The text of the display celebrating Bill Phillips, opened in the Reserve Bank of New Zealand Museum on 7 July, 2008. The text is written around various images, but may be of some value without them. I should like to acknowledge the Phillips Family, the New Zealand Portrait Gallery, the Reserve Bank Knowledge Centre, 3D Creative and various economists for their assistance in preparing the text.

Keywords: History of Ideas, Methodology & Philosophy; Macroeconomics & Money;

Bill Phillips’s early life must have seemed as usual – and as unusual – as anyone else’s of his generation, but we can see the foundations of his greatness in it. He was born at Te Rehunga near Dannevirke on 18 November 1914, one of four children, to dairy farmers Harold and Edith Phillips.

The farm, ‘Jersey Meadows’ welcomed a never-ending stream of visitors. The family was actively Christian and gave the land for the tiny wooden church, St Alban’s, nearby. Alban William Housego Phillips was the first child christened in it. and was known to the family as ‘Alban’.

Harold was a dab-hand inventor. The farm had the first flush toilet in the district and its own electricity power generation, more than ten years before electricity became generally reticulated. The restored water wheel which he used to power the house and farm is now in the Sunken Garden at Napier. Alban and his older brother Reg enjoyed inventing all sorts of ingenious devices as boys,

Phillips went to the local primary school and then to the Dannevirke District High School, which meant biking ten kilometres to the railway station It was a long day – sometimes he did not get home until six o’clock. He mounted a book stand on the bike so he could get in more reading. Later he repaired a discarded small truck and drove to school.

Matriculating at 15, he was too young to go to university, and money was scarce in these Depression years. So he was apprenticed as an electrician, working on the Waikaremoana hydroelectric scheme.

In 1935 he began his OE, first to Australia where he went crocodile hunting, and then via China and Russia, to Britain where he became a member of the Institute of Electrical Engineers.

The war intervened; he joined the RAF and was sent out to Singapore. He was an armaments specialist and modified the guns on the Buffalo fighters. Evacuated at the time of the Japanese invasion, he mounted a gun on his troopship to stave off enemy fighters. For his Far East services he was awarded an MBE. He spent three years in a Japanese POW camp in Indonesia, where he secretly built a couple of miniature radios. The exploit is documented in Lauren Van de Post’s Night of the New Moon.

After the war, he was repatriated to New Zealand, but soon – now in his thirties – went back to Britain to study at the London School of Economics on an ex-servicemen’s grant.

Despite being an undergraduate, he was influencing his teachers, using his knowledge of electrical modelling. This led to his building analogue computers (MONIACs). A PhD in 1954, and a number of important papers on modelling dynamic economies, led to the prestigious Tooke Chair at LSE. In 1958 he published his famous ‘Phillips curve’ paper.

In 1967 his family moved to the Australian National University so his two daughters could be nearer to their relatives A talented linguist he had translator’s qualifications, and helped established the Centre for Contemporary Chines Studies there.

A crippling stroke in 1969 led to a premature retirement and, later, a move to Auckland, where he taught economic modelling and Chinese economic history at the University of Auckland. On 4 March 1975 he suffered his final stroke.

LAYING THE FOUNDATIONS FOR DYNAMIC ECONOMICS

The MONIAC (Monetary National Income Analogue Computer) was the physical representation of Phillips’s interest in dynamic economic modelling.

The analogue computer shows the money income and expenditure flows of an economy as flows of water. The flows are affected by the settings of the gates and valves which represent policy settings and the like. Some of the flows are diverted out of the mainstream as taxation or payments for imports, while government spending and exports increase the flows in the mainstream. Changes to their magnitudes will change the size of the mainstream too.

A very simple representation of these withdrawal and injections was use by Richard Lipsey, a colleague of Phillip, in his textbook Introduction to Positive Economics.

Phillips developed the model when he realised the interest theory of the day was muddling stocks (which in the MONIAC  is the water in the tanks)  and flows (the water along the pipes). Setting it out in a mathematical form he realised he could represent the equations as a hydraulic system. An LSE teacher James Meade, a subsequent Nobel laureate whose work was influenced by Phillips’ insights, persuaded him to build a model; he built almost a dozen (in a  garage in Surrey). On one famous occasion, two of the models were linked to examine the interaction of economies through foreign trade.

The modern computers are so convenient that analogue computers are rarely used today – in economics or anywhere else. Had economic modelling waited for digital computing power, economics would have been set back many years.

**********************

The PHILLIPS CURVE was an empirical component of Phillip’s interest in dynamic economic modelling, the representation of a modern economy. Indeed four years before he was using in his theoretical modelling a related notion that the rate of change of prices was proportionate to the amount of capacity being used in the economy.

When long-term data became available he was able to establish his conjecture empirically, publishing his famous paper in Economica in 1958. The Phillips curve immediately attracted a lot of attention. It has been the source of much debate and research on both sides of the Atlantic. It has been developed and modified, but almost every economist concerned with inflation grapples with it.

The curve – a simple representation of which is shown on the right – says that the underutilised capacity in an economy – Phillips measured it by the rate of unemployment – affects the rate of inflation – measured by wage changes. When unemployment is high, wages rise slowly, stagnate or even fall. But when unemployment is low, wages rise quickly, as employers try to attract scarce labour by offering better wages. The implication is that a means of slowing down inflation would be to maintain high unemployment, although there are many caveats to such a policy conclusion.

There is, inevitably, much dispute about the exact nature of the curve, but Phillips’ critical insight was that the level of output (relative to the maximum potential output) impacts on the rate of inflation (although other factors impact such as import prices and the stock of money, matter too).  As most economic forecasters do today, Phillips needed such an equation for his models, and he found empirical evidence of the theoretical connection.

THE PHILLIPS LEGACY

Phillips was a pioneer in dynamic economic modelling. Every economist analysing an economy undergoing change is using analytical tools he helped develop. The essential insight from the Phillips Curve – that the level of spare capacity in an economy can affect the rate which wages and prices change – remains prominent in economic theory, policy and practice.

* Central banks concerned with inflation assess the current and future spare capacity in the economy. Here is a graph from the Reserve Bank of New Zealand’s June 2008 Monetary Policy Statement which shows a comparison of New Zealand’s capacity utilisation and actual output (GDP).

* When Ben Bernanke, chairman of the world’s most powerful central bank, the American Federal Reserve, gave his first major speech to the economics profession he devoted a considerable portion to the Phillips Curve and its subsequent developments saying ‘Most of the [forecasting] models used are based on versions of the new Keynesian Phillips curve, which links inflation to inflation expectations, the extent of economic slack, and indicators of supply shocks.’ (10 July, 2007)

* In 2006 Edmund Phelps of Columbia University was awarded the Nobel Memorial Prize in Economics for his work on what is commonly called the ‘the expectations-augmented Phillips curve’ which led to the notion of the ‘natural rate of unemployment’. .

‘Bill Phillips was a great and modest man. Not only did give a tremendous stimulation to applied economic research on wage determination and inflation, but his pupils and colleagues  respected him for his integrity and competence, and loved him for his humanity and enthusiasm.’ Conrad Blyth, Professor of Economics, University of Auckland.