Franco Modigliani was an eminent Italian Economist and Nobel Prize Laureate, who, with his great passion for economics, formulated many theories in his domain. Though born in Italy, he spent most of his life in America, teaching and engaging in scripting works, all of course, related to his all-time passion — economics. He was a strong antifascist who actively participated in various resistance movements with the support of Littoriali, a student organization in Italy. Greatly influenced by the great Economist John Maynard Keynes, he developed many important economic theories, most important one being the life-cycle hypothesis, which he developed with fellow economists like Irving Fisher, Roy Harrod, and Albert Ando and for which he was given the Nobel Memorial Prize in 1985. In this hypothesis, he made significant analysis on savings and financial markets. He also inspired several economics aspirants with his lectures and important discourses. Read on to explore more about the personal life, career, and achievements of this extraordinary economist.
Franco Modigliani Childhood & Early Life
Franco Modigliani was born to Italian parents — Enrico Modigliani and Olga Flaschel — in Rome, Italy, on 18 June 1918. His father was a renowned pediatrician and his mother was a volunteer social worker. He fared well in academics until he faced the most tragic incident of his life — the loss of his father in 1932 owing to a failed surgery. Being very close to his father, this irreparable loss caused Franco deep mental anguish. He was only 13-years-old when this tragedy struck him and his tiny world of happiness collapsed forever. Of all things, it affected his academics that led to poor performance in school for the next three years. Perturbed by his poor performance, his mother enrolled him into one of the best schools in Rome, Liceo Visconti. The exigent curriculum brought out the best in him and he excelled in studies, skipping the final year at school and going ahead to join the University of Rome at the age of 17, two years ahead of his peers.
Although his family wanted him to pursue medicine following his father’s footsteps, he opted for legal studies, which was a thriving career option in Rome during those days. During his second year, he entered a national competition sponsored by ‘I Littoriali della Cultura’ or student organization in economics and bagged the first prize. Even though he did not consider his first essay as a significant one, it was substantial enough given that it helped establish his interest in economics. Unfortunately, the teaching in this domain was dreary, under the influence of fascism and he had to seek guidance from other economists whom he knew personally. He put in deliberate efforts to develop interest towards English and Italian classics on the recommendation of Riccardo Bachi.
Marriage and Migration
Franco Modigliani met many anti-fascists through Littoriali and with their help, voiced his strong opposition against fascism. To his good fortune, his future father in law (his girlfriend Serena’s father) was also a staunch anti-fascist. He went to Paris on the invitation of Serena’s parents and got married to her in 1939. Although he joined the Sorbonne, he did not find it exciting or inspiring enough, and upon realizing that it is a total wastage of time, he started studying on his own and composed his thesis at the Bibliotheque St. Genevieve. He returned to Rome in 1939 and there he discussed his thesis and received a doctorate degree. Prevising the threat of war in Europe, he migrated to U.S (New York) in 1939, a few days before World War II.
Anticipating a long stay in U.S, Franco Modigliani searched for the best possible way to pursue his interest in economics. He was fortunate enough to receive free tuition fellowship from the Graduate Faculty of Political and Social Science of the New School for Social Research, which was an institution operated in U.S to help European scholars who were victims of fascist dictatorships. For the next three years, he had a busy schedule where he slogged during the day to support his family and burned midnight oil studying. It was during this time his first son, Andre was born. It was an exciting time for him as he worked under the guidance of some of the best teachers in economics, including Adolph Lowe and Jacob Marschak. Of this, Franco Modigliani had a great regard for Jacob Marschak, who helped him develop concrete foundations in economics and econometrics, along with some mathematical aspects and was a constant source of motivation to him. Working with Marschak provided Franco Modigliani the opportunity to participate in an informal seminar in New York around 1940-41, along with other distinguished members like Abraham Wald, Tjalling Koopmans and Oscar Lange. This experience proved significant in his development as an eminent economist.
He joined Columbia University as instructor in economics and statistics in 1942 and remained there until 1944. He then obtained his D. Soc. Sci. from the New School for Social Research in 1944, under the able guidance of Jacob Marschak. He became a U.S citizen in 1946 and two years later, in 1948, he joined the University of Illinois. The same year he received the prestigious Political Economy Fellowship from the University of Chicago and was offered a chance to take up the post of Research Consultant in the Cowles Commission. He was lucky enough to be appointed as the Director of a research project on “Expectations and Business Fluctuations” at the University of Illinois, Chicago. This opportunity helped him develop contacts with many luminaries like Marschak, Koopmans, Arrow and Simon. It was during this period that he came across two interesting theories — the theory of choice under uncertainty proposed by Von Neumann and Morgenstern and the theory on statistical interference from non-experimental observations by Haavelmo.
1950s and early 1960s witnessed two important contributions to economics from Franco Modigliani. The first one being Modigliani-Miller theorem in corporate finance along with Merton Miller, which demonstrated that “under certain assumptions, the value of a firm is not affected by whether it is financed by equity (selling shares) or debt (borrowing money)” and secondly, the life-cycle hypothesis which explains the level of saving in economy. This was an important contribution in economics and he was recognized with one of the most prestigious awards – The Nobel Prize because of his findings. He proposed that the level of consumption is stable in consumers, just as they save during their working years and spend all their savings after the retirement. During the later years, he joined MIT as an Institute Professor and stayed there until his death in 2003 in Cambridge, Massachusetts.
Modigliani was a big follower of John Maynard Keynes and his economic theories. He had stuck a cartoon on his office door, which said, “With your permission, gentlemen, I’d like to offer a kind word on behalf of John Maynard Keynes”.
- "Corporate Income Taxes and the Cost of Capital" — with Merton Miller, published in American Economic Review.
- "The Cost of Capital, Corporation Finance, and the Theory of Investment" with Merton Miller, published in American Economic Review.
- "Fluctuations in the Saving-Income Ratio: A Problem in Economic Forecasting” — published in ‘Studies in Income and Wealth’.
- "The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests." — with Albert Ando, in American Economic Review, 1963.
- "The Predictability of Social Events” — with Emile Grumburg, in Journal of Political Economy.
- "Utility Analysis and the Consumption Function" — with Richard Brumberg, in Post-Keynesian Economics, edited by Kenneth Kurihara.
Achievements and Awards
- Nobel Memorial Prize in Economics, 1985
- MIT's James R. Killian Faculty Achievement Award, 1985