Unconventional Economist Turns Water into Economic Model
Imagine an economic model represented by flowing water. That is exactly what an ingenious economist from New Zealand did. His name was Bill Phillips, and his creative approach to understanding the economy led to the creation of the renowned "Phillips Curve".
From Crocodile Hunter to Notable Economist
Mr. Phillips had a colorful past. Before he delved into the world of economics, he hunted crocodiles, mined for gold, and worked as an electrical engineer. Following World War II, he pursued a study of economics in London. His rich background allowed him to see the world from a unique perspective.
Aquatic Illustration of Economics
In 1949, Phillips constructed a fascinating machine in his garage. This contraption had water flowing between various tubs and chambers, mimicking the British economy. When he presented his invention at a well-known school of economics in London, he was initially met with ridicule by the staff. However, he demonstrated how the water moved from one tank (representing the Treasury) to various chambers that symbolized health and education sectors.
This flow of water was intended to showcase government spending and how it could be redirected back to the treasury through adjustments in taxation rates. His brilliance soon silenced the critics and he was offered a position at the school.
Exploring Macroeconomics Over Sherry
Phillips quickly found himself engaged in intellectual discussions with other economists. They would often debate over sherry about the principles of macroeconomics, a field that studies growth and productivity on a national scale. Phillips’ passion was to understand how to foster stability in a market economy.
Navigating the Economic Roller Coaster
Economic history is filled with periods of growth and decline. Prior to World War II and the Great Depression, the economy experienced a cycle of booms and busts approximately every 20 years. This cycle of growth and contraction is known as the business cycle.
After the Great Depression, a renowned economist posited that governments could control these economic fluctuations. He suggested that the government could function like a counterweight, increasing or decreasing its spending to stabilize the economy.
Unraveling the Inflation-employment Paradox
Phillips and his colleagues believed that inflation was tied to unemployment. A low unemployment rate gives workers leverage to demand higher wages, which in turn could elevate the prices of goods and services, leading to inflation. This inflation theory was dubbed a wage-price spiral.
One day, Phillips was given a dataset encompassing 100 years of the UK's wage and unemployment data. He plotted these data and created a curve that demonstrated an inverse relationship between unemployment and wage growth, which indicated a correlation between employment and inflation.
The Phillips Curve Takes Center Stage
The graph Phillips created became popular among other economists and was found applicable in data from other countries, including the United States. In 1961, this graph was officially christened the Phillips Curve and was included in a well-known economics textbook.
The Phillips Curve was particularly useful to central bankers in managing inflation. At that time, even central bankers had a basic understanding of inflation, as it was a new era for currency. Prior to the 1930s and the Great Depression, many countries used the gold standard to maintain the value of their currency. However, we now use fiat currency, backed only by the government's promise to manage the money supply responsibly.
The Phillips Curve became a guide for managing inflation, but by the 1970s the American economy began to behave differently, forcing economists to revise their anti-inflation strategies. But that's a story for another time.
