His name is William Phillips.
He may very well be the most famous New Zealander that you’ve never heard of.
From Washington to London to Brussels, central bankers worldwide are huge fans of his economic model.
Phillips may have died in 1975 — but in 2023, his idea is more alive and more urgent than ever before.
Source: NZ Edge
Let’s start from the beginning:
- Phillips was born in 1914, into a farming community near Dannevirke. His family were salt-of-earth folk. Rural and robust. His father was a Jersey cattle breeder, and his mother was a primary-school teacher. They instilled in Phillips a strong sense of curiosity, determination, and integrity.
- In 1935, at the age of 21, Phillips embarked on a Kiwi rite of passage: the OE. He pursued adventure, doing odd jobs like crocodile-hunting and gold-mining as he travelled across Australia, China, and Russia.
- In 1939, Phillips found himself in the UK. This was when World War II broke out. He dutifully joined the Royal Air Force and was immediately posted to Singapore.
- When Singapore fell to the Japanese — the most humiliating defeat in British history — Phillips was captured. He would spend over three years as a prisoner of war in Indonesia.
This was when William Phillips’ innovative personality shone brightly:
- Courageously, he snuck into the camp commander’s office. This was an act that spelled almost certain death if he had been discovered. But he wasn’t deterred. He succeeded in stealing parts from an old telegraph machine, then used them to fashion a secret radio.
- His astonishing feat allowed his fellow prisoners to receive Allied broadcasts about the course of the war. This boosted their morale. Provided much-needed hope during this dark time.
Laurens van der Post, a South African soldier also under captivity, would write about Phillips in his book, The Night of the New Moon:
‘The Phillips you came across is the Phillips who served us so gallantly in prison and who built and operated the only secret radio we had in prison. Phillips was one of the most singularly contained people I knew; quiet, true and without any trace of exhibitionism.’
However, crafting a radio wasn’t Phillips’ only achievement. Incredibly enough, he would also invent an electric tea maker for the benefit of the prisoners. Van der Post explains:
‘Thanks to Phillips invention, the whole camp could have a secret cup of tea before creeping to bed… The result was when some 2000 cups were suddenly brewed that the lights of the camp dimmed alarmingly. The Japanese were mystified by this dimming of the lights every night at about 10.00 pm.’
A breakthrough in economics
In 1945, the Empire of Japan was defeated.
World War II was over.
William Phillips was freed from captivity. And he embarked on the next stage of his life’s journey, which would propel him into greater things:
- Fascinated by his wartime observations of human behaviour, Phillips began to study at the London School of Economics.
- In his final year, he wrote a paper entitled Saving and Investment: Rate of Interest and Level of Income. His goal was an ambitious one: to model the entire British economy.
- To achieve this, Phillips built the world’s first computer-model of a country’s economy. It was called MONIAC — the Monetary National Income Analogue Computer.
Source: NZ Edge
- The analogue design was ingenious. Hydraulics were used to pump coloured water through transparent pipes. This simulated critical elements like imports and exports; taxation and spending; savings and investments.
- By doing this, Phillips could measure the circulation of money in the British economy. He could track how different inputs could result in different outputs.
- His invention stunned the academic community — propelling him to superstar status.
- This was Kiwi number-8 wire mentality. Honed by his rural upbringing. Refined to a sharp edge by his practical experience during World War II.
Ultimately, William Phillips would secure his standing as a legendary economist by introducing the theory that now bears his name:
- This model is deceptively simple. It reveals that there’s a trade-off between unemployment and inflation. It’s an inverse relationship.
- So, when the jobs market is too tight, inflation will climb. The demand for higher wages will inevitably push up prices in the economy.
A lasting legacy
The Phillips Curve has since become a firm favourite of many central bankers around the world — and they are now using it as one benchmark in their fight against inflation:
- As the theory goes, pursuing a restrictive monetary policy by raising interest rates will hopefully cool down the jobs market. And if employment eases up, so too will inflation.
- But watch out: this policy doesn’t come without controversy. Just imagine if the New Zealand economy is a car. And just imagine if the car is moving at 100km/h. What happens if the Reserve Bank hits the brakes and brings the speed down to 50km/h? Well, a passenger who isn’t wearing a seat belt is going to go through the windshield.
- This is the existential fear, isn’t it? That interest-rate hikes will lead to a ‘hard landing’ for the economy. Many people are going to go through the windshield. Experiencing catastrophic injury.
- But will the end result really be that dramatic? Well, maybe not. Maybe there’s actually room for flexibility. By tapping the brakes strategically, central bankers are trying to make reasonable headway — without causing too much pain. In other words, they are trying to achieve a ‘soft landing’.
- The United States, in particular, has brought year-on-year inflation (as measured by the Consumer Price Index) down from its peak at 9.1% in July 2022 to a mere 3.7% in August 2023. And they’ve done it without causing a widespread financial meltdown. So far.
Still, one thing is clear. William Phillips may have died in 1975, but his legacy remains powerful in 2023:
- Each time interest rates are raised, economists all around the world watch with bated breath. Trying to read the tea leaves. Trying to forecast what will happen next with the present cycle of monetary tightening.
- What is the impact on the rate of employment? Is the jobs market staying strong? Or is it getting weak?
- Well, truth be told, the resilience of jobs is just one measurement of the economy — but it may offer us a clue as to how high interest rates must go in order to tame inflation.
- The Phillips Curve remains controversial. Is it an eternal model that’s always applicable in the long-term? Or is it only relevant for some situations in the short-term? Should central bankers be following it so religiously?
- Well, the jury is still out on this. Nonetheless, you can’t argue that the symmetry of the curve is the mark of a true Kiwi genius. William Phillips has given us a persuasive tool that we have come to rely upon during this time of crisis. And if we play our cards right, it may just offer us salvation.
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