Scientific Research

An Academic Publisher

The Failure of Economic Theory. Lessons from Chaos Theory

**Author(s)**Leave a comment

The crisis that was being shaken the world economy should push economists to wonder about the approach used to analyse economic phenomena. The motivations that have generated it, describing a whole of interdependencies, interacttions, are clear and convincing. But a question remains: if the situation is so clear a posterior why economists have not been able to foresee it? What is happening to economic science if it is not able to recognize an economic crisis before it “steps on it“? How is it possible that the economic science was caught off guard yet again? Besides, what is the implication for the status of economics as a science if it is not able to successfully deal with real economic problems? The aim of the paper is to show the weakness of traditional economic theory and what improvements in terms of description and foresight could be obtained applying chaos theory to the study of economic phenomena.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

M. Faggini and A. Parziale, "The Failure of Economic Theory. Lessons from Chaos Theory,"

*Modern Economy*, Vol. 3 No. 1, 2012, pp. 1-10. doi: 10.4236/me.2012.31001.

[1] | M. Allais, “The Economic Science of Today and Global Dis-equilibrium,” In: M. Baldassarri, J. McCallum and R. A. Mun-dell, Eds., Global Disequilibrium in the World Economy, Mac-millan, Basingstoke, 1992. |

[2] | B. Cohen, “The Natural Sci-ences and the Social Sciences: Some Historical and Critical Perspectives,” Boston Studies in the Philosophy of Science, Boston, 1993. |

[3] | W. S. Jevons, “The Theory of Political Economy,” London Journal, Vol. 57, No. 2, 1924, pp. 289-307. |

[4] | J. von Newman and O. Morgenstern, “Theory of Games and Economic Behavior,” Princeton University Press, Princeton, 1944. |

[5] | P. Samuelson, “Interactions between the Multiplier Ana- lysis and the Principle of Acceleration,” Re-view of Eco- nomics and Statistics, Vol. 21, No. 2, 1939, pp. 75-78. doi:10.2307/1927758 |

[6] | N. Georgescu-Roegen, “The En-tropy Law and the Economic Process,” Harvard University Press, Cambridge, 1971. |

[7] | T. Sousa and T. Domingos, “Is Neoclassical Microeconomics Formally Valid? An Approach Based on an Ana- logy with Equilibrium Thermodynamics,” Ecological Eco- nomics, Vol. 58, No. 1, 2006, pp. 160-169. doi:10.1016/j.ecolecon.2005.07.004 |

[8] | R. Frisch, “Econo-metrics in the World Today,” In: W. A. Eltis, M. F. Scott and J. N. Wolfe, Eds., Induction, Growth and Trade: Essays in Hon-our of Sir Roy Harrod, Clarendon P., London, 1970. |

[9] | R. M. Solow, “How Did Economics Get That Way and What Way Did It Get? Daedalus, Vol. 126, No. 1, 1997, pp. 39-58. |

[10] | D. Colander, “The Economics Profession, the Financial Crisis, and Method,” Journal of Economic Methodology, Vol. 17, No. 4, 2011, pp. 419-427. doi:10.1080/1350178X.2010.525039 |

[11] | H. Poincaré, “La Valeur de la Science,” Flammarion, Paris, 1905. |

[12] | A. Kir-man, “Economic Theory and the Crisis,” VOX— Re-search-Based Policy Analysis And Commentary from Leading Economists, London, 14 November 2009. |

[13] | H. Markowitz, “Portfolio Selection,” Journal of Finance, Vol. 7, No. 1, 1972, pp. 77-91. doi:10.2307/2975974 |

[14] | F. Black and M. Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, Vol. 81, No. 3, 1973, pp. 637-654. doi:10.1086/260062 |

[15] | A. Mas-Colell, M. Whinston and J. Green, “Microeconomic Theory,” Oxford University Press, Oxford, 1995. |

[16] | D. Colander, Ed., “Beyond Microfounda-tions: Post-Wal- rasian Macroeconomics,” Cambridge Univer-sity Press, New York, 1996. |

[17] | J. A. Holyst and K. Ur-banowicz, “Chaos Control in Economical Model by Time De-layed Feedback Method,” Physica A, Vol. 287, No. 3-4, 2000, pp. 587-598. doi:10.1016/S0378-4371(00)00395-2 |

[18] | A. Medio, “Teoria Non-Lineare del Ciclo Economico,” Il Mulino, Bologna, 1979. |

[19] | M. J. Stutzer, “Chaotic Dynamics and Bifurcation in a Macro Model,” Staff Report 55, Federal Reserve Bank of Minneapolis, Minneapolis, 1980. |

[20] | J. Benhabib and R. Day, “Rational Choice and Erratic Behaviour,” Review of Economic Studies, Vol. 48, No. 3, 1981, pp. 459-472. doi:10.2307/2297158 |

[21] | R. H. Day, “Irregular Growth Cy-cles,” American Economic Review, Vol. 72, No. 3, 1982, pp. 406-414. |

[22] | J. M. Grandmont, “On Endogenous Competitive Business Cycles,” Econometrica, Vol. 53, No. 5, 1985, pp. 995- 1045. doi:10.2307/1911010 |

[23] | J. Benhabib and K. Nishi-mura, “The Hopf Bifurcation and the Existence and Stability of closed orbits in Multisector Models of Optimal Economic Growth,” Journal of Economic Theory, Vol. 21, No. 3, 1979, pp. 421-444. doi:10.1016/0022-0531(79)90050-4 |

[24] | M. Boldrin and L. Montrucchio, “On the Indeterminacy of Capital Accumulation Paths,” Journal of Economic Theory, Vol. 40, No. 1, 1986, pp. 26-29. doi:10.1016/0022-0531(86)90005-0 |

[25] | R. A. Dana and P. Malgrange, “The Dynamics of a Discrete Version of a Growth Cycle Model,” In: J. P. Ancot, Ed., Analyzing the Structure of Econometric Models, Mar- tinus Nijhoff Publishers, Hague, 1984 doi:10.1007/978-94-009-6098-5_7 |

[26] | R. Deneckere and S. Pelikan, “Competitive Chaos,” Journal of Economic Theory, Vol. 30, 1986, pp. 13-25. doi:10.1016/0022-0531(86)90004-9 |

[27] | C. H. Hommes, “Chaotic Dynamics in Economics Models. Some Single Case Studies,” Wolthers-Nordhoff, Gronigen, 1991 |

[28] | V. Bala, M. Majumdar and T. Mitra, “A Note on Controlling a Chaotic Tatonnement,” Journal of Economic Behavior & Organization, Vol. 33, No. 3-4, 1998, pp. 411- 420. doi:10.1016/S0167-2681(97)00066-8 |

[29] | Z. T. Mitra, “A Sufficient Condition for Topological Chaos with an Application to a Model of Endogenous Growth,” Journal of Economic The-ory, Vol. 96, No. 1-2, 2001, pp. 133-152. doi:10.1006/jeth.2000.2738 |

[30] | J. M Grandmont, “Stabilizing Competitive Business Cycle,” Journal of Economic Theory, Vol. 40, No. 1, 1986, pp. 57-76. doi:10.1016/0022-0531(86)90007-4 |

[31] | J. M. Grandmont and G. Laroque, “Stability of Cycles and Expectations,” Journal of Economic Theory, Vol. 40, No. 1, 1986, pp. 138-151. doi:10.1016/0022-0531(86)90012-8 |

[32] | R. Farmer, “Deficits and Cycles,” Journal of Economic Theory, Vol. 40, No. 1, 1986, pp. 77-88. doi:10.1016/0022-0531(86)90008-6 |

[33] | P. Reichlin, “Equi-librium Cycles and Stabilization Policies in an Overlapping Generations Economy with Production,” Journal of Economic Theory, Vol. 40, No. 1, 1986, pp. 89-102. doi:10.1016/0022-0531(86)90009-8 |

[34] | C. Chiarella, “The Cobweb Model: Its Instability and the Onset of Chaos,” Eco-nomic Modelling, Vol. 5, No. 4, 1988, pp. 377-384. doi:10.1016/0264-9993(88)90010-7 |

[35] | T. Puu, “Chaos in Duopoly Pricing,” Chaos, Solitons & Fractals, Vol. 1, No. 6, 1991, pp. 573-581. doi:10.1016/0960-0779(91)90045-B |

[36] | E. Ott, Grebogi C. and J. A. Yorke, “Controlling Chaos,” Physical Review Letters, Vol. 64, No. 11, 1990, pp. 1196- 1199. doi:10.1103/PhysRevLett.64.1196 |

[37] | M. Faggini, “Analysis of Economic Fluctuations: A Contributions from Chaos The-ory,” In: M. Sibillo and C. Perna, Eds., Mathematical and Sta-tistical Methods for Insurance and Finance, Springer, Berlin, 2008. doi:10.1007/978-88-470-0704-8_14 |

[38] | M. Faggini, “Chaotic Systems and New Perspectives for Economics Methodology. A Review from Literature,” In: K. A. Dennard and G. Morcol, Eds., Complexity and Pol- icy Analysis: Tools and Concepts for Designing Robust Policies in Complex World, ISCE Publishing, Goodyear, 2008. |

[39] | G. Orlando, “Routes to Chaos in Mac-roeconomic Theory,” Journal of Economic Studies, Vol. 33, No. 6, 2006, pp. 437-468. doi:10.1108/01443580610710406 |

[40] | J. A. Holyst, “How to Control a Chaotic Economy,” Journal of Evolutionary Economics, Vol. 6, No. 1, 1996, pp. 31-42. doi:10.1007/BF01202371 |

[41] | L. Kaas, “Stabilizing Chaos in a Dynamic Macroeconomic Model,” Journal of Economic Be-havior and Organisation, Vol. 33, No. 3-4, 1998, pp. 313-332. doi:10.1016/S0167-2681(97)00061-9 |

[42] | M. Kopel, “Im-proving the Performance of an Economic System: Controlling Chaos,” Journal of Evolutionary Economics, Vol. 7, No. 3, 1997, pp. 269-289. doi:10.1007/s001910050044 |

[43] | D. L. Xu , Z. G. Li, S. R. Bishop and U. Galvanetto, “Estimation of Periodic-Like Mo-tions of Chaotic Evolutions Using Detected Unstable Periodic Patterns,” Pattern Recognition Letters, Vol. 23, No. 1-3, 2002, pp. 245-252. doi:10.1016/S0167-8655(01)00100-3 |

[44] | W. A. Barnett and P. Chen, “Deterministic Chaotic and Fractal Attractors as Tools for Nonparametric Dynamical Econometric Inference: With an Applications to Divisia Monetary Aggregates,” Mathematical Computational Mo- delling, Vol. 10, 1988, pp. 275-296. |

[45] | W. A. Barnett and P. Chen, “The Aggregation Theoretic Monetary Aggregates Are Chaotic and Have Strange Attractors: An Econometric Application of Mathematical of Chaos,” In: W. A. Barnett, E. Berndt and H. White, Eds., Dy-namic Econometric Modeling, Cambridge University Press, Cambridge, 1988. doi:10.1017/CBO9780511664342.012 |

[46] | W. Brock and C. Sayers, “Is the Business Cycle Characterized by Deterministic Chaos?” Journal of Monetary Economics, Vol. 22, No. 1, 1988, pp. 71-70. doi:10.1016/0304-3932(88)90170-5 |

[47] | J. B. Ramsey, C. L. Sayers and P. Rothman, “The Statistical Properties of Dimen-sion Calculations using Small Data Sets: Some Economic Ap-plications,” In: J. Benhabib, Ed., Cycles and Chaos in Eco-nomic Equilibrium, Princeton University Press, Princeton, 1991. |

[48] | G. P. DeCoster and D. W. Mitchell, “Nonlinear Monetary Dynamics,” Journal of Business & Economic Statis-tics, Vol. 9, No. 4, 1991, pp. 455-461. doi:10.2307/1391245 |

[49] | G. P. DeCoster and D. W. Mitchell, “Reply,” Journal of Business & Economic Statistics, Vol. 12, No. 1, 1994, pp. 136-137. doi:10.2307/1391931 |

[50] | P. Grassberger and I. Procaccia, “Measuring the Strangeness of Strange Attractors,” Physica D, Vol. 9, No. 1-2, 1983, pp. 189-208. doi:10.1016/0167-2789(83)90298-1 |

[51] | D. Ruelle, “Chance and Chaos,” Princeton University Press, Princeton, 1991. |

[52] | W. D. Dechert, “Chaos Theory in Economics: Methods, Models and Evidence,” Edward Elgar Publishing, Cheltenham, 1996. |

[53] | M. D. McKenzie, “Chaotic Behaviour in National Stock Market Indices. New Evidence from the Close Returns Test,” Global Finance Journal, Vol. 12, No. 1, 2001, pp. 35-53. doi:10.1016/S1044-0283(01)00024-2 |

[54] | W. A. Brock, W. D. Dechert and J. Scheinkman, “A Test for Inde-pendence Based on the Correlation Dimension,” Econometric Reviews, Vol. 15, No. 3, 1996, pp. 197-235. doi:10.1080/07474939608800353 |

[55] | B. LeBaron, “Chaos and Nonlinear Forecast Ability in Economics and Finance,” Department of Economics, University of Wisconsin, Madison, 1994. |

[56] | M. Faggini, “Visual Recurrence Analysis: An Ap-plication to Economic Time Series,” In: M. Salzano and D. Colander, Eds., Complexity Hints for Economic Policy, Springer, Berlin, 2007. doi:10.1007/978-88-470-0534-1_4 |

[57] | M. Fag-gini, “Chaos Detection in Economics. Metric versus Topologi-cal Tools,” MPRA Paper No. 30928, Munich Personal RePEc Archive, Munich, 2011. |

[58] | G. B. Mindlin, et al., “Classifica-tion of Strange Attractors by Integers,” Physical Review Letters, Vol. 64, No. 20, 1990, pp. 2350-2353. doi:10.1103/PhysRevLett.64.2350 |

[59] | G. B. Mindlin and R. Gilmore, “Topological Analysis and Synthesis on Chaotic Time Series,” Physica D, Vol. 58, No. 1-4, 1992, pp. 229-242. doi:10.1016/0167-2789(92)90111-Y |

[60] | C. G. Gilmore, “A New Test for Chaos,” Journal of Economic Behaviour Organi-sations, Vol. 22, No. 2, 1993, pp. 209-237. doi:10.1016/0167-2681(93)90064-V |

[61] | M. Mitchell, “A Complex-Systems Perspective on the ‘Computation vs Dynam-ics’ Debate in Cognitive Science,” 20th annual conference of the Cognitive Science Society, Madison, 1-4 August 1998 |

[62] | J. P. Crutchfield, “Is Anything Ever New? Consid-ering Emergence,” In: G. Cowan, D. Pines and D. Meltzer, Eds., Complexity: Metaphors, Models, and Reality. Addison- Wesley, Boston, 1994, pp. 515-537. |

[63] | J. B. Bullard and A Butler, “Nonlinearity and Chaos in Economic Models: Implications for Policy Decisions,” Economic Journal, Vol. 103, No. 419, 1993, pp. 849-867. doi:10.2307/2234705 |

[64] | A. W. Huebler and B. B. Plapp, “Nonlinear Resonances and Suppression of Chaos in the rf-Biased Josephson Junction,” Physical Review Letter, Vol. 65, No. 18, 1990, pp. 2302-2305. doi:10.1103/PhysRevLett.65.2302 |

[65] | W. A. Barnett, “Com-ment on ‘Chaotic Monetary Dynamics with Confidence’,” Journal of Macroeconomics, Vol. 28, No. 1, 2006, pp. 253-255. doi:10.1016/j.jmacro.2005.10.018 |

Copyright © 2018 by authors and Scientific Research Publishing Inc.

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.