Browse the webpage of the University of Cambridge and you might stumble upon a video demonstrating the MONIAC. This two-meter tall, rather homemade-looking assemblage of tanks and tubes of colored water could be the work of Rube Goldberg or Jean Tinguely. Amusing but baffling. In fact, it is a computer, the Monetary National Income Analogue Computer, created in the late 1940s by New Zealand economist Bill Phillips to illustrate the dynamics of the UK economy.
Phillips was something of a cross between Crocodile Dundee and MacGyver. In his youth, he hunted alligators in Australia and as a prisoner of war in Indonesia during WWII, he secretly built a miniaturized radio from scratch. After the war he studied at the London School of Economics, where he developed the MONIAC and made several other important contributions to economic science.
While fun to watch, the MONIAC is of course eons away from modern computerized econometric models. Nevertheless we can learn some very useful lessons from it. The water running through the MONIAC’s circuits represents money. If the tubes are clogged, the water cannot flow freely even if more water is added to the tanks. At some point, however, if lots and lots of water is added to the tanks, enough pressure can be created to unclog blocked circuits. But then, if the excess water isn’t removed from the tanks, the pressure it creates can lead to major damage to the whole system.
Sound familiar? Today, money flows worldwide remain subdued, but money stocks have surged in some countries, notably in the US, in an effort to unblock frozen credit markets. Once these channels start to work again, the excess liquidity needs to be removed quickly in order to avoid a flood of inflation.
The MONIAC’s creator is even better known for the Phillips curve, which depicts the negative relationship between unemployment and inflation that he observed in postwar UK. In the 1960s, this relationship was often used by governments as a kind of recipe. Too much unemployment? Just increase inflation. But in the late 1960s US economists Milton Freedman and Edmund Phelps argued that the Phillips curve was fundamentally flawed. And the 1970s proved them right, when many countries across the globe faced both high unemployment and high inflation, the miserable condition we now call “stagflation.”
Interestingly, the Philips curve has enjoyed a bit of a revival lately, though often without citing its origin explicitly. When you hear a statement like, “Inflation isn’t an issue because capacity utilization is low and unemployment is high and rising,” that is recycled Phillips. Capacity utilizations were also low and unemployment high and rising in the 1970s. Nevertheless by the early 1980s, double-digit inflation rates plagued the US and many other countries.
The reemergence of the long-dormant Phillips-curve argument shows that economists are always ready to serve over-aged wine in new-age bottles, or, to use the MONIAC’s imagery, old water in new tubes.
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