Bill Phillips was an unlikely economist. A New Zealander who had worked everything from crocodile hunting to gold mining and electrical engineering, he arrived in postwar London and turned to economics with an engineer’s curiosity.
In 1949 Phillips built a mechanical model in his garage to explore how an economy works. It was a Rube Goldberg-style contraption of tanks, pipes and pumps. Water sloshed between reservoirs that stood for the Treasury, health, education and other government spending. Pulling a lever changed a tax rate and altered the speed at which water was returned to the Treasury, so that the device could demonstrate the effects of fiscal choices in a vivid, physical way.
He hauled the model to the London School of Economics where skeptical faculty gathered to see the spectacle. According to his friend Richard Lipsey, Phillips’s demonstration and plainspoken explanation won over the room. The model helped him land a position at LSE and join the debates about how to manage macroeconomic ups and downs.
The big question of the era was how to smooth the business cycle. Economies swing through expansions and contractions, and after the Great Depression many economists, following John Maynard Keynes, argued that government spending could moderate those swings: cut back when the economy overheats and boost spending when it slumps.
Phillips was also interested in inflation. A colleague pointed him to a century of U.K. data on wages and unemployment. When Phillips plotted wage changes against unemployment, he found a clear inverse relationship: periods of low unemployment tended to coincide with faster wage growth, which in turn fed price pressures. He presented the curve at a Monday meeting and the pattern made a striking impression.
Others found similar patterns in other countries. In 1961 Paul Samuelson and Robert Solow popularized the relationship as the Phillips Curve, and it soon entered textbooks and central-bank thinking as a way to balance inflation and employment.
The curve arrived at a moment when monetary regimes were shifting. The gold standard had constrained money before the 1930s; afterward, fiat money and active central banking became the norm. For a time, the Phillips Curve offered a practical framework for thinking about inflation. But by the 1970s economies behaved in ways the simple curve could not explain, and economists moved to models that incorporated expectations and other dynamics. That later evolution is covered in the next chapter.
This excerpt is from Chapter 18 of Planet Money: A Guide to the Economic Forces That Shape Your Life by Alex Mayyasi.