Review of Merton Miller on Derivatives (Wiley Investment) (Hardcover)

Merton Miller, who died in 2001, was an outstanding figure in modern economics. He was one of three financial economists to win the Nobel Prize for Economics in 1990, in his case for his work on the capital structure of corporations - a field that, with his associate Franco Modigliani, he revolutionised if not invented. His great insight was that the value of a company, other things being equal, is invariant with regard to the mix of debt and equity that makes up its capital structure - or, to invoke one of Miller's own picturesque analogies, if I take a dollar out of my right pocket and put it into my left pocket, I am no better off.

This book is a collection of speeches given by Miller in the early to mid-1990s, largely covering the subjects of the derivatives revolution, regulation and corporate governance. The subject matter sounds dry; the speeches are anything but. Miller's jokes are exceptionally good - he has great sport in particular by satirising the convoluted German system of corporate cross-shareholdings, and reflecting ruefully on the inevitable question that is always posed to professional economists ('what will happen to interest rates?' - to which the only sensible answer is 'they will fluctuate'). But underlying the wit and engaging manner is a serious and profound point. Modern finance consists principally in the management of risk. Derivatives perform an exceptionally valuable function in a modern, complex economy by enabling economic agents to accomplish this end. Ill-conceived regulation can do harm by making it impossible for corporations to manage their business risk efficiently; this will have significant economic cost, with no compensating social benefit.

Many collections of speeches are testament merely to an author's vanity, and do not last beyond the occasions for which the speeches were written. This one is different: it is the fruit of an extraordinary intellect, a fine prose style, and a formidable technical expertise. It deserves to last, and is much to be recommended.



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