Source : http://www.fdavidpeat.com/bibliography/essays/chaos.htm

Economics

Economics is currently under the scrutiny of experts in the field of non-linear dynamics and a variety of analyses of short and long term stock market trends have been made. There are deep questions to be answered about the very definition of economic systems and about the meaning of their variables, such as value. Chaos theory and non-linear dynamics have been added to those voices that are questioning the whole basis of economic theory.

The concept of money, for example, is highly complex and analysts are questioning the idea of economic equilibrium and of an intrinsically stable market. As Richard Day of the University of Southern California puts it: "An economic world in which money enters in a nontrivial way can be highly complex in its behavior in theory, just as in reality". Day himself has shown that even the simple models, in which expenditure and income lag behind each other, can give rise to chaotic fluctuations.

The Systems Dynamics Group at MIT have a variety of models in which a human economist or policy maker can "drive" the computer model. In one of these, a seasonal variation in the demand for beer is passed on to the main supplier and its distributors. When a human operator attempts to smooth out fluctuations the system tends to move towards ever more uncontrolled oscillations. (In essence a non-linear iteration is dominating the system.)

Dr. Ping Chen of Univ. Texas at Austin has made an extensive analysis of monetary data from the Federal Reserve and argues that economics contains inherently chaotic behavior. Even if external shocks could be totally eliminated the economy will not run smoothly, for wild fluctuations are inherent in its very dynamics and recessions and downturns are often independent of external shocks. One analyst has suggested that the 10 October 1987 crash arouse out of the non-linear dynamics of the market and not through a combination of external causes.

R.H. Day has made an analysis of a variety of situations, such as investment in competing new technologies which, over time, shows a shift from steady expansion and economic health into one of financial crisis. Day's agricultural model. in which a variety of factors such as market, prices, supply, investment in new buildings etc., are included, shows an initial set-up period, followed by a five year cycle. In time the system's internal dynamics change again and move into a period of irregular oscillations. During the former period the economics of the situation are relatively stable but in the latter period they are highly sensitive to any new trend.

In a variety of analyses of different industries and technologies, quite distinct regions of behavior have been discovered, some of these are quite stable, other chaotic, some oscillate violently, or are extremely sensitive to an external trend or perturbation.