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If you asked them, most New Zealanders could probably tell you who Ernest Rutherford was and why he appears on our $100 note.

But Bill Phillips? Except among economists, Phillips appears to be virtually unknown. Yet arguably he is just as deserving of a place on our currency, because his work is central to the way the Reserve Bank, and its international counterparts, understand their task of ensuring it keeps its value.

Deep in the mathematical innards of the bank's model of the economy is a "Phillips curve", embodying an insight of enduring relevance about the relationship between economic activity and inflation.

Phillips described it as a wet weekend's bit of work. But next week about 500 of the world's top economists will gather in Wellington for a conference to mark the 50th anniversary of the seminal paper he wrote outlining the curve, which is one of the most cited in economic literature.

Reserve Bank Governor Alan Bollard is among those who believe Phillips deserves to be better known in his native land.

Bollard is something of a Phillips scholar. He was a graduate student at Auckland University when Phillips taught there.

He describes a man who was intrepid and ingenious; unassuming but a truly independent thinker.

"He's an unsung hero and undoubtedly a genius."

Bill Phillips was born in 1914. He grew up on a dairy farm in the foothills of the Ruahines near Dannevirke.

As with many of his generation, the Great Depression cut short his schooling. He left school at 15 and became an apprentice electrician. After working on the Waikaremoana power scheme, he left, aged 20, for Australia on what we would now call his OE. In the the 1930s it was too rare to need a label.

"It was a very adventurous OE," Bollard remarks.

In Australia, he moved around the outback picking up jobs in various places, including running a movie theatre, and hunting crocodiles. He then took a ship bound for Shanghai, but the Japanese invaded China and it was diverted to Japan.

In Hiroshima he was arrested for taking photographs. "They let him out but later as he went around [Japanese-occupied] Manchuria he was dogged for much of the way by Japanese, who were highlysuspicious of foreigners with cameras."

Phillips made his way across Stalin's Russia - where casual work proved hard to find, what with an abundance of political prisoners - Poland and Nazi Germany, reaching Britain in 1937.

There he completed his training as an electrical engineer, and when war broke out he joined the Royal Air Force as an engineer, attaining the rank of flight lieutenant.

He was sent to Singapore and was on the last civilian ship out before it fell.

The ship came under under severe attack, and was strafed and bombed. Phillips was later decorated for his part in that action.

He made it to Java and was on its south coast with some mates trying to improvise a craft to get them to Australia when caught by the Japanese. He spent the next three years in a prisoner of war camp.

The privations and dangers of that period are graphically described in Laurens van der Post's book The Night of the New Moon, and the movie Merry Christmas, Mr Lawrence.

Phillips became very unwell due to malnutrition, and never fully recovered.

According to Bollard, he was part of a group which broke into the commandant's office and stole parts from which he built two clandestine radios - an offence which risked beheading.

One of the radios was built into the concrete floor of a laundry, and the other into a clog. On one of them, he heard news of the bomb dropped on Hiroshima.

Phillips returned to Britain on a New Zealand forces scholarship to read sociology at the London School of Economics (LSE). But it was the economics courses he took as part of that degree that excited his interest.

While still a student, he made his reputation in academic circles by inventing a machine, a hydraulic computer, to model the workings of the British economy.

"Lionel Robbins, who was the director of the LSE, thought he was a bit crackers," says Bollard, "but was insightful enough to team him up with James Meade who was another eccentric and a future Nobel-winning economist."

Meade persuaded the LSE to give Phillips a small amount of money to build a hydraulic model of the economy, with coloured water representing the flow of money. He did that in 1948 and the following year presented it to an initially sceptical audience containing some of the most eminent economists of the day.

Their jaws dropped, not only at the ingenuity of the machine but the sophistication of the economic model it embodied.

"It has got all the sectors of a modern economy in a way that was very insightful for the time. For example you can have a fixed exchange rate - which was all they had at the time - but you can also have a floating rate, which hadn't really been invented," Bollard says.

"It is a general equilibrium model so it tied everything together. You can change one part of it and with all the floats, cogs, pulleys and bits of rope you will move all the other parts of it at the same time."

The machine could therefore be used to run experiments: if you changed interest rates or taxes, for example, it could show not only how the economy would move from one state to another, but everything that happened in between.

"It is based on a nine-equation model. At the time I don't think anyone could have solved a nine-equation model except Phillips," says Bollard.

But compared with the electronic computers to come, it was cumbersome. If you wanted to try out a different curve for some parameter you had to cut it into a piece of perspex with a hacksaw.

"I think he could see pretty soon it was a white elephant in a computational sense."

Although electronic computing was still in its infancy, Phillips had a friend who worked at the National Physical Laboratories where only the second electronic computer in Britain (and one of the first in the world) had been built.

"During the weekends - I'm not sure how authorised this was - they managed to put his model on this machine and solve it."

Phillips' rise through the academic ranks was meteoric. By 1958 he was a full professor at the LSE, and built increasingly complex mathematical models of the economy to study how monetary or fiscal policy could be used to stabilise a cycle.

Given that the British economy at the time was in a mess, this was not just an academic exercise.

"He was thinking about this as an engineer, about how you could countershock it," Bollard explains.

"In a famous paper in 1957, he showed how you could reduce a nasty cycle to a much more pleasant one by hitting it at the right time with, say, monetary policy. But it was extremely intricate how you did it, however.

"You could end up making it worse, not better. You had to get the time delays all right."


Rules Phillips devised at the time were quite similar to those the Reserve Bank uses today.

That, says Bollard, was one of his "big contributions."

At this point, someone at the LSE pointed out to him an interesting data set.

"They had 100 years of data on unemployment, which he took as a sort of proxy for how the economy was doing - and wages and wage inflation, which is a proxy for prices.

"Then he did what he called a wet weekend's bit of work. By cutting up the data into sub-periods he was able to show quite a robust relationship between unemployment and the rate of change in wages."

This was the celebrated Phillips curve and it was very topical.

"It was a time when inflation was a problem but there was a lot of argument between those who believed you had to get wages and incomes up, and those who believed you had to keep the value of the pound sterling where it was and not let it get inflated away.

"This piece of work got used - and misused - as the first serious, robust evidence of a relationship between the two."

Phillips was quite unprepared for the amount of attention it got. Politicians seized on his work as evidence they had a menu of options available to them: running a tight economy and keeping prices down and the pound up, for example; or running a loose economy with higher growth.

"Indeed [Chancellor of the Exchequer] James Callaghan in a mid-1960s Budget cited the Phillips curve to justify what he was doing. That was never what Phillips intended."

The notion that there is a stable trade-off between inflation and unemployment came under increasing attack academically - from the likes of Milton Friedman and Edmund Phelps - and in the real world as it was discovered you couldn't buy more jobs by tolerating more inflation. At least not in the long run.

Employees came to grasp that inflation would eat away the benefits of wage rises.

"It's a short-term relationship," notes Bollard. "In the long run you have got a much flatter curve that doesn't give you those options. If you are running a central bank, for example, you don't have the option of saying: 'Shall we do growth or price stability?"'

What was missing was a term about inflation expectations. Phelps' 2006 Nobel prize recognised his role in formulating an expectations-augmented Phillips curve.

From Phillips' own early work, it is clear that he would have agreed, says Bollard, and would never have interpreted this piece of work in the way some others did.

"And indeed we can surmise that he was probably uncomfortable for it to be called the Phillips curve because he was a very quiet, unassertive guy. He didn't seek attention and wouldn't have wanted his reputation to rest on this."

But surely the central idea that there is a relationship between the amount of spare capacity in an economy and the risk of inflation holds good?

Absolutely, says Bollard. "It is there in our model, and in pretty much every very big macro model of that sort around the world there is a Phillips curve relationship."

By the late 1960s, Phillips' attention was shifting from the esoteric realms of econometrics to the workings of the Chinese economy. He had learned Mandarin in the POW camp.

Unimpressed by the student invasion of the LSE in 1967, he moved first to the Australian National University in Canberra and later, his health failing, to Auckland. He died in 1975.

Although he did most of his work outside New Zealand, he had a unique, Kiwi "can-do" attitude, says Bollard.

"He never said, 'Oh well, these are mighty Cambridge economists, who am I to question them?'. He just quietly said: 'I think I can do it better', and then did it. So he is an intellectual hero. We don't make very much of our intellectual heroes."

One of the organisers of next week's conference, Treasury economist Grant Scobie, says "every economist on the planet - and a few you would regard as off the planet" know of Phillips. But few, he reckons, would know he was a New Zealander.

The conference has attracted 12 keynote speakers, all of whom are internationally renowned. It is the the largest of its kind to be held in Australasia, with around 260 papers expected to be presented.

From July 7, the Reserve Bank Museum, in association with the New Zealand Portrait Gallery, will feature an exhibition on Bill Phillips titled "Man, Money and Machine". The museum is open to the public and free of charge.
Reserve Bank Governor Dr Alan Bollard will also give a free public lecture about Bill Phillips at the University of Auckland Business School on July 14 at 6.30pm, and in Wellington at the New Zealand National Library on July 16 at 5.30pm. Registrations are necessary at www.rbnz.govt.nz.