A doctor’s son in Rome
Franco Modigliani was born in Rome on 18 June 1918, into a Jewish family. His father, Enrico Modigliani, was a leading paediatrician in the city; his mother, Olga Flaschel, was a volunteer social worker. He later remembered his early schooling as ‘good though not outstanding’, until, in 1932, his father died after an operation. Franco was thirteen, and, as he put it in his Nobel autobiography, his whole world seemed to collapse.
For three years his schoolwork faltered. Then he moved to the Liceo Visconti, then regarded as the best high school in Rome, and the challenge transformed him. He skipped his final year, passed the demanding exams and entered the University of Rome at seventeen, two years ahead of the norm. His family hoped he would follow his father into medicine, but he admitted to a low tolerance for suffering and blood, and chose law instead.
Economics under Fascism
In his second year at university Modigliani entered a national student competition in economics, the Littoriali della Cultura, organised by the Fascist student organisation, and to his own surprise won first prize, receiving the award from Benito Mussolini himself. Economics teaching under Fascism was, in his word, dismal, so he taught himself from the English and Italian classics with the guidance of a few good economists, especially Riccardo Bachi. As a student he also wrote essays for the Fascist-era journal Lo Stato.
But the competition also put him in touch with young anti-Fascists, and his political opposition to the regime began there. So did his romance with Serena Calabi, whose father, Giulio, was a long-standing anti-Fascist. In 1938 Mussolini’s government passed the racial laws that stripped Italian Jews of their rights. At the invitation of the Calabis, who had left for Paris, Modigliani joined them there; he and Serena married in Paris in May 1939. He returned briefly to Rome in June to defend his thesis and receive his law doctorate, then, fearing that Europe was about to be engulfed in war, the young couple obtained American visas. They arrived in New York in August 1939, days before the Second World War began.
Night school in New York
In America Modigliani won a free-tuition fellowship at the Graduate Faculty of the New School for Social Research, an institution created to give haven to European scholars driven out by dictatorship. For three years he studied every evening from six to ten while selling European books by day to support his family, which soon included a son, Andre. He remembered the period as exciting: he was discovering his passion for economics, above all through the refugee economist Jacob Marschak, to whom he said he owed ‘a debt of gratitude beyond words’.
His doctoral dissertation, published in Econometrica in January 1944 as ‘Liquidity Preference and the Theory of Interest and Money’, set out to integrate the Keynesian revolution, then seen as a total break with the past, with mainstream classical economics. It became a landmark of the ‘neoclassical synthesis’ that dominated post-war economics. He taught at the New Jersey College for Women and at Bard College, returned to the New School, and became a United States citizen in 1946.
Saving for a lifetime
In 1948 Modigliani left New York for the University of Chicago and its Cowles Commission, then took a research post at the University of Illinois, where he befriended a brilliant graduate student, Richard Brumberg. Together, in papers of 1953 and 1954, they laid the foundations of the life-cycle hypothesis of saving. Its central idea sounds simple: people try to keep their consumption fairly steady over their lives, so they build up wealth during their working years and draw it down in retirement. Brumberg’s early death in 1955 so affected Modigliani that their second paper waited until 1980 to be published.
The consequences were far-reaching. As the Nobel committee explained, the theory implied that a country’s total saving depends above all on its rate of economic growth and on demographic factors such as the age structure of the population and life expectancy. It became an essential tool for analysing pension systems and social security, and Modigliani spent much of his later career applying it to public debate, including, near the end of his life, a book on pension reform written with Arun Muralidhar.
What a company is worth
In 1952 Modigliani joined the Carnegie Institute of Technology (now Carnegie Mellon University) in Pittsburgh, a period he called very productive. There, in 1958 and 1961, he and his colleague Merton Miller published two papers that founded modern corporate finance. The Modigliani–Miller theorems showed that, under idealised conditions, the market value of a firm does not depend on whether it is financed by borrowing or by issuing shares, nor on its dividend policy: what matters is what its assets are expected to earn. By spelling out exactly which assumptions were needed, no taxes, no bankruptcy costs, efficient markets, the theorems gave economists and financiers a precise way to ask why, in the real world, capital structure does matter.
At Carnegie he also wrote, with Emile Grunberg, a 1954 paper on predicting social events when people react to the predictions, later seen as one of the pillars of the theory of rational expectations. After a visiting year at MIT and a year at Northwestern, he joined the MIT faculty in 1962 with appointments in economics and the Sloan School of Management, and was named an Institute Professor, MIT’s highest faculty rank, in 1970.
Shaping policy
Modigliani was never a purely abstract thinker. In the late 1960s he led the design of a large-scale model of the U.S. economy for the Federal Reserve, the MPS (MIT–Penn–Social Science Research Council) model, which the Fed used for many years. With Albert Ando he challenged Milton Friedman’s monetarism; with his former student Lucas Papademos he introduced in 1975 the idea of a non-inflationary rate of unemployment. In 1997, with his granddaughter Leah, he devised a widely used measure of risk-adjusted investment performance, known as the Modigliani–Modigliani or M² measure.
He took part energetically in economic debate in both Italy and the United States, warning of the dangers of large public deficits and, later, arguing that high European unemployment stemmed from a lack of demand. Some Post-Keynesian economists criticised his positions as too close to orthodoxy. In October 1985 the Royal Swedish Academy of Sciences awarded him the Nobel Memorial Prize in Economic Sciences ‘for his pioneering analyses of saving and of financial markets’. He also served as president of the American Economic Association, the American Finance Association and the Econometric Society.
A refugee who never forgot
Modigliani’s career was itself a product of the Jewish refugee experience: Fascist racial laws forced him out of Italy, and he was trained at an institution founded to rescue scholars from dictatorship, by a teacher, Marschak, who was himself a Jewish émigré. MIT’s obituary described him as Jewish and recalled that his opposition to Fascism began among student anti-Fascists in the 1930s.
That memory remained sharp to the end. In September 2003, days before his death, he joined fellow MIT Nobel laureates Paul Samuelson and Robert Solow in a letter to The New York Times criticising the Anti-Defamation League for honouring Italy’s prime minister Silvio Berlusconi, who had been quoted as saying that ‘Mussolini did not murder anyone’. The letter reminded readers that Mussolini had persecuted Jews with his racial laws and was responsible for the deportation of almost 7,000 Jews who died in Nazi camps.
Teacher, sailor, tennis player
Colleagues remembered a slight, gregarious, intensely energetic man. He loved skiing, tennis and sailing, and used some of his Nobel prize money to upgrade his Laser sailboat. Samuelson, his frequent tennis partner, recalled that on the day Modigliani won the Nobel they played doubles, and that he once ran into a cement wall chasing a ball; their collaboration on one theory began between serves. His doctoral students included the economists Robert Shiller and Lucas Papademos and the future European Central Bank president Mario Draghi, and Wall Street was full of people he had taught.
He and Serena, who was active in progressive politics and the League of Women Voters, were married for more than sixty years. They had two sons: Andre, a professor of sociology, and Sergio, an architect.
Legacy
Franco Modigliani died in his sleep at his home in Cambridge, Massachusetts, on 25 September 2003, aged 85, still working and teaching at MIT almost to the end. Samuelson called him ‘the greatest living macroeconomist’ and said he had revised Keynesian economics from its Great Depression model to its modern form.
The country that had driven him out came to claim him back. Modigliani remained a prominent voice in Italian economic debate for decades, and in 1997 the University of Naples Federico II awarded him an honorary degree. At MIT, the year of his Nobel Prize also brought him the James R. Killian Faculty Achievement Award, the institute’s highest honour for its own faculty, and he was a member of both the National Academy of Sciences and the American Academy of Arts and Sciences.
His ideas are built into everyday economic life. The life-cycle hypothesis underlies how governments think about pensions, ageing populations and national saving; the Modigliani–Miller theorems are taught in the first weeks of every corporate finance course and remain the starting point for decisions about debt, equity and dividends. His papers are held at Duke University’s Rubenstein Library, and an endowed Modigliani professorship of financial economics at MIT carries his name.
Sources & further reading
Franco Modigliani, Biographical, NobelPrize.org · Press release: The Prize in Economic Sciences 1985, NobelPrize.org · Nobel laureate Franco Modigliani dies at 85, MIT News (2003) · Franco Modigliani, Wikipedia · Researched from the sources above and checked against them. Spotted an error? Tell us.
A life 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.