[OPE] "The computer model that once explained the British economy"?

glevy@pratt.edu

To see this story with its related links on the guardian.co.uk site, go to
http://www.guardian.co.uk/business/2008/may/08/bankofenglandgovernor.economics

The computer model that once explained the British economy 
As the Bank of England's MPC meets today, it might glance back to 1949

Larry Elliott, economics editor 
Thursday May 8 2008 
The
Guardian 

It is 2 metres (7ft) tall, 1.5 metres wide and
a metre deep. It runs on water and most of the time it is screened off at
the back of a lecture room in Cambridge. But when the nine members of the
Bank of England's monetary policy committee announce their latest decision
on interest rates today they will owe a debt of gratitude to the computer
built in a garage in south Croydon by Bill Phillips - an engineer turned
economist from New Zealand - almost 60 years ago. 

A sensation
when it was unveiled at the London School of Economics in 1949, the
Phillips machine used hydraulics to model the workings of the British
economy but now looks, at first glance, like the brainchild of a nutty
professor. Where the Bank's team of in-house economists are equipped with
state-of- the-art digital computers, the profession's first stab at
modelling was very much a do-it-yourself affair with a whiff of the Heath
Robinson about it. 

The prototype was an odd assortment of
tanks, pipes, sluices and valves, with water pumped around the machine by
a motor cannibalised from the windscreen wiper of a Lancaster bomber. Bits
of filed-down Perspex and fishing line were used to channel the coloured
dyes that mimicked the flow of income round the economy into consumer
spending, taxes, investment and exports. Phillips and Walter Newlyn, who
helped piece the machine together at the end of the 1940s, experimented
with treacle and methylated spirits before deciding that coloured water
was the best way of displaying the way money circulates around the
economy. 

Phillips was a far cry from today's identikit
economists, with their mathematical training and obsessions with abstruse
theory. He was born on a farm in New Zealand in 1914 and spent much of the
second world war in a Japanese prisoner of war camp after being captured
while trying to turn a wrecked bus into a boat to sail to Australia. While
imprisoned, Phillips risked death by stealing components from the camp
commandant for a makeshift radio and built an immersion heater that was
capable of providing 2,000 PoWs with a cup of tea before bed. The Japanese
never worked out why the lights dimmed every night at 10pm. 

By
today's standards, the Phillips machine was limited. It made no provision
for inflation and, with capital controls in force, had no need to take
account of the curse of the modern UK economy - the wild swings in the
credit cycle. Professor Brian Henry, a visiting fellow at the National
Institute for Economic and Social Research, said: "It was a child of
its time. It looked at how the economy could be stabilised when people
were worried about the stabilisation of aggregate demand. That is the way
things were in the 1950s. 

"Things are different now.
There is a different financial system and a completely different global
economy. But Phillips was a brilliant guy. He came up with interesting
ways of providing practical advice on policy." 

Even so,
Henry says the machine is far more than a museum piece. Today the Bank of
England's models are supposed to show how shocks affect the economy and
the time it takes for a change in policy to have an effect, precisely the
sort of problems that the Phillips machine helped identify. Even with the
most up-to-date computers, the Bank is still finding it hard to come up
with the right answers. 

Indeed, one early demonstration of the
machine displayed the difficulties that can arise when monetary and fiscal
policy are not synchronised. Phillips asked one of his students to be
chancellor of the exchequer and control taxes and spending; the other to
be governor of the Bank and control interest rates. Predictably, the
policies were uncoordinated and the upshot was that water overflowed on to
the floor. 

Out of fashion 

By the mid-1950s, the
Phillips machine was all the rage and after struggling to get a pass in
his original subject, sociology, Phillips eventually became a professor of
economics at the LSE after demonstrating a relationship between the rate
of unemployment and wage inflation. But as the Phillips curve fell out of
fashion after the monetarist backlash of the 1970s, so the machines were
mothballed and the one housed in the department of applied economics at
Cambridge is the only working model left in the country. It took a
lecturer from the department of engineering, Allan McRobie, to get it up
and running again; no economist could work out quite how Phillips had
pieced the original machine together. 

McRobie was given a
grant from Nesta - the National Endowment for Science, Technology and the
Arts - and spent a summer on the restoration project. The only difference
with the original is that McRobie has dispensed with the cochineal because
it would stain the Perspex. "Everything was in the wrong place. It
had been here since the 1950s but everything was connected wrong. I had to
work out what he was trying to do. Economics is run by people who didn't
understand it." 

Copyright Guardian Newspapers Limited
2008 

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