1 Bill Phillips

The author of the Phillips Curve, Bill Phillips, is almost unknown in his home country. But he has a crazy story.

Every economist knows the Phillips Curve.

It’s this fundamental relationship in the economy. This surprisingly strong connection between inflation and employment. Prices go up, there are more jobs. Rein back inflation, and more people are out work. It’s hotly debated what this all means.

The author of the Phillips Curve, Bill Phillips, is almost unknown in his home country. But he has a crazy story.

Bill Phillips was a crocodile hunter in Australia. He was an Air Ministry engineer in Singapore in World War II. For three-and-a-half years he was a prisoner of war, calmly building secret radios. And that was before he even saw a supply and demand graph.

Bill Phillips brought new insights that helped change the direction of the whole discipline of economics in the 1950s. He was one of a few pioneering academics who brought in engineering equations to answer questions like: can governments control unemployment? Why do the price of groceries keep going up?

To understand Bill and how he changed economics, you can look through his history, right to his childhood in rural New Zealand.

Childhood in Te Rehunga

A waterwheel lights up the farm house. Unlike most New Zealand farmers in the 1910s, the Phillips family is electrified.

Bill, Reg, and his sisters Carol and Olive grow up playing cartoons on a device called a Zoetrope. They make a crystal radio set. They watch a magic lantern playing moving images from America and Britain. Their kitchen doubles as a dark room. They read books late into the night, until they hear the squeak of their father pulling a winch. The waterwheel stops. Everything goes black.

Bill Phillips helps milk the cows. Then violin practice. Deer hunting. Homework. BB guns. 

In hindsight, this is practice for what’s to come.

As he cycles over dirt roads for hours to get to Dannevirke High School he knows that’s time wasted. So he fits a bookstand to his bicycle handlebars.

That’s not entirely satisfactory. So, with the persistent ingenuity that will come to define him, he fixes up an old truck, which he drives to school without a drivers license.

Bill graduates high school early, in the top of the class. But the price of butter suddenly halves. What does this mean for Bill? Well it’s 1929. The waves of the Great Depression are breaking all over the world. His parents tell him the news. They can’t afford to pay for him to go to university.

So Bill moves out of home to work at Tuai Powerstation, a new hydro dam.

After that, Australia. He shoots crocodiles, fixes motors, and studies engineering.

He learns his first differential equation while lying under the shade of a transformer in a gold mine.

He decides to catch a Japanese ship to Shanghai. But after a day on board, Japan declares war on China. So he’s diverted to Yokohama.

When Bill’s in Japan he takes photos of some troops. The police take him in for questioning. He’s lucky. They just confiscate the photos and let him go. But all through Korea and Manchuria he’s now stopped at every checkpoint, and taken in to a special supervised hotel for night.

He takes takes the train from China to Russia to London. And along the way he’s asking for jobs in the Soviet mines. (He thought it would be interesting to work in a planned economy.)  

This starts to sound made up. But it gets crazier.

World War II

World War II starts. Bill signs up for the Air Ministry. He’s taken to Singapore where his job is to add machine guns to these clunky old fighter planes called Buffalos. He times the machine guns to shoot perfectly in between the airplane rotors.

In 1942 the Japanese take over Singapore. And as Bill is making an escape on a boat, the ship is bombed. He finds a huge machine gun, but it only shoots sideways, not up to the sky. So with explosions and gunfire around him, he calmly builds a new mounting, and fires back up at the bombers for three-and-a-half hours.

It’s a thin escape.

Bill is in Java now as the Japanese are descending down South East Asia. He sets up a small camp on a hill overlooking the south coast, facing Australia. He and two others try to find a boat to sail across the Indian ocean. They even try to repurpose an old bus into a makeshift raft.

One day Bill and his colleague are walking back up the green scrubby hillside. They see their colleague keeping watch. There are two Japanese soldiers either side of him. Bill turns and runs, and jumps off a sea cliff. He described this like a Walt Disney character running over thin air before falling.  

Bill’s sister Carol said, “Later we would realise it was not really funny, but an absolutely petrifying experience.”

We can only imagine how many times Bill would replay this scene in his head. Walking through the palm trees and banana plants. Vines and saplings crunching beneath. Slogging up the slope. The Japanese soldiers. The cliffside.

The Prisoner of War camp in Bandoeng is brutal. Here, morale is almost as important as food rations. They have no idea what’s ahead. Will the allies win the war? If they do win, when? And they do, are the Japanese going to simply massacre the prisoners and burn down the camp?

So over three years of captivity in worse and worse conditions, Bill puts his childhood love of crystal radios to use. He makes secret receivers to keep up with progress on the war outside. He knows he could get killed if the radio sets are discovered by the Japanese guards. He makes one under the kitchen floor, one in a chair, one in a pair of wooden clogs.

Eventually over the years the radios fail as the valves blow. He needs a new acorn valve. So in the night he watches guard while another prisoner breaks into a Japanese lieutenant’s office to steal some parts for their radio.  

Under a mosquito net over three nights he repairs the radio in the clog. He presses it to his ear, and — that night — he is the first in the camp to hear of the atomic bomb exploding in Hiroshima.

“It worked, Colonel, it worked!” Bill whispers in the dark.

As the war ends, Bill Phillips returns to the family farm in New Zealand. His sister Carol says he is “woefully thin.”

He makes a joke about the camp.

“She wasn’t so bad once you got used to her. And I got to work on my Chinese.”

He is now 31 years old, chain-smoking, and while outwardly cheerful, recovering psychologically.

He applies for an Ex-Serviceman’s rehabilitation study grant. He enrolls in a sociology degree at the London School of Economics where his tutors reports says that he is “slowly overcoming feelings of inadequacy”, “not very well adjusted to school”, and that he has “something of a psychological problem.”

Bill makes a friend, Walter Newlyn, another former serviceman. They go on weekend walks. They take out two actresses from the West End.

Walter is in his second year of macroeconomics. They’re living in a country potholed by bombing, with food rations and cold flats. Explaining the shortages, the price spikes, and the currency crises seems vital.

Everyone around him is talking about the economist John Maynard Keynes. But Keynes’s ideas are hard to grasp in their entirety.

Bill fails two economics classes. He’s barely passing sociology.

His friend Walter moves to Leeds University, and Bill’s time is nearly up.

The condition of his grant is that once he’s finished his degree he has to return to New Zealand. No more of London, the city he moved to a decade ago. No more walks. Certainly no more dates at the West End.

The Water Machine

Reading his economics textbook, Bill sees a diagram. It shows water flowing into a tank with a lever. It’s classic supply and demand, just presented in a different way.

There’s one pipe where water flows into a container, and another pipe draining it. The pipe going in — that’s supply. In this case supply of wheat. The container — that represents the grain silos that farms hold onto. The pipe going out — that’s demand. Connected to the water level of the container is a little float attached to a wire and pulley. When the water level is high, price is low. When the water level is low, price is high.

It’s just a metaphor, a drawing to teach economics students. But it’s one that Bill can visualise instinctively.

The winches and levers are just like those used by his father to start and stop the waterwheel generator back in New Zealand. The force of the flow is just like the water blasting through the Tuai powerstation.

The water diagram from his textbook is more than an analogy — it actually shows the market working in a way that a supply and demand graph can’t.

So Bill draws a new diagram on a sheet of tobacco-stained typewriting paper.

On an ordinary supply and demand graph, there’s nothing to indicate how much grain the farmers are holding in storage in silos or how many packs of flour are sitting in packing factories.

The water flow analogy — with the storage container — tells a new story: Bill shows that in the short run, wheat prices can be influenced by the amount of it in storage. But in the long run, all that matters are the flows. How fast the container is filling up with supply, and how fast it’s draining with demand.

Bill, who until now, was a mediocre student at risk of failing, extends this idea. Supply and demand charts are used everywhere in economics. What other insights can he show by applying this hydraulic analogy?

Maybe this could help him write out and better understand the ideas Keynes talks about.

The interest rate for saving and borrowing is a sort of price — the price for money. And the debate over how interest rates work was being fiercely argued. Maybe a water diagram that showed the importance of the rates of flows would help.

Bill is an expert on flows, reservoirs, intakes, and chutes. So he draws a series of water tanks showing how interest rates go up and down. Money flows from earnings to savings to the banks to stock markets and back to investment in the economy. Throughout all of this, the volume of the flow determines the interest rate.

When Walter visits London in 1949 Bill shows him his paper. Bill’s lecturers weren’t interested, but his friend could be.

Walter barely reads it, but he does like the diagram of water sloshing around as money through the economy.

“Could you build this?” He asks Bill.

“Probably,” Bill replies.

Walter is intrigued. He extracts £100 from the University of Leeds. That summer he helps Bill make a machine the size of a refrigerator out of wires, pullies, a generator, and perspex taken from old Lancaster bomber.

Now Bill’s scholarship has run out. He takes out an overdraft, writes home for money, and is lucky enough to have landlords waive rent.

The machine is completed towards the end of autumn. They call it the MONIAC: the Monetary National Income Analogue Computer.

Bill has weeks left before he has to return to New Zealand. There’s an urgency to show as many people as possible in London what this machine can do. Preferably influential people.

There is this weekly seminar run by the head of the LSE’s economics department, Lionel Robbins. This would be the perfect venue.

So  Bill brings some perspex and blueprints to where he hears there are some professors at the Royal Economic Society event. He interrupts Professor Robbins in the lift.

Professor Robbins is sceptical. He says “All sorts of people have invented machines that demonstrate propositions which really didn’t require machines to explain them.”

But with some politeness, but possibly just to get rid of Bill, he arranges for another professor, James Meade, to meet with Bill Phillips.

James Meade, who would go on to win a Nobel prize, gives Bill a slot at the seminar.

On November 29, 1949, with a perpetual cigarette in hand, Bill is at the front of the lecture theatre. Everyone who matters is there.

Bill gives a preamble with his heavy New Zealand accent, pacing back and forth. His hands are shaking. He explains a debate between John Maynard Keynes and Dennis Robertson: how is the demand for money determined.  

He switches on the machine.

The motor sends pink liquid around various containers.

The debate he just describes, is laid out in the machine, transparently, cogently showing how stocks and flows of money could affect interest rates. Water falls from income, where a portion is drained out as taxes, some goes to savings and then investment, income goes to consumption. A lever oscillates as interest rates go up and down.

It leaves an impression on the faculty.

The next day, Professor James Meade writes to his colleagues saying he was “very much impressed”, the machine showed “great ingenuity and supreme craftsmanship” and “served a really useful role as a teaching device.”

He doesn’t want to just flatter Bill Phillips, he’s also trying to get Bill a £700 fellowship. This could allow Bill to stay London. He writes to the New Zealand consulate begging them to waive Bill’s requirement that he returns home by the end of the month.

The fellowship is arranged, the extension granted. Bill writes a paper on his machine. And despite some reservations over poor grades, Bill is offered an lecturing position in economics and the opportunity to complete his P.h.D.

Bill’s machine is quietly successful. It doesn’t get put into mass production. But it is picked up around the world. Harvard buys one. One is commissioned by Cambridge University. Another is sold to Oxford. The Ford Motor Company and the Central Bank of Guatamala both decide it would be useful to have a MONIAC on hand.

The MONIAC isn’t going to revolutionise economics. It’s more of a teaching tool.

But it does show Bill’s knack for creative thinking — mashing together the two things he cares about — engineering and understanding the economy.

Bill’s academic career has started. Now well into his mid-30s, he has, for the first time in his life, some stability. Every day he puts on his polished shoes, a crisp white shirt and a dark suit and heads to the university.

At a dinner party, Bill meets a New Zealand woman, Valda Bennett. Valda is 27, working for the City of London. They soon start seeing each other. Two years later they get married in a registry office. It’s not a flashy wedding. They go out for lunch with some friends. And in the afternoon they go shopping for their new flat.

Bill Phillips has never been extravagant, and this shows both at home and in his career.

Valda attends only one of Bill’s lectures. She later said, “We got into a way of life that suited us both.”

Bill’s interests at LSE moves on to more conventional economic formulas and academic papers.  But the topics are new: he works on innovative ways to incorporate formulas from engineering into principles for controlling the ups and downs of the economy.

In 1958, Valda and Bill have their first child, a daughter. They have few friends in London — just the odd colleague around for dinner. They decide that Bill should take up a sabbatical in Australia. That way they can be closer to family.

The Phillips Curve

At the university, Bill starts to think more about inflation. This was only approximated by the MONIAC machine through the exchange rate. Inflation within the economy could have been messy: somehow more pink water might have had to be pumped in.

Around the time of becoming a father, some new data is released. It’s getting closer and closer to moving day, and it’s only weeks before heading off that Bill gets his hands on the numbers.

He now has UK unemployment and price inflation rates going back all the way back to 1861.

So using plain old pencil and graphing paper, Bill set to work at home.

He pieces it together on a graph but it looks like a complete mess. No real pattern. But then he has the idea of breaking it out by business cycle. In each business cycle from boom to bust there is a strangely strong relationship. It looks like an L on the page.

Bill strings this together in a rush. He talks about it being a ‘wet weekend’s work’, and doesn’t mention it as anything significant to Valda. This would be the paper that immortalises Bill in the name the Phillips Curve, the curve that is brought up, at least implicitly, in almost every discussion about the wider economy.

As the days tick closer to leaving day, he quickly types up the paper. He sends it to the journal Economica where it’s accepted for publication immediately.

The connection between higher unemployment and lower inflation isn’t new. But the clarity of Bill’s paper is forceful. It shows the facts of the economy from just under a hundred years ago all the way up to the present. And builds patterns explaining what’s going on. This is before widespread computing.

When Bill returns to London after his three months at the University of Melbourne he is surprised that people refer to this as the Phillips Curve. If anything, he’s worried that people are reading too much into it. Bill is a little embarrassed when Parliament starts debating the Phillips Curve.

Bill’s paper, while popular, is not accepted blindly. It’s controversial. In seminars he is grilled on any perceived flaws.

His colleague Dick Lipsey hosts what he calls an investigation and publishes a follow-on paper.

Bill doesn’t believe that policymakers have a simple choice: that if you only just tolerated more inflation and you could have permanently lower unemployment. He knows that If you overheat the economy for too long and people expect higher inflation, they’ll just build this into their contracts, and then you’ll have both higher unemployment and higher inflation.

A defining moment is when American economists Paul Samuelson and Robert Solow refers to a Phillips curve in one of their papers. Paul Samuelson is literally writing the textbook on economics.

Bill is commanding more and more respect among his colleagues and internationally. He’s promoted to a special professor position.  

But he doesn’t like the controversy. He doesn’t take up an offer to write a follow-up article.

Bill does attends seminars on debates around the topic, listening respectfully, but rarely puts forth his own views. He meets with University of Chicago economist Milton Friedman, and, on a park bench in London, scribbles out a formula showing how people’s expectations of future inflation can influence today’s wages.

Ironically, Milton Friedman will later ‘debunk’ the Phillips curve using this concept.

By now, Bill is modelling the economy on more conventional computing machines. This is one with stamp cards and code, not pipes, funnels and water.

He visits Chicago; MIT. In 1966 he gives a keynote lecture in San Francisco. That’s San Francisco in the time just before hundreds of thousands of young people would swarm the Haight-Ashbury in the summer of love.

Stability

Bill’s work is all about stability, control systems and econometric prediction. That’s not what the next generation has in mind.

Bill returns to the smog of London with his students protesting the appointment of the new director Walter Adams. The students aren’t happy with Walter Adams’ links with Rhodesia, now Zimbabwe.

Hundreds of students stage a sit-in with candles in a dark lecture theatre protesting Walter Adams. Caught in the crowd, a porter working for LSE falls to the floor and dies of a heart attack.

These protests might not have been the reason for Bill’s departure, but they highlight the divide between Bill’s generation of former soldiers and nurses in World War II seeking security, and the young baby boomers impatient for social justice.

By that summer of 1967, the Phillips family decide to leave for the quiet and clean city of Canberra, Australia, population 100,000.

Bill recruits economists and builds up a strong economics department at the Australian National University. He continues with his research but, after debates with argumentative colleagues, he is increasingly reluctant to publish.

One day he drops his cigarette while talking in the economics department. He’s having a stroke.

Bill is left paralysed on one side and now uses a walking stick.

He keeps working at ANU. Every seminar is held on the second floor with the only access two storeys of circular stairs. Going up is okay. But going down, Bill thinks of Java. He remembers the green cliff that day in 1942 when he was captured. The staircase starts to look like a cliff face.

He tells a colleague, “Going down those stairs is the scariest thing I’ve had to do since I jumped over the cliff.”

Bill moves back to New Zealand, now in a wheelchair. Against the advice of his doctor and Valda, Bill teaches Chinese Economics part time.  A University of Auckland colleague puts together a review of his achievements.

He writes about how a “Phillips curve ‘industry’ quickly developed”, how Bill is a “tremendous stimulus to applied economic research.”

In 1975, Bill is in his office at the University of Auckland. He collapses, dying of a second stroke. He was only 60.

Bill quietly improved our understanding of economics. But he was never awarded a Nobel prize, never found his face on any New Zealand currency, and was never knighted. And maybe that’s the way he would have liked it.

________________________

Thanks to the Reserve Bank of New Zealand for letting me record the sound of their MONIAC machine, and to Napier City Council for the Phillips waterwheel sounds.

For a full biography, read Alan Bollard’s book A Few Hares to Chase: The Economic Life and Times of Bill Phillips.

You can download an mp3 of this podcast episode here.

Subscribe to Grid Lines on Apple Podcasts.

________________________

References

Blyth, Conrad A. 1975. “A.W.H. Phillips, M.B.E.: 1914-1975.” Economic Record: September.

Bollard, Alan E. 2011. “Man, money and machines: The contributions of A. W. Phillips.” Economica 78: 1-9.

Bollard, Alan E. 2016. A Few Hares to Chase: The Economic Life and Times of Bill Phillips. Oxford, Oxford University Press.

Brown, Willy. 2011. “MONIAC – A brat’s eye view.” Economia Politica (1): 33-34.

Doreen, Newlyn. 2011. “A memoir on the creation of the Newlyn/Phillips Machine.” Economia Politica (1): 35-38.

Forder, James. 2014. Macroeconomics and the Phillips Curve Myth. Oxford: Oxford University Press.

Friedman, Milton. 1976. Inflation and Unemployment. Nobel Memorial Lecture, December 13.

Gordon, Robert J. 2011. “The history of the Phillips Curve: Consensus and bifurcation.” Economica 78: 10-50.

Goulding, Kenneth E. 1941. Economic Analysis. Accessed from [https://archive.org/stream/in.ernet.dli.2015.228894/2015.228894.Economic-Analysis#page/n125/mode/2up].

Hoefferle, Caroline M. 2013. “The ‘trouble’ of universities in the mid-sixties.” In British Student Activism in the Long Sixties. Abingdon-on-Thames: Routledge.

Ibbotson-Somervell, Carol S. “A.W.H. Phillips, M.B.E.; 1914-1975; A.M.I.E.E.; A.IL.; Ph.D.Econ.; Professor Emeritus: As the twig is bent.” Mimeo.

Leeson, Robert. 2000. A.W.H. Phillips: Collected Works in Contemporary Perspective. Cambridge, U.K. Cambridge University Press.

Minerva. 1967. “Dr. Adams and the London School of Economics.” Minerva 5(2): 312-315

Ng, Tim, and Matthew Wright. 2007. Introducing the MONIAC: An Early and Innovative Economic Model. Reserve Bank of New Zealand.

Phillips, A. W. H. 1950. “Savings and investment. Rate of interest and level of income.” Economia Politica 2011(1): 189-196.

Phillips, A. W. H. 1950. “Mechanical models in economic dynamics.” Economica 17(67): 283-305.

Phillips, A. W. H. 1958. “The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957.” Economica 25(100): 283-99.

Sleeman, Allan G. 2009. “‘Bill’ Phillips: Remarkable economist, a remarkable life.”  

Sleeman, Allan G. 2010. “‘Bill’ Phillips’ war and his notorious pass degree.” Economic Record.

Williams, C. J. 2017. “Bill Phillips.” NZEdge, 9 June. Accessed from [http://www.nzedge.com/legends/bill-phillips/].