MODIGLIANI DISCUSSES SAVINGS THEORIES
Author: By David Warsh, Globe Staff
Date: Tuesday, December 10, 1985
Page: 44
Section: BUSINESS
Franco Modigliani, the Massachusetts Institute of Technology professor who won
the Nobel Prize for economics for his pioneering work on savings behavior and
corporate finance, eschewed controversy here yesterday in his Nobel lecture at
the Stockholm School of Economics.
He chose instead to focus narrowly on the circumstances that gave rise to
his analysis of the way in which individuals saving for their retirement
create a "hump" of investment capital that is sufficient to finance economic
growth.
Instead of criticizing large US budget imbalances, or challenging the view
that all stabilization policies are doomed to failure - both major
controversies that have engaged him deeply - Modigliani began by describing
the world after Keynes, when he was young.
It was a time, he said, when economists regarded personal savings as "a
pretty bad thing," a habit that could lead to depression by way of
underconsumption.
He related how Simon Kuznets, an early Nobel laureate, forcefully drew
attention both to the improbability of this view and to the abundant evidence
that was available to contradict it.
He described how he had zigged and Milton Friedman, still another laureate,
had zagged in attempts to reach the same goal in the early 1950s. Both framed
hypotheses designed to portray individuals as taking into consideration events
well beyond their year's income when they made spending and savings decisions.
Friedman handled the problem by treating individuals as if they lived
forever, Modigliani said; Modigliani viewed savings as a consumption-smoothing
device over a limited life-span. Both were useful conventions, he said, but
his was the one that became the fundamental basis for discourse.
Aside from a glancing reference to US budget deficits - they were
''disastrous," he said - Modigliani saved what fireworks he brought for a
comparatively recondite dispute that has flared among economists in the past
few years over the importance of inheritance and a means of explaining great
disparities in the distribution of wealth.
Children had relatively little to do with it, he said. "People are not
interested in bequests as a major reason for savings, unless they are rich,"
he told the packed house, noting that more than a few good economists
disagreed.
MARINE;12/09,17:25 CORCOR;12/10,17:33 STOCKH10
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