Hydraulic macroeconomics is an informal characterization of certain types of macroeconomic study assuming aggregate social wealth (demand or supply) as somewhat smooth, constant and homogeneous. The term was first introduced as hydraulic Keynesianism by Alan Coddington in classification of theoretical research methodologies in Keynesian economics.
Hydraulics is the science and engineering of the mechanical properties of liquids. Macroeconomics is the study of the performance and structure of an entire economy. Hydraulic macroeconomics is, essentially, a study of the economy that treats money as a form of liquid that circulates through the economic plumbing.
William Phillips, a famous economist and creator of the Phillips curve, invented the MONIAC, a hydraulic computer which simulated the British economy. This is the inspiration for the term. Even earlier, in 1891, Irving Fisher built a hydraulic machine for calculating equilibrium prices.
Initially, the phrase, “hydraulic macroeconomics”, was associated with Keynesian economic models that did not display household or firm optimization.
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- ^Phillips, A. W. (1950). “Mechanical Models in Economic Dynamics”. Economica. New Series. 17 (67): 283–305. doi:10.2307/2549721. JSTOR 2549721.
- ^Barr, Nicholas. “The Phillips Machine”. LSE Quarterly. 2 (4): 305–337.
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- ^Brainard, W. C.; Scarf, H. E. (2005). “How to Compute Equilibrium Prices in 1891”. American Journal of Economics and Sociology. 64 (1): 57–83. CiteSeerX 10.1.1.180.2592. doi:10.1111/j.1536-7150.2005.00349.x.
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Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder TBIL.co STATX Fund.