Modigliani And Miller (M & M) Theorem And The Agreement Approach Theory (Barter) In Modern Economics

In 1958, two young professors, F. Modigliani and M. Miller from a well-renown university in the USA, Graduate School of Industrial Administration (GSIA) of Carnegie Mellon University, developed a theorem in economic branch of Finance which had become influential in the Finance theory in this modern era. The theory was first published in the famous American Economic Review in 1958.

The theory was developed in Finance Economics in a world devoid of taxes and bankruptcy costs as well as agency costs. The theory which is called Capital Structure Theory states that a firm financial earning power and the risk of it underlying assets are more relevant than the manner it engages in investments and also how it makes its dividends available to share holders in this particular firm. Therefore, Modigliani and Miller approach to capital theory suggests that the valuation of a firm's importance or value means that the former indicators should be more regarded as essential than the latter. Later, some researchers have criticized this theory which states that the theory that there are no taxes is unrealistic because taxes exist and interest rates expand or increase and also they do function prominently in economic theory as a whole.

The two propositions which the theorists based their theorem on have been discussed at length and they form the cornerstones of the entire theorem which helped them to receive the Nobles Prizes in Economic Sciences in 1985 and 1990. For example, the proposition 1 states that the value of a firm does not depend on its capital structure. Before, the propounding of this influential theory in Finance, there were no generally accepted theorem in this important field in economics. The theory has come to simplify the decision making process based on it appeal on the capital structure of firms that in general the market value of a company is to be calculated using its earning power and the risks of the base assets, in this way, how a firm is financed and the manner its dividends are apportioned to its share holders are irrelevant.

The agreement approach theory (Barter), which was developed by me a few years ago, is also a theory developed in the world of no loans and interest rates. It is to aid those developing nations in the world maximize the same advantage which the developed nations gained in the world of trade prior to economic development and finance. In general when there were no loans and interest rates functioning prominently in economic matters, the trade profits were gained by these developed nations when they had all the resources in the world at their advantage and they could though secure it by force or through inappropriate stealing or confiscation of resources. It helped the developed world to maximize gains which were secured in a world of non-competitors, because once an individual or nation grabs something and it becomes his forever. In a world where there no loan and interest rates exist (or less prominent), it enabled these developed nations to grab things for free as well as they developed these things and returned them for multiple earnings which became their sources of accumulation of enormous capital until now.

The agreement approach theory which is developed in the world of no loans and interest rates ensures that at both microeconomic and macroeconomic levels non-competitive partners make gains as they trade with each other through barter. Satisfaction in trade and development of macroeconomic and microeconomic trades which lead to forging of economic progress between two non-competitive partners is the focus. The goal is to commit themselves to doing good trade in order to maximize profits in the world of no loan and interest rates. It is another manner of fighting the issuance of protectionism which has become the order of the day by some well known developed nations in the world. The trade does not signify the master-apprentice relationship which is seen in the behaviors of some developed nations around the world at present. It is a relationship that brings together two equal partners in mind and approach to do trade and maximize profit and gains that could be beneficial to both two non-competitive partners. It is believed that this is one way of fighting protectionism, championing globalization and enforcing interdependence which is seen as a great "public good" deal of positive progress in the world of non-competitive trade partners.

References
Ayim-Aboagye, D. (2010). The New Façade. Ghana in the New Millennium. Political Discourses on Ghana and Africa. London: Lulu UK .

Modigliani, F.; Miller, M. (1958). "The Cost of Capital, Corporation Finance and the Theory of Investment". American Economic Review. 48 (3): 261–297. JSTOR 1809766 .

Modigliani, F.; Miller, M. (1963). "Corporate income taxes and the cost of capital: a correction". American Economic Review. 53 (3): 433–443. JSTOR 1809167 .

Miles, J.; Ezzell, J. (1980). "The weighted average cost of capital, perfect capital markets and project life: a clarification". Journal of Financial and Quantitative Analysis. 15: 719–730. doi : 10.2307/2330405 . JSTOR 2330405 .

Sargent, Thomas J. (1987). Macroeconomic Theory (Second ed.). London: Academic Press. pp. 157–162. ISBN 0-12-619751-2 .

Suresh P. Sethi, Extension of the Miller and Modigliani theory to allow for share repurchases, Mathematical Finance Letters, Vol 2017 (2017), Article ID 3 http://scik.org/index.php/mfl/article/view/3138

Sethi, S.P.; Derzko, N.A.; Lehoczky, J.P. (1991). "A Stochastic Extension of the Miller-Modigliani Framework". Mathematical Finance. 1 (4): 57–76.

Sethi, S.P. (1996). "When Does the Share Price Equal the Present Value of Future Dividends?". Economic Theory. 8: 307-319

Professor Desmond Ayim-Aboagye
(DEAN OF FACULTY OF ARTS AND SCIENCES)
Regent University College of Science and Technology

P. O. Box DS 1636
Dansoman - Accra
Website: www.regent.edu.gh