Earlier this week, we published an extract of Alan Bollard’s biography of pioneering New Zealand economist Bill Phillips. We asked Bollard, the executive director of APEC and the former governor of the Reserve Bank of New Zealand, about Phillips’ economic innovations and legacy.
Why don't more New Zealanders know about Bill Phillips?
I'm afraid I can't really help you on that, because through my career I've had a fair go at making his contribution better known by bringing back the MONIAC machine [the Monetary National Income Analogue Computer] and getting it restored. When we got the machine to Wellington some years ago, they were just setting up Te Papa at the time and I contacted them and asked if they would like to have the machine and first of all got no response and then they said no. So you should ask people like that, rather than me. I've done my bit.
Image c/o London School of Economics and the Reserve Bank of New Zealand
So you see him as a neglected or undervalued New Zealand historical figure?
He was a genius and my view is that you're very lucky if you ever meet a genius in your life. Also, he was a non-promoter, a very quiet guy. And you'll see from the title of the book, right at the end of his life, a bunch of international economists wrote a book about his achievements and he said, 'I don't think I ever did much, I just set off a few hares for other people to chase'. My view is that that chase probably ended up with about a dozen Nobel Prize winners. But, he didn't publish very much, so I guess you can blame him for part of that.
So what was his primary innovation in economics?
There was a series of them. He started with this unusual background. Insofar as he was trained, he got trained as an electrician and electrical engineer and he showed that with the MONIAC hydraulic model. He burst in on the director of the London School of Economics (LSE) and said, 'I've sat in on an economics lecture, where I can hear some big controversy going on between what Keynes said and what a bunch of other leading economists said and I can demonstrate much more clearly what they said if you let me build a hydraulic model of the economy'. A completely off-the-wall idea. And to be fair to the LSE, today they would have just called security guards and got him off the premises. But they linked him up with another slightly eccentric but very famous economist James Meade who got him some money and an agreement from the LSE to design this hydraulic model which he demonstrated to a group of famous economists, four of whom later won Nobel Prizes, and they were just bowled over.
It looks like a very simple story where water is money being pumped round an economy, going through taxes, though business investment, through imports, exports, stuff like that, but it's actually incredibly sophisticated. The number one model we have now in the Reserve Bank in Wellington, it's all simulated on the website for people who can't see it physically. The number two model is in the Science Museum in London, next to Charles Babbage's seminal models of calculating machines. It could calculate a nine equation nonlinear differential equation system in a way that nothing else in the world could at that time.
So it's a very sophisticated model and it's linked to his genius in that he built it out of army surplus or airforce surplus materials. There's all these tanks that you can see through made of perspex and the perspex was cut out of old Lancaster bomber windows, it all prints out on a graph on the top which is driven by spitfire window wiper motors. And the whole things pumps water around the system through floats and pulleys and strings and mechanisms that join up different bits from the economy in a way that had never been done before. It was a brilliant teaching model. Today, economic models or mathematical models are in a black-box system. This is a white box, you can see everything that's happening all the way through it.
Were those ideas filtering back to New Zealand at the time?
He published in international journals, so his work on stabilising the economy had the British economy in mind, which was going through a hellish time after World War II, it'd been basically bankrupted and was trying to get not recovery/growth mode. So it was focussed on that, but by the time these things had been published in journals and copies had arrived in New Zealand, they were available to New Zealanders but it wasn't aimed at the New Zealand economy.
You say in the book that you meet him and you've called him a genius. What was he like in person?
I only met him once or twice when I was a graduate student in the economics department at the University of Auckland. I met this guy in the staff common room a couple of times. He was sitting quietly there in a wheelchair and had a funny zimmer frame thing to walk. He was very quiet and looked completely inconsequential and I only learnt afterwards that it was the famous Bill Phillips. He'd had two bad strokes which was a consequence partly of his bad health ever since he'd been stuck in a POW camp in Java by the Japanese in WWII, but he was also a nicotine addict, he couldn't stop smoking all the time. He was aged 60, but aged. And he died very shortly after that. So I wouldn't say I knew him, i'd say I met him and that intrigued me and i started doing some research on him and found that this was this famous guy known to every economist around the world for the Phillips Curve, though he should be known for different things than that.
The Phillips Curve was something he did a little bit after what I talked about earlier. it was a pioneering work into the relationship between prices and physical outputs in an economy. And that's something that today is entrenched in almost every economic model around the world, certainly ever central bank's model. Economists had been looking for that forever. But he didn't particularly want it to be named after him and it was the thing that sparked off a massive controversy in economics between monetarists and Keynesians about how the economy really worked and I think Bill Phillips didn't like that argument, that controversy. he kept being asked his views on it and refusing to give them. He was a technocrat and didn't like that sort of treatment.
What's his contemporary relevance? What can we learn from him now?
In the appendix at the back of the of the book there are about ten things that I think are his key contributions and they're all things that other people ended up taking away and, in many cases, earning Nobel Prizes for them. The first economic computer, the hydraulic one, that is now sort of a white elephant, we're passed that, but his work on economic dynamic stabilization, we have three control rules in the central bank in New Zealand and they're based on these three feedback rules that he devised. The work that he did on mathematical models of the economy on computers, well, that's what almost every economist everywhere in the world is doing now and he was first. The Phillips Curve is everywhere.
He was a very unusual guy. Not well educated, did a lot of self-education. Absolutely school in the inventive-innovative-can-do sort of thing. He pioneered a lot of stuff, he built things, he experimented on things. And the second half of his life, when he got into economics, at the LSE, he almost failed his first exams in sociology – they let him through basically because he'd had such a tough time in the war camp – but he didn't oile sociology But within a decade he went from being almost a fail in sociology to being the LSE senior economics professor. You'll never see that again. It's just an incredible story of innovativeness and genius.