Comment on the Modigliani-Miller Propositions

What a treat it is to have the opportunity to read Merton Miller's ruminations on the MM Propositions. If the view of the progress of science that interprets it as one of changing paradigms has merit, then surely the work of Miller and Modigliani provides a laboratory example of a violently shifted paradigm. Through Miller's eyes we can recapture some of the flavor of how dramatic that change was. We are now so accustomed to the acceptance of the new paradigm that the older view that capital structure did matter has about it the flavor of phlogiston. Not only does it seem wrong, it is difficult to believe that sensible folk could have held such beliefs. In fact, though, as with phlogiston, not merely did esteemed scholars subscribe to the view that capital structure did matter, the stubborn debate that followed the first publication of the MM papers attests to their devotion. Because economists now do look at finance through the eyes of MM, one of the contributions of a retrospective appraisal is that it affords us the opportunity to explore what, if anything, there was of value in the older view that we might have lost in our zeal to replace it. This is what Miller emphasizes when he says that "showing what doesn't matter can also show, by implication, what does." As their work has been recast in the shifting landscape of ever more modern theory, there is a danger that the original analysis will become discarded as "crude" or "naive." This would be a terrible mistake; the older analysis was designed less to verify some mathematical truism than to capture a live and elusive scientific intuition. Since the newer theory rests on a somewhat different base of intuitions, some of the older insights embedded in the original proofs and analysis may be lost. Miller's piece provides an opportunity to do some excavating.