6/16/00 3:40 p.m.
Nobel Mind
Merton Miller, R.I.P.

By Alan Reynolds at the Hudson Institute

erton Miller, who shared a 1990 Nobel prize with Harry Markowitz and Bill Sharpe, was one of 13 economists from the University of Chicago to be so honored within 31 years. Miller was one of a handful of scholars who practically created "Finance" as a rigorous major field in economics. In the late Fifties, Miller and Franco Modigliani argued that the value of a firm depends on earning power and risk, finding it almost irrelevant whether investments are financed by debt or equity, or whether dividends are generous or zero. Many heresies followed from these famed "irrelevance propositions": for example, that management effectiveness can best be gauged by the impact on a company's market value, not profits alone. Miller spent a great deal of time in courtrooms, battling the meddlesome political impulse to limit and regulate our choices of financial instruments. The Times of London recently revived a complaint that Miller "ruffled feathers in December 1990 by using his acceptance speech to praise the use of junk bonds and leveraged buyouts." Of course he did. High-yield bonds mean new entrepreneurs no longer have to pass up great opportunities simply because they lack the credit rating of an old toothpaste company. Leveraged buyouts mean careless and sleepy managers can be sacked. Saying such things may have been insensitive in 1990, when politicians and central bankers were eager to blame recession on impersonal financial instruments. But Merton Miller was refreshingly right, as usual. R.I.P.