MARCH NIBJ Barta: Chaos theory and the economy
Raphael Barta
We like to believe that the various sectors of the economy believe in rational ways. The “law” of supply and demand: as one side increases the other side decreases. Or, doubling the money supply while holding an asset base static will cause price inflation. Measurable stuff. Predictable.
I took courses in econometrics, the study of statistical models using data to analyze and predict economic relationships. Given enough data, and given ever-more complex mathematical equations to interpret the data, reliable forecasts could be made. But despite the increased sophistication of the models and the vast deep pools of data, reality had a funny way of not acting rationally. Enter non-linear dynamics, chaos theory, where the deterministic nature of the system does not make it predictable.
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