & Finance Department, St. John's, May 2015</ref>

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.<ref name=auto/>

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' IS–LM model, was written under the supervision of Jacob Marschak and Abba Lerner, in 1944,<ref group=note>The basis of his dissertation subsequently appeared in Econometrica. See Modigliani (1944)</ref> and is considered "ground breaking."<ref name=advisor />

CareerEdit

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.<ref name=indy>Professor Franco Modigliani, obituary, The Independent, 28 September 2003</ref>

In 1962, he joined the faculty of MIT, as an Institute Professor.<ref name=indy />

Contributions to economic theoryEdit

Modigliani, beginning in the 1950s, was an originator<ref>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</ref> of the life-cycle hypothesis, which attempts to explain the level of saving in the economy.<ref>Template:Cite journal</ref> 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<ref name=exp>Wade-Hands, Douglas (1986) Modigliani And Grunberg : A Precursor To Rational Expectations?, University of Puget Sound</ref> to originate in the <ref>Visco, Ignazio (1984) "Price expectations in rising inflation", Contributions to economic analysis, Volume 152, North-Holland, 1984, Template:ISBN, Template:ISBN</ref> paper written by Modigliani and Emile Grunberg in 1954.<ref name=grun>Grunberg, E. & Franco Modigliani (1954) "The Predictability of Social Events," Journal of Political Economy, 62, pp. 465–478, December 1954</ref><ref>Template:Cite book</ref>

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.<ref name=mm1>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.</ref><ref name=mm2>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</ref> The theorem posits that, under certain assumptions,<ref group=note>The theorem assumes an economic environment with an efficient market and without taxes, bankruptcy costs, agency costs, and asymmetric information.</ref> 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.<ref name=mm1/><ref name=mm2/>

In the early 1960s, his response,<ref>Ando, Albert & Franco Modigliani (1965) "The relative stability of monetary velocity and the investment multiplier", The American Economic Review, 55.4, pp. 693–728</ref> co-authored with Albert Ando, to the 1963 paper<ref>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</ref> 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.Template:Citation needed

In 1975, Modigliani, in a paper<ref>Template:Cite journal</ref> whose co-author was his former student Lucas Papademos,<ref group= note>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.</ref> introduced the concept of the "NIRU", the non-inflationary rate of unemployment,<ref group=note>Subsequently known as the "non-accelerating inflation rate of unemployment" (NAIRU)</ref> ostensibly an improvement over the "natural rate of unemployment" concept.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> The terms refer to a level of unemployment below which inflation rises.<ref group=note>Inflation "rises"; it does not "accelerate," as can often be misread from the acronym NAIRU</ref>

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."<ref>Modigliani, Franco & Leah Modigliani (1997) "Risk-Adjusted Performance", The Journal of Portfolio Management, Winter 1997, 23 (2), pp. 45–54</ref>

Appointments and awardsEdit

In October 1985, Modigliani was awarded the Nobel prize in Economics "for his pioneering analyses of saving and of financial markets."<ref>Press Release, Nobel Prize Organisation, 15 October 1985</ref>

In 1985, Modigliani received MIT's James R. Killian Faculty Achievement Award.<ref>Template:Cite book</ref> 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"<ref>The Newsletter for Economists Allied for Arms Reduction Template:Webarchive, Vol. 12, 1, April 2000</ref> 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."<ref name=indy/>

A collection of Modigliani's papers is housed at Duke University's Rubenstein Library.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref>

CriticismEdit

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,<ref>Mitchell, William (2016) "The Modigliani controversy: The break with Keynesian thinking", 21 January 2016</ref> as well as his general stance on fiscal deficits.<ref>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</ref> 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.<ref group=note>See "crowding out effect"</ref><ref>Blejer, Mario I.Adrienne Cheasty (1993) "How to measure the fiscal deficit : analytical and methodological issues", Washington, DC : International Monetary Fund</ref>

Nonetheless, they acknowledged his dissenting voice on the issue of unemployment, in which Modigliani concurred early on<ref>Modigliani, Franco (2000) "Europe"s Economic Problems", Carpe Oeconomiam Papers in Economics, 3rd Monetary and Finance Lecture, Freiburg, 6 April 2000</ref> with heterodox economists that Europe-wide unemployment in the late 20th century was caused by the lack of demand induced by austerity policies.<ref>Mitchell, William (2011) "Lies, damned lies, and statistics", 13 July 2011</ref><ref group=note>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, Template:ISBN</ref>

Personal lifeEdit

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.<ref>"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</ref> 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,<ref name=chil>"Chilmarker Serena Modigliani, 91, Escaped Fascism", Vineyard Gazette, 9 October 2008</ref> died in 2008.<ref name=serena>Serena Calabi obituary, The Boston Globe, 24 September 2008</ref>