Chaotic Economic Dynamics

Chaotic Economic Dynamics

Chaotic Economic Dynamics

Chaotic Economic Dynamics

Synopsis

The new science of chaos came about through weather analysis. Starting from the premise that economics is equally unpredictable, this original new book explores the ways that chaos theory may be used for economic analysis. The author shows that, since chaos theory sets out to demonstrate erratic and unpredictable behavior in a situation of total cause and effect, it has much to offer in understanding human society and the unpredictable nature of economics. It has always been assumed that the highly irregular behavior of economic time series was the consequence of extra-economic disturbances such as political decisions, trade unions, the weather, foreign trade, etc. Goodwin makes it clear that there are not one, but two explanations of this confusing behavior.

Excerpt

The origin of this collection of short essays was a series of seminars given in 1988 at the European University Institute in Florence, Italy. My aim has been to elaborate the central conceptual framework of the modern industrial economy. in this sense it derives from the formulation of the problem by my teacher and friend Joseph Schumpeter. Though a neoclassical economist, he perceived the essentially evolutionary nature of the industrialized nations.

By comparison with the natural sciences, economics suffers from the lack of a solid empirical foundation based on generally valid experimental data. To make up for this deficiency, an ingenious substitute has been elaborated with great subtlety and considerable success. the method consists in asking what would a rational man (now fashionably called an 'agent') do when confronted by the manifold problems of an economic nature: he is alleged to maximize his utility or his satisfactions, by minimizing his costs and maximizing his profits or his gains of whatever sort he desires. Under the banner of General Equilibrium Theory, this has been developed into an imposing analytic web of how a system of a large number of such agents would interact in a unified market mechanism. This programme, in an increasingly mathematical form, has produced impressive results, which may be considered 'mainstream' economics. Some tentative efforts at a kind of experimental economics have raised serious doubts about this 'rational' behaviour.

This analysis appeared to work well for a single moment in time, but there always remained the awkward fact that both agents and goods have a future. So while one could in principle solve simultaneously for all prices and quantities at a point of time, one really needed the impossibly difficult set of solutions also over the infinite future! Since the future had to be regarded as unknown and hence uncertain, it all needed to be

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