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June 29, 2012

Historical Echoes: A Water Machine that Simulates the Economy

Amy Farber, New York Fed Research Library

In 1949, engineer/economist A. W. H. (Bill) Phillips unveiled a mechanical economic model, the Phillips machine, which could demonstrate—by pushing colored water through clear pipes—how money moves through the economy. What’s more, by manipulating the apparatus, one could demonstrate what happens to the economy if one lowers tax rates, increases the money supply, or changes other parameters in the model. If a manipulation was sufficiently dramatic, it could offset the equilibrium enough to cause water to splash onto the floor. Phillips invented the first machine at the London School of Economics; afterwards, thirteen more were built.

    In a 2009 New York Times column, “Like Water for Money,” Steven Strogatz tells the story of how he was introduced to one of the two still-operating Phillips machines (also called “MONIAC,” for Monetary National Income Analogue Computer) at Cambridge University. He gives some background on Phillips and his machine and opines that even though the machine looks like a relic, it “foreshadowed one of the most central challenges in science today: the quest to decipher and control the complex interconnected systems that pervade our lives.” While the MONIAC might seem laughable by today’s standards of computer models, it was taken very seriously at the time, with Harvard, Oxford, Cambridge, and Ford Motor Company (among other institutions) each ordering their own.

    The Reserve Bank of New Zealand houses the other still-working MONIAC machine (Bill Phillips was a New Zealander). On the website for its museum, you can read about the machine (which is now calibrated to model the New Zealand economy), and click “The Virtual MONIAC" to watch a simulation of how it works (by pointing a mouse over the various parts of the diagram). If you go through the exhibit, you will notice there are no prices (except interest rates) in the model, so there is no room for (or concern about) inflation.

    You can also view a demonstration of a Phillips machine in use with narration by Allan McRobie, the engineer who was able to figure out how to make it work again (no one else could get it right). As he demonstrates the workings of the machine, he refers to a quotation by Lionel Robbins that “Keynes and Robertson need never have quarreled if they had the Phillips machine before them” (the quarrel being about interest rates) and shows how the machine differentiates between money stock and money flow.

    A 2008 article, “The Computer Model that Once Explained the British Economy” explains how the machine, brilliant though it was, cannot properly model some of today’s economic problems. For more information, you can watch a three-part lecture on Phillips (link is to part one) by Dr. Alan Bollard, given at the Reserve Bank of New Zealand.

    Yes, this is the Phillips curve guy, but that came later.

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.
Posted by Blog Author at 07:00:00 AM in Historical Echoes

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Is this the source of the term "hydraulic Keynesianism"? Maybe so, but it doesn't seem entirely clear.

A similar machine (modelling the Ankh-Morpork economy)was a plot element in Terry Pratchett's 2007 novel, Making Money.

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