Austerity, uncertainty, instability … all problems we associate with Europe today as it cycles from pre-GFC exuberance to today’s austerity. But to put things in perspective, these are minor problems compared what our grandparents endured after World War Two. In Britain many people did not have enough to eat, the government had secret plans for national catastrophe, the Cold War was raging, the colonies erupting, and Sterling was in crisis. In those days there were few policy economists, and macroeconomics was caught in a battle between non-interventionist classical economics and the Keynesian revolution of demand management.
Into the world stepped an unlikely figure: a quiet inconspicuous modest man from rural New Zealand with a bare pass in a sociology degree at the London School of Economics. Aided by unconventional supporters at LSE he was to set the new foundations for modern economic stabilisation over the next decade.
Bill Phillips is known to generations of economics students for the Phillips curve. But he should really be known for pioneering stabilisation policy.
The first part of his life was full of adventure. Ironically the second part was a search for stability. On a scholarship at LSE he became bored with the earnest academic sociology that was then being taught, and instead strayed into economic lectures where the great Classical/Keynesian battles were being fought out. His clear engineering mind cut through the waffle. Within a decade this man with no economics degree would remarkably become the London School of Economics’ senior economics professor.
The British economy was starting to rebuild, but see-sawed from boom to crisis. Phillips took on what was to become his life’s work: how economists might better stabilise the economy. With his engineer’s brain he saw the problem as a car braking and accelerating on an undulating road; keeping it constant required complex decision rules based on the car’s speed, it’s rate of change, and it’s deviation from desired speed. A central banker today will recognise these as encapsulating the three modern feedback rules of monetary policy. Phillips built a mathematical model incorporating these features: to speed it up or slow it down, he devised a form of fiscal or monetary policy. Incorporating real data from the British economy, he solved the model by hand. At the time only slide rules, logarithmic tables and mechanical calculators were available to do this. The model had to be kept very simple to calculate, and Phillips could only derive some basic results, among them showing how the wrong policy at the wrong time could be very costly.
That was not good enough for Phillips – he wanted a more realistic method to model a complex economy, and in 1955 he constructed one. But with 50 or more explanatory variables, there was no way this could be calculated by hand. At the time some very basic electronic computing machines were being considered. Phillips took his puzzle to Short Brothers, the Ulster aircraft makers, who had built what we would now call an analogue simulator, where arithmetical functions could be traced with electrical pulses. Not satisfied with the output, he then convinced a friend to give him unofficial access to the National Physical Laboratories where the first industrial version of Turing’s ACE digital computer was being tested. Phillips managed to run his model on this basic machine, and emerged with solid realistic results about how to correct instabilities in an economy, results that are still in line with what we do today. It is now commonplace to simulate economic models by electronic computer, but I believe Phillips was the first economist in the world to achieve this.
Over the next few years, this unconventional innovative genius became known world-wide. Most famous is the Phillips curve that showed a practical relationship in an economy between “real” outputs and “money” prices, and sparked off a world controversy. Amongst the more technical world of econometricians he became famous for developing new estimation techniques. Then late in life he turned in a complete circle back to an interest of his youth, studying the Chinese economy. It is an irony that this man who revolutionised the way we achieve economic stability ended his life trying to make economic sense of the chaotic Cultural Revolution.
Near death, colleagues commemorated this man whose work led to pioneering advances and a cluster of Nobel Prizes for others across topics in modern economics. Bill Phillips was characteristically understated: “All I did was to set a few hares running for other people to chase.” Some hares! Some chase!
Featured image credit: Kingsway by Ben Sutherland. CC-BY-2.0 via Flickr.