Franco Modigliani and Keynesian Economics

Theory, Facts and Policy

Antonella Rancan

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9780367497019
• eBook ISBN: 9781000069662
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book follows the intellectual path of Franco Modigliani, Nobel Prize winner and one of the most influential Keynesian economists of the twentieth century, tracing his development and examining the impact of his research.

The book begins with Modigliani's early work as a young law student in 1930s Italy and traces his development through his emigration to the US, his introduction to Keynes' General Theory at the New School, and his seminal 1944 article on Keynesian and classical economics. The book also examines Modigliani's pioneering theory of savings: the life-cycle hypothesis (with Richard Brumberg), and the Modigliani–Miller theorem, a cornerstone of modern theory of finance. The book argues that although Modigliani is placed amongst the most prominent Keynesian economists, his connections with Keynesian theory are of secondary importance until the beginning of the 1960s when he joined MIT.

This is the first book to place Modigliani's thought in its proper historical context, showing how it related to wider economic concerns and examining the social and political implications of his work. It will be of interest to scholars in the history of economic thought, and especially post-war American Keynesian economics.

1
Modigliani before Modigliani

Introduction

The New York Times, on September 23, 2003, published an open letter to protest the Distinguished Statesman Award the Anti-Defamation League offered to Silvio Berlusconi, at that time president of the Italian government. The letter is signed by three Nobel Laureates in Economics: Franco Modigliani and his MIT colleagues Paul Samuelson and Robert Solow. The news about the prize “is shocking”, they wrote, because of Berlusconi’s position towards fascism. He defined Benito Mussolini a “benevolent dictator” who “did not killed nobody… while he was responsible for the deportation of about 7000 Jews who death in the Nazi camps” (quoted from Repubblica.it, www.repubblica.it/2003/i/sezioni/politica/berlugiudici2/trenobel/trenobel.html; my translation).¹

Modigliani’s family was part of the Jewish community of Rome. He emigrated to Paris in September 1938 at the age of twenty and then to the United States because of the promulgation of the racial laws that excluded Jews from attending public school education or to hold public office.

His father, Enrico Modigliani, was a well-known social pediatrician, and his mother, Olga Flaschel, devoted herself to volunteering (Modigliani 2001, p. 1), both playing important roles in communicating the importance of civil and social commitment. Enrico Modigliani’s contributions to pediatrics were both theoretical and applied. He was especially concerned with child nutrition disorders and infectious diseases, on which he published several studies in the beginning of the twentieth century. After WWI he was increasingly engaged in applied social pediatrics, assisting unmarried mothers and their children through the creation of institutions able to host them, providing psychological and practical assistance such as finding jobs. He also supported changing legislation to remove a child’s status as illegitimate because a kind of discrimination.²

In his autobiography Franco Modigliani recalled that his stance towards the fascist regime was initially “neutral” because his family had no clear-cut position. Her mother “somewhat favored the regime” because of its laws regarding social assistance, whereas his father was “staunchly antifascist” (Modigliani 2001, p. 10). However, his premature death in 1931, when Modigliani was fourteen years old, left him without “firm guidance” (Modigliani 2001, p. 11). Like most of his peers, his awareness of the regime seemed to mature gradually. According to the historian Renato Camurri (2010, 2018), Modigliani lacked strong reference points not only within his family but also outside it, within the social and policy context. He was among those young people Camurri labeled the “generation without myths” who, as in the case of Modigliani, had no organizational structure to refer to as it was the Communist Party for some of them (Camurri 2010, pp. xxiv–xxvi).

Modigliani enrolled at the Faculty of Law at the University of Rome in 1935, after having attended the Liceo classico Visconti, thus pursuing a human-ist education with little mathematics in secondary school and not at all in the Faculty of Law. Here, there was some teaching of economics, at that time corporative economics. Modigliani recalled that his interest in economic problems was initially stimulated not by attending classes but from his translation of articles from German into Italian for the Traders’ Federation. In 1937 he won the Littorali della cultura, a competition promoted by fascism, with a paper on price control, and since then, he began thinking of himself as an economist (Modigliani 2001, p. 9).

It is quite unknown that from 1937 to 1938 Modigliani wrote a few articles on economic issues that were published in leading fascist journals. The leitmotiv of his essays was a critique of classical economics, of its individualistic and hedonistic foundations, and of laissez-faire as opposed to the principles that inspired corporative economics. In other words, Modigliani first approach to economics was that of a young student influenced by the fascist propaganda of the 1930s.³ With the exception of the 1937 paper by which he won the Littorali prize, Modigliani did not mention these essays in his autobiography or in his interviews, and they are not included in his 1986 bibliography. There are no references in his archive including his correspondence and other material. Although an English translation of some of Modigliani’s articles was made available in 2007 by Daniela Parisi, subsequent biographies about Modigliani do not mention these essays, focusing on the American period. Gary Mongiovi (2015, p. 5) mentions them as politically naïve in a paper devoted to Modigliani’s ideas on socialism (Modigliani 1947).⁴

In a recent book on Il nazionl-fascismo economico del giovane Franco Modigliani [The Economic National-Fascism of the Young Franco Modigliani], Luca Michelini calls attention to the four essays Parisi translated in English and two more articles Modigliani published between February and June 1938. Michelini investigates the cultural milieu in which he began to reason on economics through a detailed reconstruction of the intellectual and ideological profile of the journals that hosted Modigliani’s writings, and their editors, along with the main topics that were discussed. Modigliani’s articles cover a period from April 1937 to June 1938, just before the promulgation of the racial laws on September 1938, and his escape to Paris with his father-in-law’s family before his graduation in July 1939.⁵

As Michelini remarks, the journals that hosted Modigliani’s essays were among the leading fascist journals: Lo Stato. Rivista di Scienze Politiche, Giuridiche ed Economiche, founded by the jurist Carlo Costamagna, among the prominent intellectual of the fascism; Il Ventuno. Rivista dei Littorali, founded by Ettore Bernardo Rosboch, a scholar of Maffeo Panataleoni; and La Dottrina Fascista, directed by Nicolò Giani, who founded with Mussolini’s brother La scuola di mistica fascista. All these journals were involved even before the promulgation of the racial laws in the anti-Semitic campaign.⁶

This chapter does not try to investigate the attitude the young Modigliani had towards the fascist regime in the 1930s; neither does it attempt to understand whether he sincerely believed in the principles of the corporative economics he supported in his articles or whether, on the contrary, his writing represented a way by which Modigliani protected himself from the regime, a sort of “cover” in case of necessity.⁷ The chapter only testifies how, and in which context, Modigliani discovered the economic discipline.

Michelini’s research, with his close attention to the economic issues Modigliani discussed and the intellectual context from which his writings originated, fills an important historiographical lacuna. Modigliani’s early writings are important for a better understanding of the climate in which he first approached the study of economics, to investigate how much of this cultural experience he brought with him in the United States and whether there can be found any traces in his work during the 1940s and, eventually, later. Modigliani continued to reason about the relationships between state interventions and market system, ascribing to the institutional framework a crucial role in shaping economic phenomena; about self and collective interests and about the allocative and distributive functions of the price mechanism. The concrete working of a capitalistic economy, with its market imperfections and failures and the active role of government (Modigliani confidence on it), was the basis on which he built his economic theorizing. It is through his early readings and writings about corporative economics, and his critique of the classical theory, that Modigliani first met Keynes, not the Keynes of the General Theory, not yet available in Italy, but of the “End of Laissez Faire” and of “National Self-Sufficiency” published in the Nuova Collana degli Economisti by Giuseppe Bottai and Celestino Arena. It is in the context of the corporative economy that Modigliani embraced an idea of economics as a normative science committed with social and policy issues. Also later, despite postwar economics formalization, of which Modigliani became one of the main advocates, economics remained for him an applied science whose aim was to provide concrete answers to concrete problems.⁸

Discovering economics in Italy in the 1930s: price controls

Michelini explains that in the 1920s, there were two separate streams of thought supporting fascism: the liberal one, whose prominent figures were Enrico Barone, Maffeo Pantaleoni and Vilfredo Pareto and corporative-mercantilist thought led especially by jurists, political scientists, sociologists and historians. They both shared an anti-socialism stance, defending private property. For both groups theory and policy were explicitly linked to each other. Whereas liberals like Pareto saw in fascism a way to restore the capitalistic system by developing an idea of state in terms of the élite, the “corporative” especially concentrated on a re-foundation of economic science by reversing the relationships among individuals, the market and the state with respect to the classical economy. It is to this current of thought that the young Modigliani referred to in his writings about the building of the “new (corporative) economics” (Michelini 2019, pp. 3–10).⁹ Modigliani largely discussed the principles that should move the “new economics”, whose foundations were to be found in the maximization of the social utility, in contrast with the classical hedonistic approach, and the subordination of individuals interests and the market mechanism to the state interests.

Modigliani’s first published article is the one by which he won the Littorali della cultura. He decided to participate in the competition because he felt he was an expert on that year’s (1936) subject – price control – about which he learned from his translation of German articles.¹⁰ In his autobiography he recalled that the competition was particularly important to him for two reasons: because he began to think about himself as an economist and because, since then, he started to distance himself from fascism. Although the Littorali was a competition promoted by Mussolini, the cream of the antifascist youth also took part (Camurri 2010, p. 10). According to Italian historians, the Littorali, which comprised a variety of scientific, literary and artistic topics, was one of the most powerful instruments fascism used to reabsorb orthodoxy and dissent, playing a fundamental part in the pedagogical program of the regime (Camurri 2010, pp. xix–xx). Through his participation Modigliani entered in contact with a number of young antifascists who, Modigliani explained, helped him acquire an antifascist position (2001, pp. 9–11).¹¹ His recollection appears however in contrast with the publication in 1938 of further articles unless, as mentioned above, they were written to protect himself from a situation that was rapidly degenerating.

In any case, the thesis he wrote under Guglielmo Masci’s supervision and defended in July 1939 to earn his doctoral degree in law had only minimal references to fascism and corporative economics, even if the issues Modigliani discussed were close to that of his previous articles, such as the overcoming of the capitalistic system based on market competition by industrial concentration.

The contents of Modigliani’s articles are quite repetitive. Their starting point is a critique of the foundations of classical economics to which Modigliani opposed the preeminence of the principles of corporative economics. Despite the high standards of Italian economics in the beginning of the twentieth century, particularly regarding the development of marginal economics (see Schumpeter 1954 (1976), p. 855), and the debate about competitive and non-competitive market forms (Mosca 2018), Modigliani never refers to this literature. His approach is strongly rhetorical rather than analytical. There are no explicit and precise references to the classical or corporative economists and their theorizing. Only the two last articles, published in 1938, appear a little more elaborated.

The first three articles concern price control; two of them are summaries of the first one (the prize-winning article). This essay, titled “Concetti generali sul controllo dei prezzi [General Concepts on Price Control]” was published in Lo Stato in April 1937 under the feature of “Problemi dell’economia nuova [Problems of new economics]”. The other appeared in the July–August issue of the same journal, and in Il Ventuno. Rivista dei Littorali, respectively. Two further essays (still in Lo stato) are devoted to the crisis of the capitalistic economy and the international division of labor (January 1938) and the principle of autarky (March 1938), both starting from a dismissal of Ricardo’s theory of comparative advantages and Say’s law. The last articles of February 1938 (in Lo Stato) and June 1938 (in La Dottrina Fascista) are still about national autarky, its important role and modernity.

At the center of Modigliani’s discussions there are the foundations of the “new economics”, which put the national and collective interest above individual selfishness. This is the departure point from which to criticize and reject the market system under theoretical and practical perspectives, thus dismissing the classical general equilibrium framework and its self-equilibrating mechanism, along with the “doctrine” of laissez-faire and free trade. Modigliani’s radical position appears quite surprising because a few years later he embraced the marginal analysis and linked his image as an economist to his attempt to reconcile classical and Keynesian economics by reading the General Theory within a general equilibrium framework, thus reducing the revolutionary meaning of Keynes’s theory (see Chapter 2).

In Modigliani’s Italian articles the rejection of classical economics is desirable because of its individualistic approach to economic problems under the assumption of the coincidence of collective and individual interest’. This supposed consistency appears to Modigliani in contrast with the real working of the economy,...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Contents
• Introduction: Modigliani’s Keynesianism and beyond
• 1 Modigliani before Modigliani
• 2 Approaching Keynes and American Keynesianism
• 3 Keynesian economics in between corporative and socialist economics
• 4 Modigliani at the University of Illinois: “The Bowen war” and McCarthyism
• 5 Uncertainty and expectations: Modigliani at Carnegie Tech
• 6 The life cycle savings in an unstable economy
• 7 Becoming Keynesian
• Index