At the London School of Economics, a few weeks before Christmas, in 1949, the Lionel Robbins seminar was about to begin. The prestigious event was at the razor’s edge of postwar economic thought: Robbins, a giant of economics, had made the LSE a rival to John Maynard Keynes’s Cambridge, recruiting future Nobel laureates such as Friedrich Hayek, John Hicks, Arthur Lewis and the classicist turned economist James Meade.
This lecture, however, promised to be more of a curiosity than a masterclass. Meade had persuaded Robbins to invite an unlikely speaker: a small, shy, incessantly smoking mature student from New Zealand, who had just failed in his attempt to get a degree in sociology. Meade’s protégé had brought an extraordinary device with him — a Heath Robinson-esque contraption resembling an adventure playground for non-existent fish. Half a dozen or more Perspex tanks were linked together through a network of pipes, dams and sluice gates and filled with water stained a deep pink with cochineal dye. It looked like the sort of thing a mad genius might produce if asked to design a water clock. What it could have to do with economics was anyone’s guess. But curiosity is a powerful thing, and many of the School’s finest economists were there to gawp at what promised to be an outlandish display.
The subject of this sudden attention, Alban William Phillips, had been born on a dairy farm in Te Rehunga in rural New Zealand 35 years earlier. His father, Harold, had equipped the farm with a flush toilet, a generator powered by a waterwheel, and electric light, long before the neighbouring farms had any such wonders. As a result, Bill Phillips and his siblings were able to read late into the night — or at least until Harold called “lights out”, and inserted a lever into a winch in the bedroom, which pulled a wire, which pulled a chain, which, far across the farmyard, disconnected the wheel from the generator and plunged the bedroom into darkness.
Harold taught his children to build crystal radios, zoetropes and toys. His wife, Edith, a schoolteacher, encouraged them to study. School was nine miles away and Phillips soon tired of cycling, so he got hold of a broken-down old truck that the adults regarded as far beyond repair. Phillips disagreed — and he fixed it. Aged 14, he used to drive his classmates to school, parking a discreet distance away from the eyes of his teachers.
Phillips might have been expected to go to university — he passed every exam — but there was a problem. In 1929, a collapse in share prices on the other side of the world, at the New York Stock Exchange, had set in motion the Great Depression. Its effects lasted for years, and reached as far as a dairy farm in Te Rehunga. Prices for agricultural commodities plummeted, and Harold and Edith simply couldn’t afford to send their son off to study. Phillips became an apprentice electrician at a hydroelectric power station instead.
As well as diverting an enterprising young New Zealander from going to university, the Depression changed the course of history and revolutionised economics. How could it be otherwise? Economists asked themselves what was happening, why and whether anything could be done about it. They took new measurements, formulated new theories and proposed new policies, all concerned with the question of economic performance as a whole — as something rather different from the sum of its parts. Macroeconomics was born.
Pioneering macroeconomists fought to make sense of this intractable global economic slump. What they had in common was a sense that the economy was a thing that could break — and therefore a thing that could be mended. The most famous among them was Keynes, who sprang to prominence after the publication of his book The Economic Consequences of the Peace, a blistering critique of the Treaty of Versailles which ended the first world war, and who consistently criticised British economic policy throughout the 1920s.
But there were others, such as Simon Kuznets, who masterminded the construction of national accounts for the US, or Phillips’s mentor, James Meade. As a student in the late 1920s, Meade had abandoned his study of classics and took up economics instead, horrified by the widespread unemployment he saw around him and determined to do something. He later became an influential figure in the wartime governance of the British economy. All these men shared a touch of economic genius, but they also shared something else: a determination to take action.
Keynes declared at the start of the Depression that the economy was suffering from “magneto trouble” — a technical fault that might bring the entire machine grinding to a halt, but which could be fixed rather simply with the right tools and understanding. In other words, macroeconomists approached the broken economy in much the same way as 14-year-old Phillips approached that old truck.
In 1935, the apprentice electrician left Te Rehunga to see the world. Steve Levitt, a co-author of Freakonomics, was once dubbed “the Indiana Jones of economics”, but if that swashbuckling label belongs to anyone, it’s Phillips. In between leaving New Zealand and his first brush with economics in 1946, Phillips worked in a gold mine, hunted crocodiles, busked with a violin, rode the Trans-Siberian railway and was arrested by the Japanese and accused of spying. He eventually pitched up in London and signed up for the LSE. Then the war started, and he joined the Royal Air Force, which promptly sent him back to the other side of the world.
In the RAF, Phillips established himself as an outstanding engineer, working to upgrade the obsolete aeroplanes that were supposed to defend British-held Singapore from Japan. Days before Singapore surrendered, he found himself on the last convoy to flee the city, onboard the Empire Star. The cargo ship designed to carry 23 passengers had been packed with 2,000, many of them women and children. When the convoy was discovered and attacked by Japanese planes, Phillips found a new use for his talents as an engineer. He brought a machine gun up on deck and improvised a mounting for it. Then he stood there for hours, fending off the attackers as bombs fell around him.
This extraordinary performance earned him the MBE medal, but didn’t spare him from spending more than three years in a Japanese prisoner-of-war camp. Conditions were bad. Phillips later said that the small men survived and the taller men starved. He was one of the small ones. By the end of the war, he weighed just seven stone (45kg). To keep everyone cheerful and up to date on news from the outside world, Phillips continued with his engineering improvisations. He built concealed radio sets, one of which was tiny enough to be hidden from the guards in the heel of his shoe. He would have been tortured and killed had it been discovered. He also designed and built little immersion heaters, which the inmates used every evening to make hundreds of morale-boosting cups of tea. The guards never worked out why the camp lights flickered and dimmed each evening.
Phillips made light of his prison-camp experiences, and it was not until many years later that the darkest episode was revealed. In the summer of 1945, he was one of thousands of men transferred to a death camp, where they watched their captors mount machine guns on the walls, pointing inwards, and were forced to dig their own mass graves. One of the other prisoners was the writer Laurens van der Post. In his memoir The Night of the New Moon, he describes the camp, and a daring escapade with a “young New Zealand officer” who was capable of performing “a near miracle” with his engineering. Phillips, van der Post and another officer broke into the commander’s office in search of spare parts for the tiny radio. Phillips repaired it just in time to hear the news: the Americans had dropped an apocalyptic bomb on Hiroshima. The end of the war was at hand. After a few tense days, the Japanese camp commander admitted defeat; the prisoners would be freed.
When Phillips returned to London at the war’s end, he resumed his studies at the LSE. He took up sociology, a degree that contained some basic economics modules, and became intrigued by the engineering-style mathematical equations that were becoming popular in the new subject of macroeconomics. He started skipping his sociology lectures and disappearing to his landlady’s garage in the suburb of Croydon, where he put together a hydraulic representation of the equations his lecturers had been scribbling on the blackboards.
One of those lecturers was James Meade. Meade might easily have been taken aback when a student who had all but abandoned sociology approached him with a proposal to rework the calculus of economics as a study in plumbing. Instead, thanks to his patronage, Phillips was given the opportunity to demonstrate his mind-boggling machine in the exacting forum of the Robbins seminar in late 1949. It was his big chance, a last opportunity to demonstrate that he had something serious to contribute to the brave new world of macroeconomics.
Cigarette never far from his lips, Phillips began by fiddling around at the back of the array of Perspex pipes and tanks and starting up a pump that had been scavenged from a Lancaster bomber. The pink-dyed water began to squirt into a tank at the top of the machine, and from there flow down from one container to another. The sound of the pump screeched in the background like a kitchen blender as Phillips demonstrated what the machine could do.
The professors were astounded. Perhaps they would have been less so had they known more about his unorthodox education — the differential equations he’d studied by correspondence course, the hydraulic engineering he’d learnt as an apprentice, the mechanical scavenging and repurposing he’d begun on the farm and perfected in the defence of Singapore. The machine worked perfectly. Within five minutes, the entire room was buzzing with excitement at what Phillips had created: the first-ever computer model of a country’s economy.
The Moniac, or Monetary National Income Analogue Computer, is these days often just called The Phillips Machine. It churned out solutions to equations, using hydraulics instead of differential calculus to calculate the answers. It was a simple computer, although not quite as simple as one might assume. It could solve nine differential equations simultaneously and within a few minutes — a feat that was impossible by hand. Even in the 1950s, economic models were worked out by rooms full of human “computers”, typically women armed with paper and calculators to provide the mathematical equivalent of a typing pool. It would be years before digital computers could support economic models as complex as the Moniac’s.
Phillips made 14 machines in all, most Mark II Moniacs, expanded versions of the original machine. The original machine went to the University of Leeds. Others ended up at Cambridge, Harvard, Melbourne, Manchester and Istanbul. Some went to corporations or ambitious governments in developing countries, from the Ford Motor Company to the Central Bank of Guatemala.
At seven feet tall and four or five feet wide, the Moniac Mark II seems an imposing if rather quaint piece of equipment today. Down the centre of the machine runs a Perspex-fronted column, intersected every foot or so with weirs and sluice gates leading off to side chambers. Column sections are neatly marked INCOME AFTER TAXES, CONSUMPTION EXPENDITURE and DOMESTIC EXPENDITURE. One compartment, the size of a small tropical fish tank, is labelled INVESTMENT FUNDS. Along one wall is a curved dam made of flesh-coloured plastic, marked LIQUIDITY PREFERENCE FUNCTION. At the top corners of the machine are two spools of paper, poised to scroll gently as four pens connected to different floats wait, ready to trace lines up or down like a seismograph, recording the ebb and flow of the “economy”. A few plastic pipes, looking as though they have been scavenged from washing machines, are tucked away behind the machine. At the bottom is a large tank marked NATIONAL INCOME. A small pipe leads from it back to the top of the machine, where the flow of “money” can begin again.
If the Moniac was the result of exquisite engineering skill, Phillips’s flash of inspiration — that hydraulics could be used to solve complex systems of equations — was close to genius. Of course, the hydraulic computer was less flexible than the digital computers that would eventually supersede it.
Each equation quite literally had to be carved into the flow-control system of the Moniac, in small squares of Perspex set in a neat white frame, with a thermometer-like scale along the side. The equations themselves were slots, one in each piece of Perspex, each with a particular shape and angle, snugly holding a peg that ran smoothly on brass rails. Each peg was attached to a float and a sluice gate, so that as the water level in a tank rose, the peg would move up and — depending on the shape of the slot — would also move sideways, opening or closing the sluice gate.
Phillips had calibrated his equations to what was then known about the British economy: how much income people tended to put aside as savings, for example, or the overall response of supply and demand to prices. To his surprise, he found that the machine was watertight enough to be accurate to within 2 per cent — a higher level of precision than was required given the quality of the economic statistics of the day.
To the cognoscenti, the machine was more than just a brilliant technical achievement. It also embodied some groundbreaking economics. For example, when moving between an old steady state and a new one, after some change in the economy, the machine produced cycles or even turbulence for a time, meticulously recorded by the rise and fall of the seismographic pens. These turbulent transitions were beyond the capabilities of the theorists to analyse. They simply had to ignore such dynamics at the time, and even now cannot fully cope with them. Another example: the Moniac allowed for floating exchange rates. Today, the dollar, the pound, the euro and the yen all have free-floating exchange rates against each other, but Phillips lived in a world where countries tried to peg their currencies to each other, or to the price of gold.
The LSE’s establishment rushed to give Phillips a job. Within a decade, he had been made professor, then a rare honour in British academia. For a man with no honours degree and no economics qualifications of any kind, he hadn’t done so badly.
Phillips’s money machine was as much loved in its day for the sheer ingenious exuberance of the thing as for its computing abilities. It was celebrated in Punch magazine and, much later, in Terry Pratchett’s novel Making Money. It also became an influential teaching aid.
At the LSE, Meade attached two Moniacs together, one standard and the other a mirror-image, plugging the “export” pipe of one into the “import” pipe of the other in order to represent a model of international trade between the US and UK. He would then invite pairs of students to play the role of chancellor of the exchequer and Federal Reserve chair, manipulating interest rates or other variables in an attempt to increase the national income of their respective nations. Among the economic policymakers who cut their teeth in these lectures was perhaps the Fed’s most successful chair, Paul Volcker.
Eventually, the Moniacs fell into disuse. Today, only three are operational. An engineering professor at Cambridge, Allan McRobie, refurbished one to full working order. The central bank of New Zealand also keeps a working machine on display. A third is in Istanbul. The LSE kept the mirror-image machine as a teaching aid until 1992. It was then transferred to the Science Museum in London, where it sits dormant in a great hall facing the Difference Engine created by the father of computing Charles Babbage.
The water that flows around the Phillips machine is a good analogy for the way a macroeconomist thinks about the economy in terms of financial flows and reservoirs, of large quantities sloshing to and fro. Macroeconomists contemplate big glugs of spending power devoted to different ends: private consumption, government spending, investment, the purchase of imports. And these financial flows do not simply swell or evaporate of their own accord. They can be dammed, redirected and siphoned off by the choices of citizens and, in particular, by the whims of economic policymakers, who can alter interest rates, taxation or the quantity of money produced by central banks.
Phillips may have revolutionised the study of economics. But he didn’t solve the problem of how to keep the macroeconomic machine forever ticking over smoothly. That much is obvious from the lingering after-effects of the 2008 financial crisis, or today’s debates about how to fight inflation or boost productivity. Twenty years ago, we might have thought of economic stability as a solved problem, and economic growth as the natural order of things. That is no longer true. Once again, our economies look to be suffering from “magneto trouble”, and economists are hungry for solutions.
Perhaps the time has come for that Bill Phillips spirit. We need, once again, to find the same attitude to a misfiring economy that young Bill had to his clapped-out truck, that everyone thought beyond repair. We need, once again, economists who can roll up their sleeves and fix things.
This essay is adapted from Tim Harford’s book, “The Undercover Economist Strikes Back” (Little Brown)
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