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Modigliani, Franco

Franco Modigliani

American economist Franco Modigliani (1918–2003) won the Nobel Prize for Economics in 1985 for a career that began in his native Italy when he won a prize for an economics essay during his second year at the University of Rome. With prospects for a bright future dimming under the rise of Fascism in Mussolini's Italy as it began to collaborate with Hitler's Germany, he left Italy and joined his future wife and her parents in Paris. With World War II about to engulf Europe, Modigliani, himself a Jew, decided it best to leave for America. In August 1939, a few days before the war in Europe broke out, they arrived in New York.

Privilege Was No Escape

Modigliani was born on June 18, 1918, in Rome, Italy. His father, Enrico Modigliani, was a prominent pediatrician and his mother, Olga Flaschel Modigliani, was a volunteer social worker. He described himself in his autobiography for the Nobel Prize committee as being a "good" student "though not outstanding." When he was 13 his father died unexpectedly due to an operation. Modigliani was traumatized, and for the next three years his performance at school reflected his grief. It was inconsistent at best. He then transferred to Liceo Visconti, considered the best high school in Rome, and there he began to flourish. Because of his excellent progress, he took the university exam and was able to skip his last year in high school and begin his college career at age 17. Family hopes that he would follow his father's path into medicine did not last for Modigliani, who admitted a low tolerance for suffering and blood. Instead he initially decided on pursuing a law degree which he saw as opening the door to many possibilities in Italy. That plan, too, was about to change.

In his second year at the University of Rome Modigliani entered an economics essay in a contest by a student organization. He won. It was at that moment that he realized his interest was in economics. Prospects for getting a proper education there were not good due to fascism. Economics education was grim. Instead he decided he would continue to study on his own with the assistance of a few economists he knew personally and whom he valued, especially Riccardo Bachi. He began to read the English and Italian versions of the classics in the field. The same organization that had sponsored the prize, I Littoriali della Coltura, had also helped put him into contact with other anti-fascists. His political philosophy changed in that direction, as did his involvement with his future wife, Serena Calabi, and her father, Giulio, both anti-fascists.

Modigliani recalled that, "In 1938 the Italian racial laws were promulgated and at the invitation of my future in-laws, I joined them in Paris, where, in May 1939, Serena and I were married." What was a joyful time in his personal life was shadowed by the state of affairs in Europe. He was not impressed with his classes at the Sorbonne in Paris, and spent his time studying on his own at the St. Genevieve Library (Bibliotheque St. Genevieve). In June he had returned briefly to Italy to discuss his thesis and to receive his Doctor of Juris degree from the University of Rome. But with the certainty of war, Modigliani, his wife, and her parents applied for immigration to the United States. They arrived in August 1939, and the war in Europe began a few days later.

New School for a New Life

When it was apparent that Modigliani would not be returning to Europe for quite a long time, he enrolled at the New School for Social Research in New York City and was awarded with a free tuition scholarship by the Graduate Faculty of Political and Social Science. The New School had been newly created and provided an academic haven for many Europeans, especially Jews, who had escaped the persecutions that had come with Hitler and the other fascist dictatorships. He began studies in the fall of 1939 and continued his studies for three years at night, while he sold European books during the day to support his growing family that would eventually include his two sons, Andre and Sergio. In 1941 he began his first teaching job at the New Jersey College for Woman. The following year he became an instructor in economics at Bard College, which was at the time a residential college of Columbia University. In 1944, he received his doctorate in economics from the New School. His first publication, in January 1944, was in Econometrica, which, he noted, was essentially his dissertation, entitled, "Liquidity Preference and the Theory of Interest and Money." It was Modigliani's model present in his dissertation that would provide the core of the Neo-Keynesian Synthesis of post-war macroeconomics, according to the New School website page on Modigliani. An explanation of the economics system he proposed noted that, "In sum, Modigliani proposed that with sticky wages money is non-neutral: an increase in the nominal money supply M raises the price level less-then-proportionally, decreases the interest rate and raises employment and output. If money wages are fully flexible, as in the earlier case, then money is neutral it affects neither interest nor employment nor output and increases the price level proportionally. Thus, Modigliani concludes, Keynes' (Economist John Maynard Keynes) theory only works if there is sticky or rigid money wages."

He returned to the New School to become a lecturer and research associate at the Institute of World Affairs. His project was published in National Income and International Trade. He also created his first proposal for saving, known as the Duesenberry-Modigliani hypothesis.

Modigliani left New York in 1948 to study at the University of Chicago after receiving the nod for the Political Economy fellowship. At the same time he joined the Cowles Commission for Research in Economics as a research consultant. He soon accepted a position as director of a research project at the University of Illinois on "Expectations and Business Fluctuations." In 1952 Modigliani left Chicago to join the faculty at the Carnegie Institute of Technology, now Carnegie-Mellon University, and stayed there until 1960. While there he completed two important papers that would set the foundation of his "Life Cycle Hypothesis," as well as a collaboration on a book and two essays with another economist, Merton H. Miller. He then spent a year at Massachusetts Institute of Technology (MIT) as a visiting professor. After another year teaching at Northwestern, he returned to MIT and stayed the duration of his career.

With Nobel, Criticism for President

Modigliani was announced as the recipient of the 1985 Nobel Prize for Economics in October 1985, the 13th American to win the prize since its establishment in 1969. David Warsh of the Boston Globe broke the story on the local honoree that was more than simply one expressing Modigliani's pleasure in receiving the nod. "After receiving news of the award," Warsh wrote, "he immediately rebuked President Reagan for coining political positions that contradicted virtually all of the findings of Modigliani's 40 years of investigations." Modigliani seemed to be leveling only criticism at the president that first year of his second term for insisting that the growing deficit did nothing to hurt savings. He also criticized the president for doing everything to undermine the economy except to raise taxes. On a lighter note at his press conference that day in Cambridge, Modigliani said that, "I sometimes think that my work on this subject was colored by the savings bank where I was banking at the time when I was working on this. Their motto was, 'Save it when you need it least, have it when you need it most.'" He also mentioned his appreciation of an early collaborator at Illinois. Richard Brumberg was a "brilliant" graduate student, according to Modigliani, who had been working with him as the "Life Cycle Hypothesis" began to unfold. The plan that was outlined in 1953 and 1954 had laid the foundation for the future evolution of the project. Each of them then went to pursue other work: Brumberg to Johns Hopkins to complete his Ph.D. studies, and Modigliani to Carnegie. Brumberg died suddenly in 1955 of a brain tumor. Modigliani's shock and grief over the untimely death prevented him from publishing the second paper until 1980. Paul Samuelson, the first Nobel Economics winner in 1970 and an MIT colleague of Modigliani, reacted to the announcement of his prize as saying, "With many people with respect to the Nobel Prize, it's a question of 'if;' with Franco, it was only a question of 'when.'"

Modigliani's fame in the United States among his peers, students, and the circle of economists was not nearly as great as it was in Italy, where he was actually a celebrity. He wrote for a leading news magazine there, advised politicians and bankers, and sponsored many Italian students to attend MIT. John Bossons, an economist at the University of Toronto, noted at the time of his Nobel that Modigliani was "a very enthusiastic advocate," and had "inspired a lot of people."

Modigliani published prolifically, particularly in economic journals. In 2003 he published an autobiography titled, Adventures of an Economist.

Modigliani, a naturalized United States citizen, was a member of the National Academy of Sciences and the American Academy of Arts and Sciences, and at the time he was honored with the Nobel, the only man to serve as president of both the American Economic Association and the American Finance Association. He also served as president of the American Econometric Society. In addition to advising Italian banks and politicians, Modigliani acted as a consultant to the United States Treasury, the Federal Reserve System, and numerous European banks.

Modigliani died in his sleep on September 25, 2003, at his home in Cambridge, Massachusetts, at the age of 85. When he died, an obituary in the Economist related an interesting, and amusing, story. "Serena Modigliani warned her husband not to turn around if someone shouted his name on the streets of Rome. 'Otherwise they'll shoot you,' she said. It was the winter of 1978, and Italy was gripped by political violence and economic chaos. Franco Modigliani, an economist at the Massachusetts Institute of Technology, had returned to the country of his birth to take part in a televised debate, urging unpopular reforms. When Mr. Modigliani left his hotel the next morning, he heard a man behind him call his name. He tried to walk faster, but his pursuer drew nearer, and finally caught him, grabbing his jacket. An assassin? No: a cobbler, in fact, desperate to tell him that, of all the bigwigs on the television the previous night, Mr. Modigliani had been the only one to say, 'anything comprehensible.'"


Boston Globe, October 16, 1985; December 5, 1985.

CFO, The Magazine for Senior Financial Executives, November 2003.

Economist, October 4, 2003.

The Guardian, October 1, 2003.

MIT News, September 25, 2003.

Science, November 7, 1986.


" Adventures of an Economist, by Franco Modigliani," Texere Publishing website, (January 16, 2004).

"Dining With Nobel Laureate Franco Modigliani," Massachusetts Institute of Technology (MIT) News website, (January 16, 2004).

"Franco Modigliani," New School for Social Research website, (December 31, 2003).

"Franco Modigliani," Sloan School of Management, personal home page, (January 16, 2004).

"Franco Modigliani Autobiography," Nobel Museum website, (December 31, 2003).

"In memory of Franco Modiglian, (Pierleone Ottolenghi)," Open Democracy website, (January 16, 2004).

"Neoclassical Keynesian Synthesis," New School for Social Research website, (January 16, 2004).

"A Solution to the Social Security Reform," Massachusetts Institute of Technology web, (January 16, 2004).

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Modigliani, Franco

Modigliani, Franco 1918-2003


Franco Modigliani was an Italian-born Jewish-American economist. He fled the fascist and anti-Semitic regime of Benito Mussolini (18831945) in 1939 and migrated to the United States with a doctor of law degree (1939) from the University of Rome. He earned a doctorate in economics from the New School University in New York in 1944, writing his dissertation on the Keynesian liquidity preference. In his dissertation, he reworked the Hicksian IS and LM curves to present a new version of Keynesian economics. His Keynesian paradigm laid the foundation for the Federal Reserve Bank econometric model. In 1962 Modigliani joined the economics department of the Massachusetts Institute of Technology, where he stayed for the rest of his career.

Liquidity preference explains unemployment without wage rigidity. It posits a relationship of money to prices. The price of money is anything that can be exchanged for it. Money in the future is also a price with a discount rate Rt = (1 + rt )-1. Being flexible, the rate of interest will rise in tight money situations. People will raise cash by liquidating money instruments or through borrowing. Investment and savings will fall and be subsequently followed by a fall of income and employment. The demand for money will then fall to equal its supply. Essentially, Modigliani argued for a rate of interest to output adjustment consequent to a tight monetary policy, in contrast to classical economists, who argued for a rate of interest to price of all goods adjustment. By keeping policymakers on guard to supply an adequate quantity of money or to fix an appropriate interest rate, Modigliani made unemployment an equilibrating mechanism.

Modigliani rid the investment concept in corporate finance of its traditional utility and production analyses. The Modigliani-Miller hypothesis first argued that a firm trying to increase its value by moving from only equity to a mixture of debt and equity positions will encourage arbitrage among individual investors that would undo its actions, making value invariant to the debt/equity ratio. Second, the rate of return on equity is linearly dependent on the debt/equity ratio. If a firm's stock is $1,000, debt is $400, interest on debt is 0.05, and the expected rate of return is 0.1, then its return on equity will be . Third, new invest-600 ment opportunities are also independent of the debt/equity ratio. This three-part hypothesis abstracted from the effects of taxes and bankruptcy. The discussion was extended to a dividend invariance value model.

In Modigliani's second best-known hypothesis, the life-cycle hypothesis of saving (LCH), consumers receive income, Y, up to the end of their working life, N. They accumulate savings during their working year, and consume, C, uniformly during their lifetime, L > N. Since lifetime consumption must equal lifetime income, assuming no bequest, we can express CL = NY, or C = (N ǀ L ) Y, in which case the terms in parentheses represent the marginal propensity to consume. Fitting the LCH to labor income and net assets, A, the equation C = .766 Y + .073 A reconciled some anomalies of the post-World War II (19391945) period.

For his contributions to investment and consumption theories, Modigliani received the Nobel Prize in economics in 1985. He also contributed to economic policy debates, evolving the NIRU (noninflationary rate of unemployment) concept through the Phillips curve, and Okun's unemployment versus the gross domestic product gap relationship, public deficits, and reinstated personal savings into the post-Keynesian debate on the equilibrium profit rate, creating the dual or anti-Pasinetti theorem.

SEE ALSO Life-Cycle Hypothesis; Modigliani-Miller Theorems


Ando, Albert, and Franco Modigliani. 1963. The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests. American Economic Review 53 (1): 5584.

Modigliani, Franco. 1944. Liquidity Preference and the Theory of Interest and Money. Econometrica 12: 4588.

Modigliani, Franco. 1949. Studies in Income and Wealth. Vol. 11: Fluctuations in the Saving-Income Ratio: A Problem in Economic Forecasting. New York: National Bureau of Economic Research.

Modigliani, Franco. 1963. The Monetary Mechanism and Its Interaction with Real Phenomena. Review of Economics and Statistics 45: 79107.

Modigliani, Franco. 1986. Life Cycle, Individual Thrift, and the Wealth of Nations. American Economic Review 76 (3): 297313.

Modigliani, Franco. 1988. MM-Past, Present, Future. Journal of Economic Perspectives 2 (4): 149158. Modigliani, Franco. 2003. The Keynesian Gospel According to Modigliani. American Economist 47 (1): 224. Modigliani, Franco, and Richard Brumberg. 1954. Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data. In Post-Keynesian Economics, ed. Kenneth K. Kurihara, 388436. New Brunswick, NJ: Rutgers University Press.

Ramrattan, Lall, and Michael Szenberg. 2004. Franco Modigliani, 19182003: In Memoriam. American Economist 43 (1): 38.

Ramrattan, Lall, and Michael Szenberg. 2007. Franco Modigliani, A Mind That Never Rests: An Intellectual Biography. Houndmills, U.K.: Palgrave Macmillan.

Lall Ramrattan

Michael Szenberg

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Modigliani, Franco

Franco Modigliani, 1918–2003, American economist, b. Rome. Jewish, antifascist, and trained as a lawyer, he fled Mussolini's Italy in 1938, settling in the United States in 1939, where he studied economics. After teaching at various universities, he became a professor at the Massachusetts Institute of Technology in 1962 (emeritus in 1988), Modigliani won the 1985 Nobel Memorial Prize in Economic Sciences for his pioneering work in economic theory. He developed a life-cycle theory about the fluctuations in personal savings over an individual's lifetime, which states that people save to spend their money during retirement. He also demonstrated that corporate debt had less affect on how investors value a company than did the company's profitability, and helped devise an economic forecasting model used by the Federal Reserve Bank.

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