Just for you newsletter readers: a short excerpt from our book Planet Money: A Guide to the Economic Forces That Shape Your Life, by Alex Mayyasi.
Bill Phillips — best known for the “Phillips Curve,” still central to economic debate — used a remarkably imaginative method to study the economy. Born in New Zealand, Phillips worked odd jobs from crocodile hunting to gold mining and electrical engineering before studying economics in postwar London.
In 1949 he built a mechanical model in his garage: a Rube Goldberg–style contraption where water flowed between tanks and chambers to represent the British economy. One tank stood for the Treasury; others represented health, education and similar government expenditures. Pulling a lever adjusted a taxation rate and changed how quickly water was pumped back to the Treasury. He demonstrated it at the London School of Economics, where skeptical faculty came to see the spectacle. As his friend Richard Lipsey recalls, Phillips’s model and explanation quieted the critics — and earned him a job at LSE.
At LSE Phillips joined debates about macroeconomics: how to smooth the chaotic booms and busts of economic history. Economies often swing through expansions and contractions — the business cycle — with panics and crashes punctuating long growth stretches. After the Great Depression, John Maynard Keynes argued governments could moderate these swings by varying spending: reduce spending to cool an overheated economy; increase spending to revive a slumping one.
Phillips and others also focused on inflation. When unemployment is low, workers can demand higher wages, which can push prices up in a wage-price spiral. A colleague pointed Phillips to a dataset: a century of UK wage and unemployment figures. Phillips plotted the data and, in a Monday meeting, presented a striking curve showing an inverse relationship between unemployment and wage growth — lower unemployment accompanying higher wage growth, and thus more inflationary pressure. The curve suggested a trade-off policymakers could face between inflation and employment.
Phillips’s result spread. Economists found similar patterns in other countries, including the U.S. In 1961, Paul Samuelson and Robert Solow popularized the finding as the Phillips Curve, and Samuelson included it in his textbook. Central bankers began to use it as a guide: pick a point on the curve and aim for that balance of inflation and employment.
At the time, many central bankers were still adapting to modern monetary systems. Before the 1930s, the gold standard had constrained money; afterward, fiat currency — money not backed by a physical commodity — became the norm, with governments and central banks responsible for managing the money supply. The Phillips Curve offered a practical tool for thinking about inflation management until the 1970s, when economies behaved differently and economists had to revise their playbook. That later story — including the curve’s limits and the emergence of expectations-driven models of inflation — is another chapter.
This excerpt is from Chapter 18 of Planet Money: A Guide to the Economic Forces That Shape Your Life.