- Person
- Franco Modigliani
- Lived
- 1918–2003
- Field
- Economics & finance
- From
- Italian-American
The story
In 1936 John Maynard Keynes published The General Theory of Employment, Interest and Money, a new account of how economies work written in the shadow of the Great Depression. In the early 1940s economists were sharply divided over it. Many saw it as a total break with the classical economics that had come before, in which markets were expected to correct themselves. A year later the British economist John Hicks had offered a compact way of expressing Keynes's ideas, the IS–LM model, but how the new theory related to the old remained a live question.
Franco Modigliani arrived in New York in August 1939 as a young Jewish refugee from Fascist Italy, with a law degree and a passion for economics. At the New School for Social Research, founded in 1933 as a University in Exile for scholars fleeing dictatorship, he studied in the evenings under Jacob Marschak, who taught him to blend theory with empirical testing. Marschak also invited him into an informal seminar that met in New York around 1940 and 1941, whose members included Abraham Wald, Tjalling Koopmans and Oscar Lange. Modigliani also carried on a running debate with the economist Abba Lerner.
Out of these discussions came his doctoral dissertation, supervised by Marschak and Lerner. Published in Econometrica in January 1944 as Liquidity Preference and the Theory of Interest and Money, it was his first article in English. It elaborated and extended Hicks's IS–LM model and set out to integrate the Keynesian revolution with mainstream classical economics, showing where the two approaches agreed and where their differences lay. By then Modigliani had begun teaching, first at the New Jersey College for Women and then at Bard College.
Modigliani regarded the paper as one of his major contributions, and it is described as ground-breaking. His friend and MIT colleague Paul Samuelson later said that Modigliani revised Keynesian economics from its Great Depression model to its modern-day form.
Modigliani went on to win the 1985 Nobel Memorial Prize in Economic Sciences for other work, but the 1944 paper set the pattern for his career: careful theory, tested against data, aimed at helping governments manage the economy and keep people in work.
Why it matters
Modigliani's synthesis helped make Keynesian ideas usable for everyday economic policy, shaping how governments respond to recessions.
About Franco Modigliani
Rome-born economist who fled Mussolini’s racial laws and, at MIT, explained how people save over a lifetime and how firms are valued, winning the 1985 Nobel Prize.
More about Franco Modigliani
- Franco Modigliani explained how people save over a lifetimeWith his student Richard Brumberg, Franco Modigliani developed the life-cycle hypothesis of saving in 1953–54, a key reason for his 1985 Nobel Prize.
- Franco Modigliani built a model used by the Federal ReserveIn the late 1960s Franco Modigliani led the design of a large model of the US economy for the Federal Reserve, a tool that guided monetary policy for decades.
- Franco Modigliani introduced the NIRU unemployment conceptIn 1975 Franco Modigliani and his former student Lucas Papademos introduced the NIRU, the non-inflationary rate of unemployment, a concept still debated in monetary policy.
- Franco Modigliani helped found rational expectationsAt Carnegie Tech, Franco Modigliani and Emile Grunberg published a paper on predicting social events when people react to predictions, a pillar of rational expectations theory.
- Franco Modigliani inspired generations of MIT studentsFranco Modigliani taught at MIT for about 40 years. Paul Samuelson called him a great teacher whose students included Nobel laureate Robert Merton.
- Franco Modigliani’s theorem reshaped corporate financeIn 1958 Franco Modigliani and Merton Miller showed that, under certain assumptions, a firm’s value does not depend on whether it is financed by debt or by shares.
Sources
- Franco Modigliani: Biographical NobelPrize.org
- Franco Modigliani Wikipedia
- Nobel laureate Franco Modigliani dies at 85 MIT News
- IS–LM model Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.