Bill Phillips and the MONIAC

This is the only operational MONIAC in the southern hemisphere that we're aware of. 

What Bill Phillips did was so creative, lateral, and off-the-wall. 

It's one of the first macroeconomic computers. It was built in the 1940s. 

It is a computer, it's hydro-mechanical. It's a model of the macroeconomy, so the economy as a whole. 

Bill Phillips created one of the most extraordinary economic tools that was created in the mid twentieth century. 

This machine here is going to show how water flows around the economy or how money flows around the economy.

We have this income tank down here and it's water flowing up into the machine as income. Before the income reaches households, some of it is taxed and for the government this is income. Taxes flow down here as income to the government then the government decides how much it would like to spend.

The people who saw it could scarcely believe the achievement that here was this tremendous machine that laid out so simply and clearly all of the concepts and ideas of economics. 

If the government does not spend all its revenue then it will have a surplus and this is what this box here measures. 

The income that is after taxes, this is where it reaches the household and the households have a choice to make. They have to choose between how much they'd like to save and then what they don't save they consume. 

How much a household saves will save depends on the level of interest rate in the economy. When there's only a little bit of money in the economy like there is now there is very little water in here. This means interest rates are very high.

The principal purpose of the MONIAC was as a teaching tool. 

In this investment fund here which helps determine the level of interest rates, this will also determine how much investment firms undertake. So if we add these three components here up, this is our domestic part of the economy. So we've got government spending plus consumption plus investment and this adds up to domestic expenditure so the way all this water flows around. 

It was possible, for example, for somebody like Phillips to have one operating in front of the class.

What we're going to do now is we're going to do a scenario involving the central bank. The level of GDP down here is very high so the economy is running about hot. So what we're going to do now is we're going to drain money from the investment fund. This is tightening monetary policy. 

The MONIAC  really pioneered the field of economic forecasting.

When there's less money in this investment funds, we're going to see the level drop, which is just like seeing interest rates rise. Money is now more scarce. What you can see on this chart here is the interest rate is increasing. It is increasing rapidly.

As time went on the advent of digital computers made it possible to have mathematical models that were vastly more complex than the MONIAC.

These slides here show how households and firms react to changes in the interest rate. This bottom bit here shows how much the firm's cut their investment when interest rates increase. This one up here shows how much the household stop consuming when interest rates increase. Down here we will be importing a little less because our incomes are lower. Over on this chart over here this is GDP. There hasn't been much of an effect but this is something we would expect to see. The flows go around the economy and it continues having an impact for some time. This means it takes time before monetary policy has an impact on the economy which is what we see in the real world.