Franco Modigliani is the most famous economist of Italian origin. In 1985 he received the Nobel Prize in Economic Sciences. The Bank of Sweden in memory of Alfred Nobel instituted the Nobel Prize in Economic Sciences. It has been awarded annually by the Royal Swedish Academy of Sciences on December 10 during a formal ceremony. From 1969 there has only been one winner of Italian descent so far.

Birth and early years

Franco Modigliani was born on June 18, 1918 in Rome, Italy. His father Enrico Modigliani was a leading pediatrician in the city. His mother Olga Flaschel was a volunteer social worker. In school he was a good student though not outstanding. In 1932 a major traumatic experience in his life affected him. He lost his father as a result of a failed operation. It was then he realized how much he loved and admired his father. For a thirteen year old it as if his whole world had collapsed. This event also had an adverse effect on his studies at school for the next three years. Then he changed his school and joined Liceo Visconti, the best school in Rome. The challenge provided by the school brought out the best in him and he decided to skip the last year at the school and passed the required school exams. He entered the University of Rome at seventeen, two years younger than his peers.

University Education

Although his family wanted him to pursue a career in medicine he chose law. In his second year he entered a national competition sponsored by the student organization I Littoriali della Cultura in the area of economics he won the first prize. This victory kindled his interest in the subject. Unfortunately the field did not have many good teachers and under the advice of Riccardo Bachi he began to read the English and Italian classics on his own.

Effect of Fascism on his life

Modigliani met his future wife Serena and her remarkable father Guilio Calabi through his involvement with the antifascists in the 1930’s. In 1938 when the Italian racial laws were passed in 1938, due to his Jewish background at the invitation of the Calabi family he joined them in Paris. In May 1939 he and Serena were married. He enrolled at the Sorbonne but was uninspired by their teaching. He studied on his own and wrote his thesis at the Bibliotheque St. Genevieve. In June 1939 he returned briefly to Rome to discuss his thesis and receive his degree of Doctor Juris from the University of Rome. Fearing the outbreak of war in Europe they applied for and were granted an immigration visa for the U.S. They arrived in New York in August 1939, a few days before the beginning of World War II.

Higher education in the U.S.

Modigliani was fortunate enough to be awarded a free tuition fellowship by the Graduate Faculty of Political and Social Science of the New School for Social Research. In the fall of 1939 he started a new routine of studying at night from 6-9 p.m. while working during the day selling European books to support his family, which soon included his son Andre. This routine continued for three years. This was nevertheless an exciting period for him as he had excellent teachers including Adam Lowe and Jacob Marschak. Marschak had both a benevolent and professional influence on him. He also provided Modigliani with an experience of vital importance by inviting him to an informal seminar held in New York between 1940-41. The members were among the greatest in their field at that time and included Abraham Wald, Tjalling Charles Koopmans and Oscar Lange. In 1941 his formal training ended when Marschak left the new school to join the University of Chicago.

His Career

He obtained his first teaching job as an instructor at the New Jersey College for Women.

In 1942 he became an instructor in economics and statistics at the Bard College, which was then a residential college of Columbia University. In 1944 he returned to the New School as a Lecturer and Research Associate at the Institute of World Affairs. Here together with Hans Neisser he was involved in a project whose results were published in the National Income and International Trade. During this period he made his first contribution to the study of saving.

At the University of Chicago and the Cowles Commission

After the fall of 1948 he left New York as he had been awarded the prestigious Political Economy Fellowship of the University of Chicago. He was also offered the opportunity of joining the Cowles Commission for Research in Economics as a Research Consultant. Shortly after arriving at Chicago he also accepted an attractive position as Director of a research project on “Expectations and Business Fluctuations” at the University of Illinois. However he remained in Chicago through the academic year 1949-50 greatly benefiting from the Cowles Commission as this was staffed and visited by many great luminaries including Marschak, Koopmans, Arrow and Simon. It was also a period when two interesting and revolutionary theories were being propounded-one being the theory of choice under uncertainty proposed by Von Neumann and Morgenstern and the other the theory on statistical interference from non-experimental observations inspired by Haavelmo.

Although he stayed in the University of Illinois briefly till 1952 he befriended a graduate student Richard Brumberg. They collaborated to work on the foundations of the “Life Cycle Hypothesis of Saving” which was finally published in 1980 in his Collected Works.

At the Carnegie Institute of Technology

After leaving the University of Illinois he joined the Carnegie Institute of Technology (Carnegie Mellon University). He stayed there till 1960. It was a very productive phase in his career. He completed two basic papers on setting the foundation for the “Life Cycle Hypothesis”. He also collaborated on a book dealing with the problems of optimal product smoothing and wrote two papers with Miller on the effect of financial structure and dividend policy on the market value of a firm. This is called the Modigliani- Miller theorem in corporate finance. He also published a paper with E.Grunberg on the predictability of social events when the agent reacts to prediction. This paper provided the material need to develop the “theory of rational expectations”. According to him all these papers represented the coming to fruition the seeds of what he started during his research on “Expectations and Business Fluctuations”.

At MIT

In 1960 he became visiting professor at the Massachusetts Institute of Technology (MIT), to which he returned to after a year at the Northwestern University. He has remained there since then. In 1970 he was named an Institute Professor, which is a distinguished honour, and in 1988 he became Professor Emeritus.

At the M.I.T. he pursued interests developed earlier in macroeconomics, including criticism of the monetarist positions, generalizations of the monetary mechanism and empirical tests of the “Life Cycle Hypothesis”. He also explored new areas in particular international finance and international payment system, the effects of and cures for inflation, stabilization policies in extensively indexed open economies. He also worked on the various fields of finance including credit rationing, the term structure of interest rates and the valuation of speculative assets. He held appointments in MIT’s Department of Economics as well as the Sloan School of Management.

The MPS

In the late sixties he had the major responsibility of designing a large-scale model of the U.S. economy the MPS. It was sponsored by the Federal Reserve Bank and is still used by it. He has also participated in the debate over economic policies both in Italy and in the U.S. concentrating on the deleterious effects of the huge public deficits.

The Nobel Prize

Modigliani was teaching at the M.I.T. when he won the Nobel Prize in Economics in 1985. He won the prize for his pioneering analyses of saving and of financial markets. He was one of the pioneers in developing economic theories, which have stood the test of time.

In 1985 Franco Modigliani was bestowed the James R. Killian Faculty Award by MIT. The Modigliani Professorship of Financial Economics, which is an endowed chair, was established in 1995.

Many considered him the greatest living macroeconomist and it was even speculated that he could have won multiple Nobel Prizes. He was a great teacher. He was very enthusiastic and intense. He inspired generations of students and colleagues with his passion and desire to use economics for the betterment of society. His students included Robert Merton a 1997 Nobel Laureate.

Modigliani was a member of the National Academy of Sciences. He was also a member of the American academy of Arts and Sciences. He served as President of the Econometric Society, the American economic Association and the American Finance Association. He also served as a consultant to the Federal Reserve System, the U.S. Treasury and several European banks.

Modigliani also co-authored the textbooks “Foundations of Financial markets and Institutions” and “Capital Markets: Institutions and instruments” with Frank J. Fabozzi of Yale School of Management.

He enjoyed skiing, tennis and sailing. He died on September 25, 2003 in his home in Cambridge, Massachusetts. He is survived by his wife and two sons: Andre a professor in Sociology and Sergio an architect.