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...earned Doctor Juris in 1939, by studying on his own. Later that year, in response to the alarming developments in Europe, Modigliani landed in the United States just days before the beginning of World War II. He proceeded to attend the New School for Social Research, an institution that was founded by European scholars who escaped Nazi Germany. At the New School, he studied with economists like Adolph Lowe and Jacob Marschak, and earned his Ph.D. in economics in 1944. Modigliani then set off on teaching career, holding positions at numerous institutions including the New School for Social Research (1944, 1949), Carnegie Institute of Technology (1952-1960), Northwestern University (1960-1962), and MIT (1962 until he retired). He was a research analyst at the Cowles Commission at the University of Chicago (1949-1952), and served as an advisor to numerous governmental bodies. Modigliani also served as president of the American Economic Association in 1976, and was awarded the Nobel Prize in 1985 for his achievements and contributions to the fields of economics and finance.
Franco Modigliani is most known for the Keynesian Liquidity Preference (LP) theory. In fact, he started and ended his career with this now well-known concept. He wrote his dissertation on the LP at the New School in 1944, and his last published article on the subject of Keynes appeared in The American Economist (2003). His earlier presentation of LP was axiomatic in nature; the assumptions being that LP is a sufficient condition to explain unemployment equilibrium, i.e., without the assumption of rigid wages, when the demand for money is infinitely elastic relative to a positive level of interest rates (Modigliani 1944, 74). He held that the dependence of the rate of interest (R) on money (M) is explained by rigid wages (W), where LP is not a sufficient or a necessary condition to explain underemployment equilibrium (Ibid., 76). Thus, he concluded that if wages are flexible, then interest rates, savings, and investment propensities will determine prices (Ibid., 76). Usually, the dominant theme of Modigliani's LP research program has been built around the special cases of wage rigidity and interest inelasticity. Tobin (1987, 25) noted that Modigliani should also have mentioned the interest inelasticity of investment demand as "... another and very important exception to the wage rigidity explanation of unemployment." But, as we can see from Modigliani's last paper (2003), he concludes, in accordance with Keynes (1979, 3) that "... the postulates of the classical theory are applicable to a special case only and not the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium."
As Modigliani stated, "... the present version differs from my previous papers, published throughout my career, starting from my first on 'Liquidity Preference'. The difference springs in part from the fact that the new presentation is meant to be understandable by a non-technical audience but in part it reflects my recent realization, that it is possible to use a model different from the prevailing one, which stresses the communality between Keynes and the classical theory. In fact, I will argue that the classical model is but a special case of Keynes's General Theory. It applies only to an economy in which wages (and prices) are highly flexible downward in...
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