NOBEL FOR MIT ECONOMIST
Author: By David Warsh, Globe Staff
Date: Wednesday, October 16, 1985
Page: 1
Section: NATIONAL/FOREIGN
Franco Modigliani of the Massachusetts Institute of Technology won the 1985
Alfred Nobel Memorial Prize in Economics yesterday for a pair of key
contributions to the understanding of how individual savings patterns and the
capital markets influence the overall course of national economies.
After receiving news of the award, he immediately rebuked President Reagan
for coining political positions that contradicted virtually all the findings
of Modigliani's 40 years of investigations.
"I think one of the big surprises of our life . . . is how a man like the
president could have started out, could have gotten elected on the grounds
that the deficit was the greatest curse that ever occurred and caused all
kinds of harm . . .. Then this man has suddenly turned around and . . .
somehow his administration explains that the deficit does not reduce savings,"
Modigliani said.
"We are ruining (the future of our) youth, we are ruining the rest of the
world, and all of that because the president says that the last thing we're
going to do is raise taxes. Well, hell!" he snorted.
Modigliani spoke at a festive press conference in Cambridge, hastily called
after he became the 13th American among 21 economists to win the economics
prize since it was established in 1969. The 7 a.m. phone call from Stockholm
was "the best alarm clock I've had in a long time," he said.
The Royal Swedish Academy of Sciences cited Modigliani's "life-cycle"
hypothesis, first advanced more than 30 years ago, as the chief reason for the
award.
Modigliani said yesterday, "I sometimes think that my work on this subject
was colored by the savings bank where I was banking at the time when I was
working on this. Their motto was, 'Save it when you need it least, have it
when you need it most.' "
The view that people routinely vary their savings across the trajectory of
their lifetime - building up funds when they are young, drawing down when they
are old - sounds common-sensical today, Modigliani said, but before he wrote,
the conventional view among technical economists was that savings activity was
confined mainly to the rich. His achievement was to introduce the life-cycle
behavior into the austere mathematical models with which economists work.
He paid tribute to his collaborator on the early life-cycle work, Richard
Brumberg, a graduate student and close friend who died of a brain tumor at the
age of 25, just as the method was being introduced.
The life-cycle approach has since proved to be a tool adopted by economists
of every persuasion to study everything from retirement schemes to taxes, with
a single fundamental amendment. Modigliani said that the main important
addition was made by Harvard University's Martin Feldstein and Alicia Munnell
of the Federal Reserve Bank of Boston, who had shown that Social Security
could affect the timing of retirement, and therefore that it might have
unanticipated effects on the savings rate.
The Nobel Prize citation also mentioned Modigliani's work on corporate
finance, a secondary theme throughout his career. With Merton Miller of the
University of Chicago, he wrote in 1961 the paper that first advanced what has
become known since as the "efficient markets" hypothesis, arguing that
information about the future quickly becomes incorporated in the market price
of securities. And he has been a continuous contributor to the exploding
literature of corporate finance ever since.
He is the only man ever to be elected president of both the American
Economic Association and the American Finance Association. A university
professor, he holds a dual appointment at MIT, as a member of both the
economics department and the Sloan School of Management.
At the press conference yesterday, Modigliani traded champagne toasts with
his colleague Paul Samuelson, the first American Nobel laureate in economics,
in 1970, and gibed President Reagan. The impact of the American budget deficit
on the world economy was "a tragedy much greater than I expected," he said of
a paper on the economic effects of government borrowing that Modigliani wrote
15 years ago.
The award to Modigliani, an extemely well-liked man, was applauded
yesterday across the spectrum of professional economics. Said Samuelson,
''With many people with respect to the Nobel Prize, it's a question of 'if;'
with Franco, it was only a question of 'when.' "
WARSH ;10/15,13:58 LDRISC;10/16,15:00 NOBEL16
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