Franco Modigliani, the Italy-American Economist is one of the most distinguished economists of the contemporary period. His contribution to the discipline of economics is worth a watch. He has been one of those economists who made economics a household subject. His application of economics to calculate the household savings and trace the dynamics of financial markets made a striking difference in the perception of economics by the general mass.
Personal Life and Educational Background
Franco Modigliani was born on 18th June 1918 in a Jewish family. He embarked on his educational journey with the discipline of Law but fled Italy, which was in the grip of Fascism in 1939 and settled in United States of America. There he studied at the New School of Social Research and received his doctorate degree from there in 1944. He was under the supervision of Jacob Marschak while pursuing his doctorate in the institute. He became the citizen of US in 1946, which enabled him to join different universities as a teaching faculty.
Professional Career of Modigliani
Modigliani joined the University of Illinois at Urbana-Champaign as a teaching faculty in 1948. After his stint in this university he went ahead to teach at the MIT Sloan School of Management and MIT Department of Economics during 1961 and became professor emeritus in 1988. Modigliani was a trustee of the Economists for Peace and Security.
Contribution to Economics
Modigliani has contributed a lot towards applied economics. He made these two path-breaking contributions while he was at the Graduate School of Industrial Administration in Carnegie University as part of the faculty.
The major ones among them happen to be:
The life-cycle theory, which concerns with the analysis of personal savings. The theory explores the various types and rates of savings that people from different strata of the society maintain. Individuals belonging to different age groups save in different capacities. They save the money for future consumption. The theory helped in explaining the factors that lead to the difference in the rates of savings, it explained why people through out their lives save in varying degrees. The theory not only explained the trend of saving but also aided in prefiguring the future effects of the different pension plans.
The second important finding was the Modigliani-Miller Theorem, which he founded along with Merton H. Miller. They worked jointly on this model and observed that the worth of the company in a market depends on the investor’s faith on the company and their expectation from the company in future. The debt-to-equity ratio of the company is comparatively of less importance. This theorem was of immense importance because the value of the company in the financial market is determined by its future earning potential. The effect, which the company will have to bear, will influence the market value of the company’s stock. This theorem became an important tool for the corporate sector to anticipate the value of the company and played an important role in the decision making process.
Achievements of Modigliani
Franco Modigliani was honored with the Nobel Prize in 1985 for his research work on the household savings and the dynamics of financial markets.
During his teaching days in the MIT he had Robert Merton the winner of Nobel Prize in economics in the year 1997 as a student.
Major Works of Modigliani
He had written a number of books on economics. Some of them are:
The Collected Papers of Franco Modigliani
Rethinking Pension Reform
Readings in Microeconomics
His death in September 23rd 2003 proved to be a fatal loss for the world. He was one of the best economists of his times and will always be remembered as the creator of the personal savings theory.