MONIAC: how was the economy explained with water pipes?

To many people the "circular flow of money" diagram in an economics textbook looks like dry arrows. In 1949 a student at the London School of Economics turned these arrows into real pipes, and money into flowing water. The result was a machine that let you see the economy with your own eyes.

Key points

1. Author and year. According to the record in the collection of the London Science Museum (Science Museum Group), this analogue computer was developed in 1949 at the London School of Economics (LSE) by Bill Phillips, and it became known as MONIAC. The Reserve Bank of New Zealand factsheet describes Phillips as a New Zealand economist.
2. What the name means. According to the Reserve Bank, MONIAC is an abbreviation of "Monetary National Income Analogue Computer". The calculation was performed not with gear wheels but with flowing water.
3. How it worked. According to a 2021 article by economists from Istanbul University, the water circulating in the machine represented the flow of money, and its movement made it possible to observe the behaviour of the household, firm, government, export and import sectors. The authors note that the machine's working principle reflects the assumptions of Keynes and the classical school. In this way one could watch with one's own eyes how a change in one sector reached the other sectors through the water.
4. The first demonstration. According to the Centre for Computing History, MONIAC was shown to an audience at the LSE in November 1949. Smithsonian magazine notes that the machine's main value lay not in complex calculation but in making the result visible.
5. Where it can be seen today. One example is kept in the collection of the London Science Museum. According to the Reserve Bank, the example in its museum is the first production example; it was originally set up for the British economy and is the only MONIAC known to be in working order in the southern hemisphere. The University of Cambridge also has a Phillips machine: it was restored by Allan McRobie, a scientist of the engineering faculty, who demonstrated it to students (page of the Cambridge Faculty of Economics).
6. From the machine to a famous curve. Phillips entered the history of economics with one more piece of work: in 1958 he published an article in the journal Economica on the relationship between unemployment and the change in wages in the United Kingdom in 1861–1957 (EconPapers). This relationship was later called the "Phillips curve".
7. Today's successors. The idea behind MONIAC, that is, modelling the economy as interconnected flows, continues today in computer macroeconomic models. The difference is that the "pipes" and "tanks" are now written as equations.

Then and now

Example: where does the water flow in the "Oqtepa" economy?

The model below was compiled by the author and is greatly simplified; the figures are hypothetical (billion soum). It is not the exact scheme of MONIAC but explains the idea of "leakages" and "injections".

In a hypothetical economy called "Oqtepa", the income flow in one period equals 100. Of this, 20% "leaks" into the government tank as tax, and 10% of after-tax income into the savings tank; the rest returns to consumption. Government spending is 20 and investment 8: this is the water "injected" into the system.

In equilibrium the water "injected" equals the water "leaked". When government spending rose by 5, income grew by about 17.86, that is, 5 × 1 ÷ (0.2 + 0.1 × 0.8) ≈ 5 × 3.57. This is the multiplier effect: the additional water circulates through the system several times and then leaves through taxes and savings. MONIAC showed students exactly this, without formulas.

Link with the previous period: in 1936 Keynes had set out the role of government spending and demand as a theory; MONIAC turned these ideas into a visible model. At the next stage, behavioural economics showed that people do not always act as predictably as a "pipe" in a model.