Bill Phillips Models Economy Using Flowing Water
Alex Mayyasi’s new Planet Money guide arrives in bookstores today. Filmogaz.com is publishing a short excerpt from chapter 18.
From New Zealand to London
Bill Phillips grew up in New Zealand. He worked odd jobs, from crocodile hunting to gold mining.
He trained as an electrical engineer before studying economics in London after World War II.
An eccentric laboratory experiment
In 1949 Phillips built a mechanical model in his garage. It used flowing water to represent parts of the British economy.
The setup routed water from a Treasury tank into chambers labeled for health and education. He adjusted a lever to mimic tax changes.
Reception at the London School of Economics
He demonstrated the device at the London School of Economics. Colleagues initially mocked the display.
According to economist Richard Lipsey, the demonstration quickly changed opinions. Phillips was offered a position at LSE.
Discovering a key economic relationship
A colleague supplied 100 years of UK wage and unemployment records. Phillips analyzed the series and produced a striking graph.
The plot showed an inverse relationship between unemployment and wage growth. Economists saw this as a trade-off between inflation and employment.
Naming and spread
Paul Samuelson and Robert Solow labeled the pattern the Phillips Curve in 1961. Samuelson included it in his textbook.
Researchers found similar patterns in other countries, including the United States. Policymakers began to consult the curve.
Policy uses and context
Central banks like the Bank of England and the Federal Reserve relied on the relationship. White House advisers also cited it.
The idea fit into broader debates about stabilizing the business cycle. John Maynard Keynes had earlier proposed using government spending as a counterweight.
Limits and later changes
The Phillips Curve guided policy until the 1970s. After that, inflation and unemployment patterns changed.
Economists revised their frameworks. The move from the gold standard to fiat currency also shifted monetary dynamics.
Enduring influence
Phillips combined engineering skill with curiosity about macroeconomics. His models aimed to reduce economic volatility.
The water demonstration remains famous. It is often described by the phrase Bill Phillips Models Economy Using Flowing Water.
Filmogaz.com highlights this excerpt to illustrate how creative experiments can reshape economic thinking.
