Chaos Theory and Macroeconomics

Abstract

Chaos theory has entered the old debate between Classicals and Keynesians regarding the nature of macroeconomic fluctuations and the ability and desirability of government efforts to stabilize them. In its current form between New Classicals and New Keynesians both sides use the assumption of rational expectations to varying degrees. For the New Classicals (Lucas, 1972, 1975; Barro, 1974; Kydland and Prescott, 1982; and Long and Plosser, 1983) real business cycles arise from exogenous supply-side shocks to a basically stable economy which lead to fluctuations due to sectoral or labor market misperceptions or “time-to-build” lags in capital investment. Government stabilization policies will be ineffective if systematic and non-optimal if effective.

“A. A violent order is disorder; and B. A great disorder is an order. These Two things are one. (Pages of illustrations.) The pensive man … He sees that eagle float For which the intricate Alps are a single nest.” Wallace Stevens, 1947 “Connoisseur of Chaos”