Bill Phillips approached economics with the inventiveness of an engineer. A New Zealander who had hunted crocodiles, mined gold, and worked as an electrical engineer, he turned to economics after World War II and in 1949 built an unusual demonstration in his garage: a Rube Goldberg–like apparatus of tubs and chambers through which water flowed to represent the British economy.
At the London School of Economics, he rolled out the machine to skeptical colleagues. Water moved from a central Treasury tank into chambers labelled health and education to represent government spending, then pumped back to the Treasury at rates adjusted by a lever representing taxation. The demonstration made abstract fiscal flows visible and dynamic. As Richard Lipsey later recalled, the staff who had come to humiliate an upstart were soon impressed and the LSE offered Phillips a job.
Once in academic circles, Phillips focused on macroeconomics and the recurring booms and busts known as the business cycle. Economists after the Great Depression, following John Maynard Keynes, believed governments could smooth these cycles by changing spending: cooling activity when the economy overheated and boosting it in downturns. Phillips and his peers were also concerned about inflation and its connection to unemployment. When unemployment is low, workers can push for higher wages; higher wages can push prices up, creating a wage-price spiral.
Phillips received a dataset of 100 years of UK wages and unemployment. When he graphed wage-rate growth against unemployment, he discovered a striking inverse relationship: lower unemployment tended to coincide with faster wage growth. This suggested a trade-off between unemployment and inflation — you could have lower unemployment but higher inflation, and vice versa.
The finding caught on. Economists found similar patterns elsewhere, and in 1961 Paul Samuelson and Robert Solow christened the relationship the Phillips Curve. Samuelson included it in his influential textbook, and policymakers and central bankers used the curve to think about the employment–inflation trade-off. In an era when fiat currency and modern monetary management were still relatively new, the Phillips Curve served as a practical guide for thinking about inflation.
That guidance held through the 1960s, but the economic behavior of the 1970s — when inflation and unemployment rose together in many places — forced economists to rethink the simple trade-off and revise policy frameworks. The Phillips Curve remains a foundational idea in macroeconomics, even as its interpretation has evolved.
This excerpt is from Chapter 18 of Planet Money: A Guide to the Economic Forces That Shape Your Life by Alex Mayyasi.