Heard this segment yesterday on NPR’s Marketplace about how metaphors shape our view of the economy and was astounded to learn of the existence of the Phillips Machine, a hydraulic machine designed by New Zealand economist Bill Phillips in the 1940s that models economic activity by pumping water through a series of chambers and pipes. Economics is, of course, drenched in metaphors of money as obeying the laws of fluid dynamics. Liquidity is the ability to quickly convert assets into cash. A firm is solvent when it has plenty of liquid assets. Cash flow occurs at the confluence of revenue streams. A company floats shares in an initial public offering. Dark pools are platforms that allow share trading without revealing prices, even to the participants, until the trades are completed. Banks get bailed out when they are too big to fail. (Consumers don’t, alas.) Governments prime the pump by pouring money into the economy (er, except in the euro zone…). When you need money, you can tap a friend, sponge off relatives, dip into savings or—if you’re prepared to be unscrupulous—skim a little something off the top. When growth is buoyant, a rising tide lifts all boats. When options are underwater, though, checking your investment portfolio feels like snorkeling into a shipwreck.

Amazing to learn how Phillips literally embodied these metaphors in his machine. This description from the Wikepedia entry gives an idea how it works:

The machine “consisted of a series of transparent plastic tanks and pipes which were fastened to a wooden board. Each tank represented some aspect of the UK national economy and the flow of money around the economy was illustrated by coloured water. At the top of the board was a large tank called the treasury. Water (representing money) flowed from the treasury to other tanks representing the various ways in which a country could spend its money. For example, there were tanks for health and education. To increase spending on health care a tap could be opened to drain water from the treasury to the tank which represented health spending. Water then ran further down the model to other tanks, representing other interactions in the economy. Water could be pumped back to the treasury from some of the tanks to represent taxation. Changes in tax rates were modeled by increasing or decreasing pumping speeds.”

Here is a link to a demo of the Phillips Machine in action, by Allan McRobie of Cambridge University.