Who Was Franco Modigliani?

Franco Modigliani was a Neo-Keynesian economist who received the Nobel Prize in 1985. Modigliani was born in 1918 in Rome, Italy and later came to the United States at the outbreak of World War II. He is best known for his contributions to consumption theory, financial economics, and for the theory he developed, called the Modigliani-Miller Theorem of corporate finance.

Key Takeaways

  • Franco Modigliani was a Neo-Keynesian economist, best known for his development of the Modigliani-Miller Theorem of corporate finance.
  • Modigliani’s early academic career was devoted to advocating fascist (and later socialist) central planning of the economy before transitioning to a Neo-Keynesian approach to macroeconomics.
  • He was awarded the Nobel Prize in Economics in 1985 for his work in the fields of consumption theory and corporate finance.

Life and Career

Modigliani initially studied law at the Sapienza University of Rome. After immigrating to the United States, he went on to receive his doctorate in economics from the New School for Social Research. He taught at Bard College at Columbia University before serving as a professor at the University of Illinois at Urbana-Champaign, Carnegie Mellon University, and the Massachusetts Institute of Technology.

Modigliani served as president of the American Economic Association, the American Finance Association, and the American Econometric Society. He also worked as an advisor to Italian banks and politicians, the U.S. Treasury, the Federal Reserve System (FRS), and sat on the board at a number of European banks. He was awarded the Nobel Prize in Economics in 1985 for his development of models of private consumption and corporate finance. 


Modigliani’s early contributions were in the field of socialism and centrally-planned economies, for which he was given an award by Italian fascist dictator Benito Mussolini. His most notable contributions to economics include his life-cycle consumption theory and the Modigliani-Miller Theorem of corporate finance. He also made important contributions to the theories of rational expectations and the non-accelerating inflation rate of unemployment (NAIRU). 

Socialist and Fascist Economy

In his early career in Italy, and then in the United States, Modigliani wrote extensively on the possibility of rational management of a command economy by a central planner. While a student in Rome, he won a national essay contest for a paper arguing in favor of government control of the economy. He wrote a series of papers before World War II in favor of fascist principles of economic management by the state, later transitioning to favor market, socialist-style central planning of prices and production in a 1947 paper. This work was published in Italian and was less influential than his other work until it was translated into English in the mid-2000s. 

Life-Cycle Consumption Theory

One of Modigliani's early contributions to economics was the life-cycle consumption theory, which says that individuals primarily save money during their early years to pay for their later years. The idea is that people prefer a relatively stable level of consumption, borrowing (or spending down savings passed on to them) while young, saving during middle age when earnings are high, and spending down savings in retirement. This introduces age demographics as a factor that helps to determine a Keynesian consumption function for the economy.

Modigliani-Miller Theorem

His other major contribution, in cooperation with Merton Miller, was the Modigliani-Miller (M&M) theorem, which formed the foundation for capital structure analysis in corporate finance. Capital structure analysis helps companies determine the most effective and beneficial ways to fund their companies through a mixture of equity and debt.

The Modigliani-Miller theorem argues that if financial markets are efficient, this mixture will make no difference for the value of the firm. This theorem would go on to form the basis of much of modern corporate finance.

Rational Expectations

Modigliani made a fundamental contribution to the theory of rational expectations in a 1954 paper, which argued that people adjust their economic behavior based on the impact that they expect government policy to have on them. Ironically, rational expectation theory would be developed by other economists into a major and wide-ranging criticism of the effectiveness of Keynesian macroeconomic policy (which Modigliani championed).


In a 1975 paper, Modigliani argued that monetary policymakers should target output and employment in setting policy. The appropriate target, he proposed, would be the non-inflationary rate of unemployment, which he estimated at about 5.5%. Ironically, though his paper was explicitly opposed to monetarism and in favor of Keynesianism, his idea would go on to be developed into the theory of the non-accelerating inflation rate of unemployment (NAIRU), which would become a powerful critique against Keynesian macroeconomic policy.