# Franco Modigliani

Franco Modigliani (June 18, 1918 – September 25, 2003) was an Italian-born American economist and professor at the MIT Sloan School of Management and MIT Department of Economics, who won the Nobel Memorial Prize in Economics in 1985.

## Quotes

* What is the "cost of capital" to a, firm in a world in which funds are used to acquire assets whose yields are uncertain; and in which capital can be obtained by many different media, ranging from pure debt instruments, representing money-fixed claims, to pure equity issues, giving holders only the right to a pro-rata share in the uncertain venture? This question has vexed at least three classes of economists: (1) the corporation finance specialist concerned with the techniques of financing firms so as to ensure their survival and growth; (2) the managerial economist concerned with capital budgeting; and (3) the economic theorist concerned with explaining investment behavior at both the micro and macro levels.
** Franco Modigliani and Merton H. Miller. "The cost of capital, corporation finance and the theory of investment." The American economic review (1958): 261-297.
* The life cycle of family size, at least in the U.S., has a very humped shape rather similar to that of income, though with a somewhat earlier peak. As a result, one might expect, and generally finds a fairly constant rate of saving in the central age group, but lower saving or even dissaving in the very young or old.
** Franco Modigliani, "Life Cycle, Individual Thrift and the Wealth of Nations" Lecture to the memory of Alfred Nobel, December 9, 1985, in: Nobel Lectures, Economics 1981-1990, Editor Karl-Göran Mäler, World Scientific Publishing Co., Singapore, 1992.
* A situation where people can grow old without having a job that rewards them individually while adding to the collective well-being is morally unacceptable.
** Franco Modigliani (2001) Adventures of an economist, p. 41.

### Conversations with Economists (1983)

Franco Modigliani, in Conversations with Economists (1983) by Arjo Klamer
* Macro rational expectations, as I have labeled the hypothesis, seems to say that expectations in an economist's model must be perfectly consistent with his model that embodies these expectations. In other words, the agents of his model must all share his views of the relevant economic mechanisms, as well as his data. Why? Because if he holds them they must believe they are God's truth and, if so, rational people can have no other views (and of course we should never ask how they would come by these views and data, that not even other specialists may have heard of yet, let alone accepted). I submit that this view is pretty absurd--I would almost say offensive! I certainly believe that I know more about economics and the economy than (almost) everybody else, and i can even prove it: If everybody shared my vies, then the economy could not be in today's troubles (though it might conceivably be in some different ones!).
* I believe people can solve complex problems eventually. By repeated trial and error they will get there; but they need a long time. At this point I agree with Herbert Simon. People do not learn immediately, as those rational expectations models seem to imply. I don't believe that. The statement that assumptions do not matter is nonsense. It is funny. Yes, I assume people are consistent in their behavior. I assume that not because I believe everybody actually is, but because I believe, on the average, you do not get too far from it.

## Quotes about Franco Modigliani

* Modigliani's theory was a powerful searchlight on what was happening... It is the best explanation of what has actually been happening in the great swing of American life since the 1950's.
** Paul Samuelson in: Louis Uchitelle. "Franco Modigliani, 85, Nobel-Winning Economist, Dies" in New York Times, September 26, 2003.
* In the early 1950s Franco Modigliani, with Richard Brumberg and Albert Ando, formulated the life-cycle theory of consumption and savings that enjoyed a huge and undisputed success for at least three decades. It replaced Keynes’s ‘fundamental psychological law’ of savings, according to which the marginal and average propensities to save grow as income rises. On the other hand, the life-cycle theory maintains that the level of savings depends on the age of consumers, and hence on the demographic structure of society rather than on the level of family income.
** Mauro Baranzini, "Modigliani's life-cycle theory of savings fifty years later." PSL Quarterly Review (2012).

## External links

* Franco Modigliani autobiography
* Franco Modigliani (1918–2003). Library of Economics and Liberty (2nd ed.). Liberty Fund. 2008.