Cause and effect: Bill Phillips, the Iran crisis and electric cars

New Zealand economist Bill Phillips (1914-1975) is today best known for his work on the relationship between wages growth (or inflation) and unemployment. This relationship – the Phillips Curve – has been highly influential on the work of many subsequent Keynesian and neoclassical economists, including Robert Solow and Paul Samuelson. It is also, as I can personally testify, one of the easier concepts for young economics students to remember and understand.

But, long before this, Phillips had been central to another important economics innovation. From 1949 onwards, when digital computers were still in their infancy, he developed an analogue or mechanical alternative for modelling a national economy. This was the MONIAC (the Monetary National Income Analogue Computer), one version of which is pictured below with its creator.

In the MONIAC, water (representing money) was pumped to the top of a sequence of transparent tanks connected by pipes, with each tank below representing an economic sector (e.g. education).  Water flows from the top tank to these different sectors could be controlled and redirected using a sequence of mechanical processes based on pre-determined or variable relationships: water (now representing taxation) could also be pumped up to the top of the model to start the downward journey yet again. Modellers could therefore use the MONIAC to understand the interaction of different economic and policy relationships within an economy: in other words, cause and effect.

In our digital world, this mechanical approach to economic modelling all sounds rather quaint (and has featured in at least one humorous novel [i], perhaps the only economic model so honoured). But the system worked well enough for around 12-14 MONIAC machines to be built and set to work modelling multiple economies, from the UK to Guatemala.

I thought of MONIAC recently when I was pondering the likely impact of the Iran crisis on the global economy.  Despite all the forecasting advances of the last seven decades, we still struggle to assess the likely future impact of a major challenge to the global economic system like the closure of the Strait of Hormuz (even one which, in retrospect, was always a considerable risk). We prefer instead to assume an essentially fixed system, as in MONIAC, where the economic components and the linkages between them remain intact and broadly understood.

A crisis, when it happens, then forces economic modellers to look (often in great haste) for evidence of new economic relationships and patterns as they try to explain what is likely to happen and why.  But in the search for explanations, we need to avoid assuming that simple new explanations are true: causation can be complicated.

One merit of the MONIAC was its transparency. Another, rather different, merit is that the structure of the MONIAC machine itself reminds us that money (the water) can flow through an economic system in many different ways. There is no single path of causation. So I would still be very careful – despite some dramatic recent gains in indicators such as electrical vehicle (EV) car registrations – about asserting that the experience of a Strait of Hormuz closure will by itself automatically herald a new golden age for renewable energy.

There are well-rehearsed “macro” arguments for and against predicting that the recent rise in hydrocarbons prices will give a major boost to future renewable energy development. Obviously, higher hydrocarbons prices, if sustained, will increase the appeal of cheaper and less easily disruptable renewable or nuclear energy supplies. But you can also argue, for example, that if higher energy prices push up inflation and thus interest rates, investment in renewables projects will get more difficult to finance. Countries may also be tempted to invest instead in traditional domestic energy sources that are dirtier but apparently better understood (e.g. coal).

There also important “micro” factors that should remind us there are other reasons for the current success of some renewables technologies.  Much has been made of the remarkable rise of EV car registrations in recent months: UK battery electric vehicle (BEV) registrations, for example, were 59% higher in April than a year before, and most of these came from China. Higher petrol prices will have encouraged the shift away from internal combustion engine (ICE) vehicles. But many other factors explain the longer-term rise of the Chinese EV car industry, which is now driving the success of EVs globally: technological improvements, reduced costs (battery costs down 90% since 2010), increased model availability government support and so on. Technology, costs, availability – these would all be factors in any economic study of the global auto industry done in the last 100 years. The risks to Chinese and global EV production and adoption (e.g. higher material input costs, individual company failures, trade tariffs and restrictions) would also have been understood by Phillips and contemporary economists back in the mid-20th century. New technology does not necessarily remove existing truths.

In his later life, Phillips retired to the University of Auckland in New Zealand. Here he taught, until shortly before his death in 1975, a course on “Chinese Communist Economics since 1949”: one wonders what size of MONIAC machine would be needed to represent this extraordinary structure! Ultimately, I think, his interest in China was well-founded: understanding the functioning of the Chinese economy is likely to remain as important to understanding the future of renewable energy as any development in the Strait of Hormuz.

[i] Terry Pratchett, Making Money, 2007.

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