A Boston lawyer’s son
Merton Howard Miller was born in Boston, Massachusetts, on May 16, 1923, the only child of Joel and Sylvia Miller. His parents were Jewish; his father was an attorney and a Harvard graduate of 1916, and his mother kept house. Merton went to the Boston Latin School, the city’s historic public exam school and the oldest public school in the United States, and in 1940 followed his father to Harvard.
His interest, though, was economics rather than law. In the introductory economics course at Harvard he sat in the same section as Robert Solow, another future Nobel laureate. Miller finished his degree in three years, graduating magna cum laude in 1943 with the class of 1944, in the middle of the Second World War.
Treasury, the Fed and Johns Hopkins
During the war Miller worked as an economist in the Division of Tax Research of the US Treasury Department and then in the Division of Research and Statistics of the Board of Governors of the Federal Reserve System. The experience with taxes in particular stayed with him; questions of how taxes shape companies’ financial choices would run through his later research.
In 1949 he returned to graduate school at Johns Hopkins University in Baltimore, chosen mainly because the Austrian-born economist Fritz Machlup taught there. He received his PhD in 1952 and spent the following year as a visiting assistant lecturer at the London School of Economics.
The M&M partnership
In 1953 Miller joined the Carnegie Institute of Technology in Pittsburgh, whose Graduate School of Industrial Administration was, as he put it, the first and most influential of the new wave of research-oriented business schools. His colleagues included Herbert Simon and Franco Modigliani, both future Nobel laureates. Modigliani and Miller began a collaboration that produced the papers known simply as “M&M”.
Their first, “The Cost of Capital, Corporation Finance and the Theory of Investment”, appeared in the American Economic Review in 1958. A second, “Dividend Policy, Growth and the Valuation of Shares”, followed in 1961, and they continued working together into the mid-1960s. The papers challenged the conventional wisdom that a company could lower its cost of capital and raise its value simply by finding the right mix of borrowing and shares.
What the theorems say
The M&M argument begins with an idealised market: no taxes, no costs of bankruptcy, and investors who can borrow and lend on the same terms as companies. In that world, Miller and Modigliani showed, a firm’s value depends only on the earnings its real investments produce, not on how those investments are financed. Splitting the earnings between lenders and shareholders, or paying them out as dividends instead of keeping them, does not change the size of the pie. If a firm could make itself more valuable just by borrowing more, investors would profit by borrowing on their own account, buying and selling until the advantage vanished. That “no-arbitrage” style of reasoning set the pattern for much of modern finance.
Miller liked to explain it with milk. A farmer can sell whole milk, or separate out the cream and sell it at a higher price, but what is left is skim milk that sells for less. Without costs of separation, cream plus skim milk fetch the same as the whole milk. Selling debt is like skimming off the cream; what remains for shareholders is riskier, lower-grade equity.
A simple illustration shows the idea. Imagine two identical bakeries, each earning the same profit every year from the same ovens and shops. One is financed entirely by its owners; the other has borrowed half its money. The borrowing bakery’s shareholders get a bigger share of each good year but also carry more risk, because the lenders must be paid first. In the M&M world, investors can create exactly the same pattern of risk and return for themselves by borrowing to buy shares in the debt-free bakery, so the two bakeries must be worth the same in total. The value comes from the ovens and the customers, not from the financing.
Why an ‘irrelevance’ result mattered so much
Real companies do not live in that idealised world, and that was exactly the point. The M&M theorems told managers and economists where to look: if the mix of debt and equity or the dividend policy does affect a firm’s value, it must be because of taxes, bankruptcy costs or other identifiable market imperfections. Miller himself led this research for decades, showing how tax systems and the costs of financial distress shape companies’ choices. The Nobel committee called the theorems the natural basis, or norm of comparison, for all theoretical and empirical analysis in corporate finance.
In practice, the theorems changed how companies are run and valued. The University of Chicago said at his death that he helped revolutionise corporate financial practice, changing it from a loose collection of rules into a sophisticated approach to maximising shareholder value. Every business school student learns the M&M propositions, and the logic behind them underpins how analysts value companies, how firms weigh borrowing against issuing shares and how they decide on dividends.
Chicago and the making of modern finance
In 1961 Miller moved to the Graduate School of Business at the University of Chicago, where he stayed for the rest of his career apart from a visiting year at the University of Louvain in Belgium in 1966–67. Eugene Fama, later a Nobel laureate, was his first PhD student at Chicago and a colleague for 37 years; together they wrote The Theory of Finance (1972), a seminal textbook. Myron Scholes, another future laureate, had been his research assistant. Dean Robert Hamada called him widely considered to be the founder of modern finance, the person who turned it from an institutional field into an accepted part of economics. Hamada added that Miller believed theories are only good if they conform to real-world data. Scholes called him a visionary, a man of intense curiosity who was willing to use his brilliant intuition to overturn a multitude of long-held “truths”.
In 1990 he shared the prize in economic sciences with Harry Markowitz and William Sharpe for pioneering work in the theory of financial economics, Miller’s share being for fundamental contributions to the theory of corporate finance. Markowitz had shown how investors can reduce risk by diversifying, Sharpe how assets are priced, and Miller how companies themselves should be valued.
Markets, exchanges and controversy
From the early 1980s Miller’s interests turned to the economics and regulation of financial markets, especially the futures and options exchanges. He was a public director of the Chicago Board of Trade from 1983 to 1985 and of the Chicago Mercantile Exchange from 1990 until his death, and he chaired the Mercantile Exchange’s academic panel investigating the stock market crash of October 1987. He argued that futures and other derivatives are valuable to the people who use them and that heavy regulation would do more harm than good, a case set out in Financial Innovations and Market Volatility (1991) and Merton Miller on Derivatives (1997).
He did not avoid controversy. In 1993 he argued in the Wall Street Journal that managers at a subsidiary of the German firm Metallgesellschaft, not its trader, were to blame for its huge oil-futures losses because they liquidated positions too early, and in 1995 he was engaged by Nasdaq to rebut allegations of price fixing by its dealers. He described himself plainly as an activist supporter of free-market solutions.
Family and private life
Miller’s Jewish parents raised him in Boston, and he is counted among the Jewish Nobel laureates; he did not write publicly about religious practice. His first wife, Eleanor, the mother of his three daughters, Pamela, Margot and Louise, died in 1969, a loss he called a heavy personal blow. He later married Katherine, and the couple divided their time between a townhouse in Chicago’s Hyde Park and a weekend retreat on a working farm in Woodstock, Illinois, where his hobbies were brush-cutting and a little gardening.
He had a dry sense of humour about himself. Unlike some more athletic fellow laureates, he wrote, the closest he came to recreational exercise was watching the Chicago Bears from his season-ticket seats, held for seventeen years, in the south end zone of frigid Soldier Field.
Last years and legacy
Miller retired from the faculty in 1993 but kept teaching, most recently a symposium on financial regulation for business, doctoral and law students. He died at his home in Chicago on June 3, 2000, aged 77. Fama said that all who knew him recognised him as a path-breaking, world-class scholar and a dedicated teacher who mentored many of the most famous contributors to finance. Miller wrote or co-wrote eight books, from Macroeconomics: A Neoclassical Introduction with Charles Upton to his essays on derivatives, and his papers, spanning 1941 to 2002, are preserved in the University of Chicago Library’s Special Collections Research Center.
The questions Miller and Modigliani asked in 1958, whether a company’s value depends on how it is financed and whether paying dividends makes shareholders richer, are still the starting point for corporate finance. Chief financial officers deciding whether to borrow or issue shares, boards setting dividends and analysts valuing companies all begin, knowingly or not, from the benchmark he helped establish.
Sources & further reading
Merton H. Miller, Biographical, NobelPrize.org · Press release: The Prize in Economics 1990, NobelPrize.org · Merton Miller, Nobel laureate and finance pioneer, University of Chicago Chronicle · Merton H. Miller, The Concise Encyclopedia of Economics, Econlib · Merton Miller, Wikipedia · Researched from the sources above and checked against them. Spotted an error? Tell us.
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