“Would you like fries with that?” asks the man behind the counter. If you say yes, then you will pay an extra $1.69, stay at your table an extra 2 minutes and 49 seconds, and start your car on the way out at 13:36:26 instead of 13:33:37. If you say no, you will never have spent the extra $1.69, leave at 13:33:37, and avoided a collision with a runaway ice cream truck that would be just outside of the parking lot at 13:36:48. We are talking about big life decisions here.
People spend a lot of time making big decisions. This is because they know how important changes will be on their future. In other words, the future depends strongly on changes in initial conditions. According to Eric Weisstein, “This strong dependence of outcomes on very slightly differing initial conditions is a hallmark of the mathematical behavior known as chaos” [2]. All sorts of patterns in life include this characteristic of chaos and others. Such behaviors are inseparable from daily life. Despite this, it is a very strong historical trend that groups of people have gone to extremes to moderate chaos.
Civilizations spend enormous amounts of time and resources to control the chaos around them. In the United States, the Federal Reserve works every day to moderate the natural chaotic fluctuations in the national economic environment. The economy is continuously gaining and losing in GDP, the country’s goods output, and the Fed recognizes the importance in controlling those chaotic patterns to ensure moderated growth and prosperity [3] [4]. It is observed rather promptly that the source of chaos in the economic system is consumers and their choices. As in the Lorenz attractor, a set of simple rules completely dictates the behaviour of the system. In an economy, these rules are supply and demand [5]. In fact, demand is found to be a more significant factor than supply in small economies on the scale of nations [6].
Again, supply and demand guide chaos that arises when multiple citizens follow these rules and form an economy. The Fed uses its resources to control that chaos, specifically the power to use three tools. The Federal Reserve can adjust federal interest rates to change the role banks play in an economy, they can adjust the reserve rate that banks must adhere to so that lending is controlled, and they can buy or sell treasury bonds to adjust the money supply [7]. This control that the Fed has over the economy is not total. It cannot grab chaos by the ears and ride it into submission. Instead, the institution must apply its three adjustments such that they only impact the economy indirectly.
In fact, the indirect nature of this power is key in characterizing the patterns that appear in the United States economy. Because the impact that the Fed has is only indirect, it cannot be represented mathematically with a linear function. Because you cannot directly link the cause and effect, a function such as
GDP=Rx+y+z ( 1
where GDP is the gross domestic product of an economy, R the change of interest rate, the change in reserve rate, and the amount of treasury bonds sold, will not work. Instead, the rates of change of unemployment, GDP, or other products of the chaos must be given by first or greater order differential equations such as
∂GDP∂t=Rx-y-z ( 2
The distinction is important because the mathematical difference is profound. The looser definition of GDP based on the things that contribute to it allow for chaos to happen and interesting patterns such as those seen in the Lorenz attractor to be observed.
According to Barry D. Hughes, the author of Random Walks and Random Environments Part 1: Random Environments, this type of chaos which he calls “deterministic chaos” is “now recognized as a very common feature of … evolution” [1]. The development of species and social systems depends on this regulated chaos for adaptation to the environment. A specific interest in chaos is present in evolutionary biologists who find “dynamics important in studying short-term dynamics of changes in genotype frequency, and in understanding selection and its constraints” [8]. Not only has chaos helped form who humans are through evolution, but scientists can use its mathematical principles to analyse the process that brought the species to where it is today.
It is clear through the use of chaos to drive an economy and math to control it that disorder can and has been successfully controlled on a large, societal scale. The importance of the trait to biology is that, even when unconstrained, chaos can profoundly positively impact a group of people. The study by Ferriere et. al is particularly significant because includes that “dynamical systems theory may be important because nonlinear fluctuations in some traits may sometimes be favored by [natural] selection” [8]. This means that the “loose” control that nonlinear traits involve, such as the Fed changing the reserve rate, are systematically advantageous and favored by evolution. If nothing else, that is a testament to the effectiveness civilizations have when they exercise that control over chaos.
Works Cited
- Hughes, Barry D. “Random Walks and Random Environments Part 1: Random Environments” Oxford University Press, 1995. Oxford science publications. ISBN: 9780198537885.
- Weisstein, Eric W. "Butterfly Effect." MathWorld--A Wolfram Web Resource. http://mathworld.wolfram.com/ButterflyEffect.html
- Rudebusch, Glenn D. "Federal Reserve interest rate targeting, rational expectations, and the term structure." Journal of Monetary Economics 35.2 (1995): 245-274.
- Woodford, Michael, and Carl E. Walsh. "Interest and prices: Foundations of a theory of monetary policy." (2005): 462-468.
- Lucas, Robert E. "Supply-side economics: An analytical review." Oxford economic papers (1990): 293-316.
- Croes, Robertico R. "A paradigm shift to a new strategy for small island economies: Embracing demand side economics for value enhancement and long term economic stability." Tourism Management 27.3 (2006): 453-465.
- Romer, Christina D., and David H. Romer. "Federal Reserve Information and the Behavior of Interest Rates (Digest Summary)." American Economic Review 90.3 (2000): 429-457.
- Ferriere, Regis, and Gordon A. Fox. "Chaos and evolution." Trends in ecology & evolution 10.12 (1995): 480-485.