Wealth & Money Quote by Merton Miller

“Arbitrage proof” is the economist’s way of smuggling a moral claim into a technical one: if there’s a free lunch, the model is broken. Miller’s line reads modestly, almost bureaucratic, but it carries the brash confidence of postwar finance as it tried to style itself into a hard science. The phrase “has since been widely used” signals more than diffusion; it’s a victory lap for a method that let economists replace psychological stories about value with an almost judicial standard of consistency. Not “true,” not “realistic,” just: does it permit a riskless profit? If yes, toss it.

The subtext is Miller’s lifelong project (most famously in Modigliani-Miller): strip away narrative fog and reveal invariances. Arbitrage becomes the discipline’s lie detector. It also flatters the market: mispricings aren’t enduring injustices; they’re opportunities that smart, incentivized actors will erase. That’s an elegant faith, and also a convenient one, because it turns messy questions about power, information, and institutional frictions into “assume away the arbitrage.”

Context matters. “Arbitrage-proof” reasoning rose with modern derivatives, quantitative trading, and the academic-industrial pipeline that linked business schools to Wall Street. Its wide use is a testament to how portable the idea is: you can build asset-pricing theory, corporate finance, even parts of macro on it.

But “widely used” also hints at the blind spot. Real markets have funding constraints, transaction costs, and forced liquidations - the exact conditions where arbitrage can fail. Miller’s sentence captures both the triumph of a method and the quiet audacity of treating markets as self-correcting machines.