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From Mandelbrot to Chaos in Economic Theory

PHILIPMIROWSKI Universityof Notre Dame Notre Dame, Indiana

in the history of ideasis goodforthe scientist's soul. [49, 21] An interest

I. Can Economic Theorists Admit That History Matters? between older andemergentnotions of scientific We are living in the midst of a profoundrupture The 51]. very meanings of order and chaos, the deterministicand explanation[67; 68; 24; 25; in this decade, and it is fair to presumethat things will the stochastic, are being reconceptualized do not want to be left in the lurch, and never be the same. Some economists, understandably, have turnedtheirprodigiouseffortsto assimilationof some of the new doctrinesand mathematical techniques. But, so far, what this movementlacks is historicalperspective.While it is easy to be one of the most significant swept up in the enthusiasmof the momentfor what is unquestionably intellectualinnovationsof the century,that still does not absolvethe economistfrom asking some formalismsbe wellset of ideas or mathematical very basic questions:Why should this particular thatwill necessarilyimprove suited to economic discourse?What is it aboutthis new mathematics new techniques?How will they change the economics? What accounts for this rushto appropriate of numerous is done? the economics surveyarticlesthese questionshave Despite appearance way not yet been adequatelyaddressed[5; 11; 33]. historicalratherthan narrowly The reason these questionslanguishis thatthey are inherently in the histories technical. Since most economists cannotbe presumedto have a firmbackground cannotbe providedin the space of a journal of physics or of economics, and such a background in this section about these historieswill not be documented most of the statements made article, here, althoughthe readeris directedto some of the author'swritings[56; 57; 58; 61; 62] for the evidence. All that can be accomplishedhere is to set the stage for the narrativesin corroborating the subsequentsections of this paper, which will documentthe historicalrelationship(or, more to work in economics and the later work the point, the lack thereof) between Benoit Mandelbrot's of such authorsas J. Grandmont,R. Day, J. Benhabib,W. Brock, J. Scheinkman,W. Barnett, P. Chen and others in attemptingto import the insights of chaos theory into economics. The purpose of this narrativeis to illustratethe major thesis of this paper, namely, that economists
*The firstdraftof this paperwas writtenwith the help of a grantfrom the NationalEndowmentfor the Humanities. The authoris extremely grateful to William Barnett, William Brock and Ping Chen for supplyingunpublishedworking for spendingsome time answeringwhatmusthave seemed to him to be very naive quespapers, and to Benoit Mandelbrot tions. I have been very fortunateto have received extensive commentson this paperfrom RandallBausor, John Burkett, Claude d'Aspremont, Roy Weintraub,Hal Varian,anonymousrefereesand Bruce McCulloch.


neoclassical economics was blocked from following physics into the realm of a serious formal dynamics. 59. . imitationof physics was thoughtto rendereconomic discourse intrinsically "scientific". was conserved in the can be directly traced to a persistent tergiversation economic system [58. This progressiveabandonment explanation felicitously by Ilya Prigogine [67.whereasneoclassicaleconomics did not of the ideal of deterministic has been summarized [66].In particular. favoredmode of conceptualizationof dynamics in neoclassicaltheory [75] and (b) there is absolutelyno agreementupon of Hamiltoniansdue to the problemsmentionedin [58.has a long history of imitation of the physical sciences.physics. to incorporatestochasticideas into physicalexplanations.and neoclassical theory was directlycopied from mid-19thcenturyenergy physics [58. at the latter thatthe secondlawshould be reconciled withdynamics conception but it is clear that (a) they are not the 1. The purposeof that or "utility"to a field of potentialenergy.This inabilityto emulate the core of the ideal of deterministicexplanationtarnishedthe entireprogramof imitatingphysics. Mathematicaleconomics is essentially co-extensive with the school of neoclassicaleconomictheory. claiming destroys of the universe. 62. Secondly.physics increasinglybegan centuryorientation. the favored tactic of resort to Liapunov techniques to discuss dynamics have never been plausibly linked to the core neoclassical tenet of optimizing behavior[6]. Such disputesover the meaningof scientificactivity also compromised the claims of neoclassical theory to have attained"scientific"status. 60]. the absence of a legitimate dynamics also compromisedthe ideal of a scientific empiricism [57. What could it mean to attemptto fit neoclassicalrelationsto time series of neoclassicalequilibrium evidence when the fundamentaldeterminants displayedno necessary from one moment to the next? most firstand second-generation Indeed. This weakness over what. stability prominent were to to such as neoclassicals hostile attempts import techniques least-squaresestimationinto economics. and the earliest efforts in this area were pioneeredby individualsskeptical of neoclassical theory [59. 62]. 60]. there was the problem that physics continuedto evolve rapidly after the mid-19th century.'and insteadretreatedinto the spurious pseudo-dynamicsof ceteris paribus conditions. some believed that energy was the intermediate reductionof the social to physical law from psychic energy down to mechanicalmotion. chap. Without an analagousconservationprinciple. As a parenthetical the properinterpretations remark. 61]. 64]. 7. was transferof metaphor. 5. The intense attractionwhich the chaos literatureexerts upon modem mathematicaleconomics can be readily explained by the history of that discipline. chaps. and more specifically its neoclassical incarnation.290 Philip Mirowski for theirdisciplinewith sufficient have not thoughtthroughthe implicationsof the chaos literature depth and rigor. constrainedoptimizationover a conservativevector field was thoughtto embody the deterministicideal of all scientificexplanationprevalentin that term which allowed the era. 187]: In the nineteenth therewas a profusion of controversy between"energeticists" and century. Hence mathematicaleconomics. at another level. chap. precisely. whereas the neoclassical researchprogramtended to remainmired in its original 19th fromJamesClerkMaxwellonwards. the former the secondlaw [of thermodynamics] the mechanical "atomists". including the formal structureof Hamiltonians. was nowhere as successful at this endeavoras its exemplar. Third. because they are not yet readyto admitfreely thathistorymattersat all levels of discourse.which equated "preferences" multi-levelled:at the grossest level. What is more importantfor our present concerns is the problemswhich such imitationhas thrownup over the past century. First. while neoclassical economics attemptedto partakeof the ideal of deterministicexplanation. One may occasionally find an economist working with Hamiltonians. at yet a third level.

Now. these stochastic"shocks" had little or no theoreticaljustification. afterwards. it seems there is a remedy for the palpable failure of a half-centuryof econometricendeavor. Moreover.Hence we observe the curious fact that economists have conceived of an enthusiasmfor the chaos literaturea decade or more after this literaturemay be said to have its roots in economics. it is true that neoclassical economics finally admittedsome aspects of stochastic concepts into its ambit with the rise of "econometrics"(and somewhatfurtherwith the "rational expectations hypothesis") [57. modification Now.he went on to become famouselsewhere.takesthesubject of genuine history[71. The allureof this developmentfor neoclassicaleconomists is readily it seems to outsiders that there is now a "technical"solutionto many of the most irriapparent: and endemic problems of neoclassical theory over the last century. with some few exceptions [7. of the structure of dynamics. chaos theory looks like it just might be the salvationof the neoclassicalresearchprogram. unlike the parallel not part and parcel of a fundamentalreconceptualization events in physics.Here again it seems thatthe previouslack of a substantive dynamicsmay be repaired with only a little more so saying. 81-118] writes as though Mandelbrot'seconomic ideas had a great impact upon the profession. since it involves furtherdirect imitationof theoriesgeneratedwithin the physics community. assumptions" a far-reaching it involves The"price" is notsmallbecause exactlycannowbe seenmoreclearly. II. As one prominentneoclassical ideal of explanationin the face of massive disconfirming the case: put tendedto thinkof modelsin whichthingssettledownto a economists] [neoclassical naturally of initial conditions. and yet they exhibit no interest in or curiosity about those roots.FROMMANDELBROT TO CHAOS 291 Whatthis means suchas probabalistic the priceof some "additional arguments.Here it seems that the formalismof strange attractorsmay promise law-governedbehaviorindependentof historicallocation.Further. 19. we observe the intrusionof the furtherdevelopment of chaos theory in physics. but the curious aspect of this developmentis that the stochastic terms were merely appendedto the existing constrainedoptimizationformulas. one can find no indication of how the connections might be made in the existing literature. we theorists Technically unique independently speaking. into this unsatisfactorysituation. 20.nothingcould be furtherfromthe truth. 53. Contraryto these impressions. theBibledoeswhenit says. and were of economic theory.but themselves seemed only an excuse to maintainthe pure deterministic evidence. 54] which seem to have been subsequentlyabandonedby those authors. 184-5].it merely involves a simple extrapolationof the original tendenciesof neoclassical theory. .as we shall observebelow. and then. "Wepassthis hysteresis phenomena of scienceandintotherealm outof therealm wayonlyonce"and. the simple historical fact is that they have been by and large ignored.In summary. while it can be claimed that the work on economics was an importantinput into his later innovationsconcerning "fractals" which did make him famous. Here. 63]. hopednot position to introduce intoourmodel. AlthoughGleick [25.Here (again we stress) tating it seems that the most rigid determinismis reconciled with the pervasive appearanceof random phenomena. Mandelbrot on the Irrelevance of Modern Econometrics Benoit Mandelbrotwrote a number of stunninglyoriginal papers in economics from roughly 1962-1972.

it is not truethatdifferences in development between sciencesarerelated to. There he arguedthathis effortsshouldbe regardedin the vanguard of a "second stage of indeterminism.292 Philip Mirowski Mandelbrotthe persona is at least as fascinatingas Mandelbrotthe theorist. Mandelbrot'swork in physics. "age" by investigation in different saw its first but it had been born theory triumphs physics. geology.demand no apology. He is often voluble concerningthe view that he could neverhave accomplishedhis work in and thathe was extremelyfortunateto have any conventionalacademic discipline or department. 120]. one which he revealedin his 1964 "Premature only recently published [51].he.and especially outsideof the hidebounddistinctionsbetween disciplines in the moder university. worked for IBM. and add up to a uniquecombination"[1. andthereas of the foreexcused differences of measured the earliest systematic by.There is a clear connectionin this respectbetween his ideas and his life. . the reduction to axioms is largely a matterof satisfying the teacher" [1." one thathe suggestedwith his usual modesty. because they let him follow his instincts.turbulence. No rationalmaximizer. 208]. economics.statistical socialsciencecouldstillbe presented as a modelto be followed by statistical physics[51. 214]. he is a partisanof the revival of a specifically geometric intuitionin mathematics.The key to the plausibilityof this first stage was a resortto the classical centrallimit theorem. Clearly. The first is thatMandelbrot has been a perpetualoutsider the 1962 ing episode in almost every intellectualcontext. at best. such a person would not be taken with the work of a KennethArrow or a GerardDebreu. which allowed those so inclined to cling to their previousdeterministicworld-views. in an attituderefreshinglyunorthodoxfor a mathematician. And fourth. topics. "Veryoften when I listen to the list of my previousjobs I wonder if I exist. by economic-psychological as 1912. 216].and of course. Third. in the studyof problems raised choice ." largerpartiallyhidden agenda. it may very well be preferable to avoidthe temptation to attackperiodsof crisis . The intersectionof such sets is surely empty" [ the extent of there being a profoundphenomenologicalapproachin all of his work (and not just the economics) [45.and the ironyof much of statisticaltheory first originatingin social theory has not been lost on him. 86]. And. Mandelbrot has persistentlyridiculed the physics envy of neoclassical economists.tensile strengthand fractures. 261]. "Economics is very far from what I plannedto tackle as a scholar"[1. The first stage of indeterminism was an attemptto introduceprobability off of the causal deterministheory into such areas as physics and economics by the partitioning tic aspects from the stochastic disturbances. His primary have insisted that what he identity is as a mathematician. Even as late elsewhere. "To a student. There are four special traitsof Mandelbrot and his work which arecentralto an understandof from to 1972. which Mandelbrotthought was merely symptomaticof a larger problem: "in studying economic records. Any researchprogramthatregularlydisplaysa certainmethodologicaldisdainfor visual evidence would certainly find this attitudequaint. economics and meteorologyhave all been part of a FractalManifesto. . He himself has said. Much of this resonatedwith the "holism effect subordinating the latterto the former. was a broad culturalphenomenon. he dismisses Bourbakistformalism. reductionism" debatewhich was endemic to social theory. 114]. as he admits. Second. The second stage would be markedby the explorationof those areaswherethe classicalcentrallimit theoremfailed to hold: these would be in the "less-developedsciences. .Indeed. as he himself has noted: "As I allowedmy self to drift. I soon came to view the normal unpredictability of life as contributing layersor strataof experiencethatare valuable. ." the intellectualslums of deterministic science: weatherprediction. probability .althoughon occasion mathematicians does is not really mathematics[25. and thinks the fetish for axiomatizationhas largely run its course.

which is why it is not 100%foolproof. But prices are different:mechanics involves nothing comparable" [49. . for any arbitrary time lag d. All of this implied that prices should not be modelled as analagous to Brownianmotion. given his "geometric"intuitionand his phenomenological approach. to copy the proceduresthatprove successful in Newtonian physics . he showed that the Gaussianor "normal"distributionwas the log of the characteristic functionfor the stable only one of a family of "stable" distributions. at least for the tails of the distribution.His teacher. In particular.y > 0. Recent rule changes such as stop-trading and the orders.and that the problem lay where no neoclassical economist would look for it: price changes were geometricallyconceptualizedas being continuous. Briefly.1. price records were punctuatedby large discontinuouschanges. while most customershave to buy at the next higherprice" [48. . a)] (1) . knowingly or not. But furthat their geometric appearance ther. "The only reason for assuming continuity is that many sciences tend. But there was another fortuitous element to Mandelbrot'spreparation. as had been (and generally still is) the practicesince Bachelier [15]. This set Mandelbrotdown the path of actually looking at time series of prices. 1/31 . monthly or yearly. price changes did exhibit the previouslyunnoticedattribute seemed unchangedby changes in time scale. . but in the real world they were not. Toto. for a scale factor.log P (t) seemed to be distributed independentlyof d. Mandelbrotwas drawn into the whole questionof prices in economics by a request from a co-worker as to whether "filter rules" wouldn't work better as an investmentstrategythan any other approachto stock-marketportfolio behavior. It didn't look like Kansas.FROMMANDELBROT TO CHAOS 293 separately"[51. First. This a distribution of except implied hyperbolic price changes. Paul thatthe centrallimit theoremwas muchmore complicatedthanhad been Levy. and activates a buy signal at the moment when the price first reaches a local minimumplus p%. 124]. and conversely activatesa sell signal when price first reaches a local maximumminusp%. as just mentioned. 335]. and what he saw did not at all accord with the orthodoxeconomic stories.records all local maxima and minima. "Even on days when price variationseems reasonablycontinuous. o(t. log P (t + d) . The specialist creates bargains reservedto friends.A filterrule calibratedat p% is a device that monitors a share price continuously. had demonstrated previously suspected [35]. and it certainlydidn't look like rational expectations.One observes that Mandelbrot was congenitallypredisposedto notice all of this. large changes tended to "bunch"together:this contradictedthe Gaussian smoothing propertywhich would be inherentin existing stochasticmodels of prices. Third. Secondly. weekly. be it daily. generally by attemptingto model them by means of continuousfunctions.root mean squaredeviationsdid not seem to stabilize as the record grew longer. 'a) tan(a7r/2) -(2/Tr)logIt if ca = 1 if a = 1 . called "stable in Paretian" the 1960s economic (sometimes literature) Levy familyof distributions is [31]: logf(t)= logf -xoc eiUtdP(u < u)= y Itla[1 - ist - i. "circuit-breakers" like are simply de facto admissionsof this state of affairs. as a corollary of the first two attributes. its continuityis the result of deliberateaction by a marketspecialist . In many instances. even insider tradingdoes not experiencecontinuousprices. 102]. Mandelbrotdecided that filter rules could not dominate any other strategy.3sgn(t)(t. where 8 is any real number. .

294 and Philip Mirowski sgn(t) = if t >0 0 -1 if t 0 if t <0. 8 = 0. All it meantwas that sample variances grew unpredictablyand without bound with increase in sample size. improvisingsmall variationson this theme and padding the vita. Therewas. lesser intellect rest content with this for Any might finding. writ large. 20]. a result seconded by Eugene Fama [18. In the other cases.of a certainapproachto and chaos. Levy Stable distributiontheory was. 7. Mandelbrot tions of price changes that were not Gaussianbecause they had too many outliers. Whateverelse one might say about this statisticalestimators work. For instance.oo. which was referredto in some previousliteratureas the problemof "fat tails" [59]. showed that the distributions for sums of independentidenticallydisLevy only possible limiting tributedrandomvariableswas a stable Levy distribution.Further. When the parameters a = 2. so any estimatorcould not depend on any momentshigherthanthe first. the distribution is symmetric). Mandelbrot plottingthe cumulativesample density of {log P (t + d) . y = 1). chap. and thatthey also matteredin physics. It just so happenedthat the tails of all non-Gaussianstable Levy distributions resembledan asymptoticform of "Pareto's Law. nor could one write down an analytic expressionfor an estimator. when P = 0.a did seem to consistentlyclock in at less than two. Mandelbrot was familiar with the literature in economics on the Pareto law for incomes. but Mandelbrotwanted to push it further. no piece of cake. restrictsthe outcometo normalityby imposingthe condition that each of the constituentrandomvariableshas finite variance. the problemof what the existence of infinitevariancemeant. which is a special case of the above. He now began to suspect that such hyperbolicdistributions were endemic to economic variates. 217].a connection fell into place. see how it connectedwith everythingelse. for instance.logP(t)} in orderto estimatethe magnitude of a by making use of the asymptoticParetolaw resultmentionedabove [40]. 77]. had been looking at distribuHere. and had himself publishedon that topic [37. which were precisely the ones Mandelbrot of economic suspectedwere characteristic variates(where 1 < a < 2). 3 = 1. "When working in economics. Although there was no way of gauging the confidenceintervals. miraculously. the refereesasked me to irregularity takethese statementsout" [ 1. "It can be said without exaggerationthatthe problemof constructing of stable laws enteredinto mathematicalstatisticsdue to the workof Mandelbrot" [77./ = 0) and what was sometimes explicitly called the Levy distribution(a = 1/2. since there existed no analyticaldensity function(given the caveats above) one was preventedfrom makingany statementsaboutthe samplingbehaviorof estimators.varianceswere infitook to nite. 8 = . and y = or2/2 (P is a skewness parameter.the Cauchy(a = 1. explicit exfor the density functionsof the family of pressions (excluding series expansion approximations) distributions were known only in three cases: the Gaussian. 38]." namely P(u > u*) -> [u*/V]-a as u -. I was similarlydying to be allowed to make it known in my researchpapersthatmy methodswere partof a generalphilosophy. The conventional centrallimit theorem. then the resultingcharacteristic functionis Gaussian[26. Invariably. perhapstesting Levy stable distributionsin a thousanddifferentguises. and that fact would have profoundconsequencesfor how one thoughtaboutthe economy.nor did it mean that sample moments of all orderswere not themselvesfinite. 222]. It did not mean thatthe values of observedprices were infinite. Then there was the problem of the widespreadhabit of enforcinga bound on samplevariancesby automatically .

a situationwith a < 2 was dubbed (perhaps unfortunately)"fractionalGaussiannoise". but in fact to have built-in low-frequencydependence.even if the actualdistanceis knownto be finite. The Joseph effect was evident whenever observersthoughtthey saw "cycles" in economic time series which would fail to remain stable as the series lengthened. Mandelbrotwas led to think about what it would mean for somethingto appearnon-stationary. "It is well known thatphotographyis simplest when an object is at an infinitedistance from the camera.See Mandelbrot'sreactionin [46]. Increasingly.2 Here is where Mandelbrot'sphilosophicalposition began to set him apartfrom others. "whitenoise"). while the other has infinitevarianceand-in effect-has a white spectrum[43. independent of the natureof the marginaldistribution. By direct analogy with the previous case. onehaving anH-spectrum and a finite variance. 266] in that it relinquishedthe search for truly general law. The Josepheffect was the existence of very long-runtemporaldependence. See Engle [17].it is my impressionno economist characterof accompaniedhim beyond this point. .which he later distinguished as the differencebetween "Noah" and "Joseph"effects. . Again. . to produce a finite variance. A third way of building in epicycles is to treat the variance of the distributionof prices as if it were the result of a draw from a finite-variance distribution. Infinite variance was certainly bad enough. time]seriesto havean infinite while all Gaussian distributions stable Paretian [i. becomeresigned to give up linearity for the sakeof coexistence . 396-397] dominate the was noninquiry. letting the old tropismatic predispositions of a deterministic core and a subordinatestochastic explanation[42. .f-2 dependence would exhibit a characteristic with 1 < a < 2. This was the first time in history that someone had developed a taxonomy for all of the possible cases which would cover the "typical spectral shape" of an economic time series. These two effects were separateand separable. Thus Mandelbrotentered the next phase of his economics research. which allow variances of Gaussian disturbancesto themselves vary in an autoregressivescheme. Wereall [economic onemight havebeenableto save variance. ..e. note well that all of these processes are purely stationary. the photographer ought to set the distance at infinity if that distanceexceeds some finite threshold"[42. An even more involved (and epicyclic?) proceduretakes the formatof ARCH models. No linearmodelI can thinkof allowsfor suchcoexistence. Butwe mustalsoallowforcoordinate serieswithfinitevariance andanH-spectrum [of fractional Gaussian and I have noise] .a hyperbolicspectraldensity S'(f) . He for a partitioning regardedthis practice as backsliding. the name was intended to refer to the Biblical seven lean years and the seven fat years. the name was intendedto conjureup the abruptflash floods that came out of nowhere and swept away all in their wake. 399]. at the very least it violated the principle of parsimoniousexplanationin the context of a phenomenologicaldescription. 88]. The Noah effect was the extremenon-Gaussian the marginaldistributionof prices. Therefore. a pure Gaussian spectral density would have a = 2 (thatis. Yet it was not a taxonomy without rhyme or reason: the great preponderance of cases encompassed 2.FROMMANDELBROT TO CHAOS 295 and detrendingor otherwise "pre-whitening"in order regardingthe processes as non-stationary.More than once he suggested that a resortto the hypothesisof non-stationarity scientific [45. but now the purely general case was mindnumbing. by linearity replacing Levy]distributions. but they did have one connection in Mandelbrot's way of thinking:time series with long spectrum. [twotime series]can be in the longrunevenif the structures identical arevastlydifferent. 86. the spectrumwould be flat.

one is not makingreferenceto a few discontinuities here and there." .Gaussianwhite noise was just the in our next can glean from his papers a bill coherentthan any other such of indictmentsagainst orthodoxeconomics that is more profoundly endeavorin the 20th century. 335]. While one can repairto the sequence of journalarticlesfrom 1962 to 1973 in orderto survey the technical issues. which are then ranked according to their relative inertia. and the short-term fluctuations"[42. "It is astonishing that the hypothesis of indepedence of weekly changes can be consistentlycarriedso far. Mandelbrot finds he must resort to functionswhich are nowheredifferentiable. meteorology and computergraphics. ing no discernablediscontinuitybetween long-termadjustments which would be the subjectmatterof economics. But these were precisely the sorts of speculations regularly expurgatedby journal editors. showto follow supply and demand. 58]. cuttingto the very heartof the neoclassical world-view. like thatdinosaur the "kinkeddemandcurve". perfectarbitrage should "whiten"the spectraldensity.that is. The notion of efficient marketsis bound up with the possibility of arbitrage. such as Weierstrass functions and Cantordusts.3and in any event. the neoclassicals were using the wrong mathematicsfor the wrong reasons [55.The entireproject initial obof smooth substitutionand constrainedmaximizationis compromised by Mandelbrot's servation:empirical timeseries of prices are not continuousfunctions. whereasthe Gaussiancase the most special of cases. The Marshallian"law" of supply and demand is most certainlythe primaryvictim of this In [56. insights he had gained into the relationships between fractaldimensions and randomprocesses were findingall sorts of fruitfulapplicationsin physics. a class of rationaltradesthat serve to stabilizethe price by bringingit closer to the "fundamentals": to put it anotherway. the short-runand long-runis an analyticalmistake. and for my deliberatepreferencefor seeking soft acceptance. 61]. In orderto discuss manyof these randomprocesses. In conversationsMandelbrot controversy. after 1972 one gets the impressionhe just lost interestin economics (or perhapsthe reactionsof neoclassical economists just grew tedious).as opposed to hard acceptance.and gives no guidance on this account" [49. shallian system is the division of all economic phenomenainto differingtime frames. a co-worker"hadgrown impatientwith my refusalto reopenold fightsthathadbeen won to an acceptabledegree. But the Noah and Joseph effects chamfereven deeper thanthat. with controversyonly when it is unavoidable. has expressedhis reticencewith regardsto protracted 3. the whole penchantfor differentiable functionsis where the often programgoes off the rails. As usual. To begin at the beginning: recall that the "marginalist revolution"of the 1870s was derived from direct imitation of the energy formalismof 19th centuryphysics [56. 4]. Anticipating narrative correspondedto the Euclidean world of integer dimension. there is no text where Mandelbrot actuallydrew out all the implicationsof his programfor neoclassical economic theoryand for orthodoxeconometrics. instead. chap.Indeed. I have arguedthatthe centralanalyticaldevice of the Marreconceptualization.296 Philip Mirowski either infinite variance or infinite intertemporal dependence. Nevertheless. In thatinstance. the rest of the cases corresponded to fractal-dimensionedprocesses. The of Mandelbrot's work is that of prices are approximately distributions primaryinsight empirical scale-invariant: it just doesn't matterfrom the stochasticpoint of view if you look at them minuteThat scale invariancesuggeststhatthe Marshallian distinctionbetween by-minuteor year-by-year. 406]. the very name itself reveals that value was predicatedupon continuousand reversiblefields of force that gave rise to continuousand reversiblefunctionswith prices as theirmain arguments. Yet. with unforgivingvictims. "But prices are different: mechanics involves nothing comparable. In this context. as Mandelbrot observes.

410]. meaning rationality divergesfrom smoothNormality. very long dependence in prices.he can almost alwaysnever quite "catch horizon. "When the Arma approachis viewed as analagousto fitting of curves by broken lines. there is nothing in the approachto warrantcriticism (or interest?)" [52. ARIMA estimationwould also have to be jettisoned. Spectral analysis is also heavily compromised. One of the profoundimplications of the Mandelbrotprogram is that the constrainedmaximizationversion of rationalbehavior is often loses the Gauss-Markhov and with it least squares. but are merely an . "learning" compromised dependencecan give the impressionof periodic cycles whichjust aren'tthere. To a great extent this is also the case with otherLevy stabledistributions. The idea is really quite simple.because the technique is an attemptto decompose a time series into a sum of periodic harmoniccomponents. but Bayesian increasingthe variance of the overall time series. probablyhave to be discarded.Neoclassical theorists like to talk in terms of "economizing"with respect to information. but since changes are intrinsicallydiscontinuous.the whole notion of "economizing"on information is renderednugatory. 233]. and otherswhere 'marketnoise' is so overwhelmingthat predictionis impossible and the assumption of efficiency cannot be disin anticipatory proved!" [44. the main implicationsof Mandelbrot's work revolve aroundissues of inference.and manyconsistent estimatorsof first moments actuallydo not make use of all the componentsample elements [73]. since augmentation of a sampledoes not resultin convergenceof samplestatisticsto highermoments. Suppose price changes are discontinuousand is tryingto "get rid" of sharpdiscontinuities(the Noah exhibit long dependence. 225]. and when it is recognizedthat such curve fitting does not warrantbeing called 'modelling'.incrementalimprovements foresightcould result in is A variation that less smooth. because in the presence of the Josepheffect fractionalGaussiannoise is technicallyARMA (0. have inference governed by "loss functions" and the like. With anythingless than a perfect infinite anticipatory consequences far down the line (the Joseph effect) that no one can forsee. The upshot is that almost every technique of orthodoxeconometricsis useless and would theorem. from a Cauchy distribution.First. "thereexists indeed a class of importantcases where useful is impossible"[44. sample average superfluous. But in the presenceof the Josepheffect. few souls a price perceptive caught glimpse of what this would mean for finance departments:"Since no rationalman with a quadraticutility function would invest in stocks. and so he ends up doesn't mentionit. a sample meaninglesswhen confrontinga Levy stable stochasticenvironment. most normativework on utility approachesto speculativemarketsis obsolete" [15. The thrust of the Joseph effect is that the separateperiodicitieshave no actualexistence. Since augmentation of the dataset neverimprovesthe performance of the estimator.) Variouscombinations of the Noah and Joseph effects (or indeed some marketswherepurewhite noise reigns) will "Those closest to efficiency produce differentconsequences for the actions of the arbitrageurs. 23]. (Mandelbrot also in this schemes are since we have alreadynoted that long the presence of Levy stable distributions.and most sample statistics depend upon the assumptionsthat p < ooand q < oo. 196-197]. and the of in a world that information. (Notice the date on that quote-1964!) Of course. oo). sample [22. although implementationof arbitraging it can be expressed as formally as one might wish.FROMMANDELBROT TO CHAOS 297 as often assertedby the rationalexpectationsschool. collecting 51]. that is. are of two kinds: some in which anticipatory horizonis infinite. The arbitrageur effect). for instance. more informationis futile [74.The distribution of the sample mean (the expected value of the distributiondoes not exist) in this case is identicalto the distribution of each individualitem in the Hence calculation of the is and indeed. his actions have systematic up". least squaresis a defective estimatorbecause it gives too much weight to outliers and is too heavily sample-dependent[73. and most obviously. 40. Ironically. 25].

"Normal"distributionsweren't normal at all. the of thatis usually in which the unskilled and the skilled kind detail both eye distinguish paths should be consideredas perceptualillusion associated with causal relations .there are some direct and fractalswhich may prove of interest bridges between the work on Levy stable distributions to those concerned with the chaos literature. the distinction between the causalandrandom areasis sharp case andvery diffuse in the stableParetian case [40. . one which could brook no This was a project of the most thorough-goingindeterminism.which we intend to provide elsewhere [63]. 18]. 415]. particularlythose involving trended variables..and the analyticimportanceof hyperbolicdistributions. which. The very practice of fitting linear models. Hence. In that sense. .or. the geometryof the irregular. in the spirit of the 19th century. . and all the econometricidols need to be smashed. after all. was their self-similarityrelativeto scale. 403.These areas of continuitybetween the earlier and later work may be found in the governingrole of chance. acted to filter out low frequencyvarianceand outliers.theremay be nothingactuallyto estimate.but howeverclose you get. noiseis Paretian. a time series of prices looks like a coastline:it appears to be very irregular. we hasten to add. of having occurred by chance onlyif in somesenseits "likelihood" repeated. with research or no the neoclassical make program. thus effectively "pre-whitening" the data. . "The notion thata numericalresultshoulddependon the relationof object to observeris in the spirit of the physics of this century.whenone worksin a fieldwherethebackground than thatof physics. dispense structure. . As Mandelbrot has often said in lecture.a pattern is verysmall. Fractal Bridges over Troubled Waters The reactions of econometriciansand finance economists to Mandelbrot'scritique deserves a separatenarrative. then how is it have been so grossly misled for so very long?Perhapshis most possible that so many practitioners disquietingthesis is that their own flawedpracticesservedto deceive them: is to notethatlargepricechanges areusually to wellOneverycommon traceable approach determined 'causes'thatshouldbe eliminated beforeone attempts a stochastic modelof the remainder. a preoccupation would obstruct the ability to "see" the full range of stochastic possibilities. lineartransforms with "theory" tic processes could look deterministicand vice versa: in a sense."but not at all.298 Philip Mirowski artifactof infinite long dependence [ revealed by Levy's work on centrallimit theorems. III. nothingmore than a bowdlerizednineteenth-century is scientifically andis felt to havechancesof being significant Broadlyspeaking.. . However. This was a very of the victors in the "Measurement without Theory" wry twist on the orthodox interpretation controversy[59]. these structures [39. 433-434]. was compromise peace imitationof physics.. it also looks roughlythe same. facesa burden of proofthatis closerto thatof history andautobiography withanykindof built-in causal andyet generate somestochastic models. A coastline also . onemustrealize thatone But. The interestingcharacteristicof Levy stable distributions. . "A process that has no scale has the scale of the observer". while spectralanalysis might be useful in tryingto diagnose the presence of long dependence. they werejust artifactsof the shotgunwedding of of stochasdeterministictheory with "randomshocks. 268]. If Mandelbrotis right. Suchpreliminary closerto the Gaussian obviously brings anydistribution censorship in theGaussian ." In a stableLevy world. as in TheFractal Geometry of Nature [49.

exact self-similarityis a puregeometricconceptcharacterizing such abstractobjects as the Koch curve. In fact. We have sacrificeda certainmodicum of precisionhere in the interestof makingthe cross-disciplinary connections more transparent.Mandelbrotoriginallycalled d(S) the "fractaldimension"of the curve. 422]. 24].no well-behavedconstantsof motion 4.Ke -d.and not Mandelbrot'seconomic the mimetic impulseamongstmodem neoclassicaleconomists. and particularly[49. fractionalBrownianmotion is self-affineratherthan self-similar:if the time axis were to be magnifiedby a factor6 > 1. and here was the link which connected the geometry of the irregularto was only a special case of the Levy stable stochastic processes. since the uses found for fractal in extended his own interests mathematics. in [49. etc. 68.but the problem here is that standardGaussian or randomwalk processes are not able to adequatelysimulate the geometry. conventionalgeometry was only a special case with integer exponent of a much more general geometry.whereH > 1/2. "A fractal is by definitiona set for which the Hausdorff Besicovich dimension strictly exceeds the topological dimension.TO CHAOS FROMMANDELBROT 299 looks like it might be generatedby some sort of stochasticprocess. or the music of the of intervals spheres. To be more precise. writings. mountains. This is precisely the estimationtechniqueMandelbrot had been using on his time series of prices. Statisticalself-similarityis more characteristic of phenomenasuch as coastlines. This led in turn to a subsequentrealizationthat a single numberis not sufficient to characterizethe fractal objects pioneeredby Mandelbrot[50. The norm of Nature was not the smooth celestial orbits of the planets. 40]. detours. changes of fractionaldimensions. whereK is space containingsuch an irregular some arbitrary constant. meteorology and gegeometry beyond ology. . While textbooks and classroom expositions of Hamiltoniansmade it seem as thoughin the generalcase Hamiltonians had determinateanalyticalsolutions. More relevantto our overarching thesis is the impact of Mandelbrot'smarriageof geometryand probability theory upon problems of Hamiltoniandynamics in physics. just as one mightsay the probability characteristic distribution characteristic of the Euclideanworld is the Gaussian. and so we shall not repeat it here. As Mandelbrothad earlier claimed that the stable distribution exponent a for price 1 was a fraction now between and he claimed that nature abounded with the geometry 2. then a graphof n M / Ine against [ln E]-1 would be linear with slope d. Just as the Gaussiandistribution more general Levy stable class of distributions with an integerexponent. But here we are concernedwith the recapitulationof the historicalroad from economics to fractals (and back again). Finally. 5.5 If one is dealing with a self-similar curve. 357-66] makes one realize in retrospectthat the attemptto restrictfractalsto a metric conceptionwas leading to a proliferationof dimension definitions. it was a growingembarrassment thatthey had an "incurable disease unmentionablein polite society" [24. called fractal geometry."But perusalof the appendices. "the probabilitydistribution of fractalsis hyperbolic"[49. which includes what would now be regardedas errors.hydrology. The applicationmost relevant to a modem neoclassical economist is in the area closest to his own heart: namely. Even the distribution in music was closer to fractal noise than the Gaussian. Moreover. namely. this impliesthatM(E) . For small e. supposewe define a numberd(S) such that: lim lnM(E)/ln(1/e) d(S) = E---oc (2) where M(e) is the minimum numberof N dimensionalcubes needed to cover a subset S of a curve. 32]. since it is that literature. the physics of energy and motion.etc.4 In an effort to describe the degree of irregularity. in a strict sense. 15] Mandelbrotwrote. which has of late spurred The story of the breakdownof determinismin Hamiltoniandynamics has been well-told by Prigogine and others [67. but ratherthe roiling turbulenceof Heraclitus'brook. far beyond anythingsuspectedin the heavenlycity of the Greek geometers. the value of the self-affinevariablewould be magnifiedby a factorof OH. At this juncturewe leave the specific writingsof Mandelbrot.

In the 1980s. and the like. by a detour through the Sarkovskii theorem. of the system? And I tell theory. However. Everyoneknows that errorterms shouldn'tjust be tackedon to deterministic equations. not to mention giving 6. however much they prognosticated that a viable dynamics was just around the corer. neoclassicals never partook of the successes of that world-view. 7.see [13. I how does this atom come here and stick there? . 62]. 1]. While this is responsible mathematical pedagogy (and a great toy if you have access to computer graphics). The general problem of a full neoclassical dynamics is discussed in detail in [58. namely. a Hamiltonian dynamics in their core doctrine of Walrasian general equilibrium. physicists have found the Hamiltonian approach wanting. And can you write the Hamiltonian don't care. what interestsme is the shape.One more paper that says these things doesn't add anythingto the practiceof economics. then the reader is led to the more general mapf : IR -> IR and.].e in the above ordering. but since this inherently contradicted neoclassical theory. the deterministic world-view. and this was taken as an indication that a wholly different approach must be taken to the description of the evolution of mechanical systems. The rejectionof the whole Hamiltonianapproachto dynamics is clear from a quote from the physicistLibchaber:"A physicistwould ask me. but sophisticatedneoclassical theoristswill admit that these achieve their seeming dynamicsby either resortingto single good models with only one consumer. .5 -.. 8. 60-68]. See [16.7). ).223 )-22 . The Sarkovskiitheorem is based upon the following orderingof the naturalnumbers: 3 -5). no production. or else writingeverythingin terms of "utility units. The technical terms are all explained at an incrediblynon-technicallevel in Gleick [25]. Many introductory texts such as Devaney [16] and surveys for economists such as Kelsey [33] and Baumol and Benhabib [5] begin with the simple map xt+l = xt (1 xt) on the unit interval [0. 1989. so it is imperative to make it clear how all the strands of our narrative converge on just this point. the mathematicsof the shape and the evolution"[25. 210].... andf has a periodic point of prime period k. but have used it as a benchmark and a springboard to reconceptualize the nature of dynamics.8 to the result that iff has a periodic point of period three.I The theorem states that iff : IR-> IR is continuous. thenf also has a periodic point of period e.. This suggested that many phase-space portraits of dynamical systems exhibited fractal geometries. one fears.. it was rejected by the majority of economists.For a surveyof such attempts. Now some neoclassical economists. That is not to say that neoclassical theoristsappreciate having this century-longfailure pointed out to them: "Everyoneknows that economic dynamics isn't in a satisfactory state. etc. 2 .300 Philip Mirowski other than H itself. . A brief consideration of the modem chaos literature will reveal that a little physics is a dangerous thing. 76. because it gives the impression that somehow this is what chaos is all about. have rushed headlong to embrace the new mathematical technology largely.. 62 et seq. indeed. . the phenomenon of self-similarity at different geometric scales. . it has been disastrous for economists. It is at just this point that economists tend to lose their way.. then if k ).3 ). 23) 22 2 .7 Mandelbrot essentially proposed to relinquish all hope of determinism by renouncing the quest for any mechanistic dynamics in favor of a thoroughgoing stochastic approach in economics. One must acknowledge a numberof apparently dynamicmodels in growththeory.6 What they found was a wholly different kind of order amidst the chaos. with no sign of self-awareness that one can't persist in legitimate imitation of the physics if you never had the solid analytical structure of the Hamiltonian to start with." Letterof Hal Varianto Philip Mirowski.. 75]. and show how raising the forcing parameter b causes period-doubling and the onset of chaos.. because of its popularity amongst the physicists. Neoclassical microeconomics is predicated upon the metaphor and formalism of potential energy which is the heart and soul of the Laplacean daemon in physics. The breakthrough came when physicists stopped looking for deterministic invariants and began looking at geometric patterns in phase space. June 17.23 5 )-23 3 )- ." hence obviating any general equilibriumstructure..etc. then f has periodic points of all other periods [16.2 5 ).

the dynamicsof physicalsystems are generallycast as of continuityin motion problemsof motion in phase space.9 The most importantdistinctionsto be made from the presentpoint of view are those which divide conservativefrom dissipative systems. This is extremely at variance with almost every other discussion of "chaos" in economics.but this has nothingto do with the mathematical niceties mentionedin the above. since it should only legitimatelybe attachedto dissipative systems of mentionedearlier 9. macrofluctuations. and there are no restrictionsupon the continuity of the motion described. and distinctionsbetween low and high numbersof of these catedegrees of freedom in the particular dynamicalproblem. 25]. c-systems Arnold diffusion strangeattractor true "chaos" rise to the temptationto generate all sorts of single-variablematchbookmodels where a single recursivedifferenceequationis somehow supposedto "account"for the apparently stochasticbehaviorof stock prices.The variouspermutations gories are presentedbelow in Table I. it has been long known that well-behavedHamiltonians could themselvesgive rise to apparently stochastictrajectories. Althoughthe terminologyin this arenahas not yet stabilized. a plot of the motion of the system is discrete. 5. one which rejected imitationof physics. these confusionsover the meaningof "chaos"would not pose any obstacle [63]. dating back at least to the work of Henri Poincare[36.FROMMANDELBROT TO CHAOS 301 TableI. 33]. Thus the "degreesof freedom" of an economic model will be defined as the N parameters requiredto fully specify the motion of the minus the constraints on the p independent system system.physicists have come to believe that there are many qualitativelydifferentkinds of stochastic output. in orderto stress the differingkinds of seemingly random behaviorthat may arise in a deterministiccontext. This raises the possible objection that I have just now ignoredthe contentionof Mandelbrot in this paper that the assumptionof continuous motion is part of the problem in orthodox economics.2 conservative(integrable)system dissipativesystem resonance no stochastic behavior 3 or more mixing. TheCategories of a Stochastic Dynamics Degrees of Freedom 1. However. Over the last century. a theory confusion. 3. 107]. One can observe from this table that the terminologyof "chaos" has already been sadly abused in the literature.we shall reservethe terms "chaos" and "phase space" exclusively for flows because we arehere concernedwith the relation of neoclassicism to the treatmentof dynamics in physics.monetarydisturbances. which generallystartswith examples of maps and not flows [2. In maps. and that they should be distinguishedby the sort of process that generatesthem. and every otherscourge known to mankind. In a truly alternativeeconomics. 67]. To prevent any Table I are problemsof neoclassical economics. . I would like to suggest that the issues surrounding which began by copying the physical metaphorof motion in a commodity space. For instance.The issue of conceptualization of chaos in physics is much more complex than these little mathematicalexercises. it may be useful for economists to be made more awareof the difference between fractal structurein maps and chaotic flows [70. More advancedtexts in physics acknowledgethatthe problemof the extractionof seemingly stochastic behaviorfrom apparently deterministicprocesses is much older than the presentchaos craze. which must conformto requirements [72. as in the simple tent map above. paragraph In what follows.

and thereforearewhistlingin the darkwhen it comes to claiming any economic phenomenonis or even might be "chaotic". one might argue that it is more likely that conservativepreference fields are the very paradigmof reversiblephenomenaand hence should give rise to mixing or Arnold diffusion.Unfortunately. Here you know the right equationsbut they'rejust not helpful. etc.302 Philip Mirowski flows (and then. 10. It then follows that neoclassicals have no theoreticalrationalefor claiming that any economic system or phenomenonis dissipative. The reasonfor this distinction is thatthe stochasticmotionthatone observesin Hamiltonian dynamicsis exhibitedover the entire characteristic of the phase space of dissiparameter range [36. neoclassical microeconomistspossess no parallelexpertiseor is only we who Mandelbrot. i. only dissipative systems display such phenomenaas a "transition to chaos" conditional upon some forcing parameter. but does not seem to realizehow it undermines the rest of his article. in the neoclassical case. and hence evolve in an irreversible in a does not stochastic behavior deterministic system dependupon the presence of "chaos".The mere appearance due to friction. the geometric self-similarityof the attractors in phase space. and they found it in the entirely differentkind of invariantother than energy conservation:namely. heat loss. was right: irregularity have chosen to avertour eyes from them. it was an entirelydifferentway of attackinga long-standing problem.. 422]. whereas the distinguishing is of the simultaneous and systems presence regular trajectories regions of stochasticity.'0 It is critical to see that physicists have used their priortheory to divide the world up into regions of invarianceand regions of change. 25] mentions this in passing. not to all of them): namely. systems that "lose availableenergy" or wind down manner.1Indeed. 11. has suffereda serioussetbackin these instances. those situationswhere Hamiltoniansare not applicableor solvable. Physicists needed somethingto groundtheir analysisin these situationswhere Hamiltonians couldn't work. . of and randomnessare everywhere. 64]. It is important or to conservative whereas true "chaos" is confined to dynamics only apply integrablesystems. have priortheoreticalexpectationsabout which variables should be governed by low-dimensionalattractors.e. First.the very notion of "determinism" since it is widely acknowledged that conservativesystems stand as the epitome of the ideal of determinism." Quoted in Gleick [25.and more importantly. Kelsey [33. where stochastic behavioris pervasive and "order" is entirelyabsent. no rationalefor even looking for strange attractors.Only intrinsicallydissipativesystems can exhibit a strange attractorin phase space. Undoubtedlythis derives from his ignorance of the origins of neoclassical economics in copying energy physics. because trajectoriescan't be "attracted"in a conservativesystem.In pative other words. 174].and cuts to the very to recall that Hamiltonian quick of the neoclassical fervourto imitatethe physics.But this is more than a terminologicalor philosophicalquibble. and thus know in what situationsone might expect to find a strangeattractor.The reason for this is that neoclassicals have never made up their mind about what precisely it is that shouldbe conservedin their theoretical system [58. they possess no usual. That's completely falling apart. Mitchell Feigenbaum:"The whole traditionof physics is thatyou isolate the mechanismand all the rest flows. It is the dissipation which serves to lower the "dimension"of the geometric characterization of in trajectories phase space.It was not just anotherversion of mechanismor a neat bit of math to get them over the hump (so to speak). This is just one of a sequence of examples of the contretemps which economic theoristscould avoid if they did not hold the historyof their discipline in such contempt. Already. in their "fractal"character.

often skirtednervously.chaotic models might in the futureserve to reveal the futility of the neoclassicalresearchproject. The prime implication of these lapses of explanatorypractice is that all claims that chaos theory will somehow "reconcile randomnessand determinismin economics" are what should we ing from such to find out expect procedures?What can we say about "intrinsic"versus "extrinsic" randomness?Some say we should expect both: termsin ourequations.thiswill be because bybiological activity be chaotic in nature. and thereforeplace no intelligible restrictions upon economic explanation. etc.Here we find researcherswho view the chaos literaturein a much more sophisticatedmanner. two periods. Since the numberof goods and actors in true ruse of general equilibriummodels is unbounded(especially if one resortsto the Arrow-Debreu defining physical goods at differenttemporallocations as differentcommodities). as we shall argue below.FROMMANDELBROT TO CHAOS 303 Secondly.If a source of possible empirical techniques which may or may not have any direct connectionto the existing neoclassical researchprogram. since the incoherenceof a neoclassicaldynamics is neither rectified nor clarifiedby the introductionof nonlinearmathematics. two goods. etc. as if degrees of freedom were not a centralcriterionfor model evaluation. 74]. 12].however. Often this issue is finessed by arbitrarily restrictingmodels to a single actor. Hence the neoclassicals have ignored the crucial distinctionsin TableI because they have no idea what restrictionsshould be placed on the sorts of randomphenomenato be detected in the social sphere.and not any sort of reconciliation.or are they rathermore like resonance? No matter how mathematicallysophisticatedthey might seem to an untutored outsider. in ourequations as random terms is concerned [33. process" process But this "deep philosophical" problem is not to be shuntedoff onto the despised band of philosophersand methodologistsso easily. neoclassical general equilibriummodels leave too many degrees of freedom dangling. In fact such models have nothing coherent to say about the actual economy. If it seemsinevitable thatwe will haverandom In economics. 72]. Do price fluctuationsmore resemble mixing sorts of turbulence. The case of the econometricallyorientedeconomist is much more interesting. Yet even here the confusionover the correct meanthe Grassberger-Procaccia of "randomness" is evident. they have no analogueto the physicists' a prioriknowledge of the relevantnumberof spatialdimensions.These authorschampionthe use of such techniquesas estimation in economictimeseriesby means of of Liapunovexponentsor the dimensionof strangeattractors method [30. The crucial question.and thereforetry to opt out of the problem: For the purposesof this articlewe will avoidthe deep questionsof philosophyand define "random dimensionis "high". This shows up in differentways. dependingon whetherthe statementsare made by a neoclassical economic theoristor else by an economist more concernedwith econometricpractices. theywill appear Otherssuspect that thatroad leads to perdition. neoclassical economists have no argumentsto place some bounds upon any expected degrees offreedom in any of their models. A "deterministic process" to be a process whose [fractalstrangeattractor] dimension" is a with "low [12. is affected economic andmeteoroforno otherreason. thereis an impasseherebornof an unthinkingmimesis . it often appearsin the context of a claim that some small recursivemodel "demonstrates" that randomoutput can be endogenous to the economic system. and then perhapssome further moralizing as to how this might disprove rationalexpectationsor reveal the legitimacy of governmentinterventionor Keynesian concerns. In the former case. but this betokens the abandonment of determinism. As faras economics Thesesystems will almost certainly logicalphenomena.

This. 12].and they can intervenein an experimentto take each into account. Further. but they have nothingto say about "folding.After all. The inability to divide the world up into types of stochastic phenomenadescribed above in Table I now comes home to roost. Both approachesto conceptualizingthe distinctionbetween orderand randomness are equally incoherent. process. Contraryto Kelsey [33]. while properlyviewed as the result of a deterministic as the limit of a randomprocess.All the possible "types" of randomnessare lumped together. when one observesfromsuch mathematical workas thatof Barnsleyand Demko [4] that Julia sets and other fractalshapes. have the equally valid interpretation It should be made clear that this paper does not argue that the chaos literaturehas no substantialimplicationsfor economics. Or.the tone of Baumoland Benhabib[5] is notably muted. Contrary to Brock [12]. "the probabilitydistribution characteristic of fractalsis hyperbolic.. Whathas been missed in the interimis thatthis was exactly the point of Mandelbrot's earlierwork in economics. . 190] remindus. as Mandelbrot[49. Quite the contrary. 422] has written. mixing chaotic processes with other stochasticprocesses rendersboth unrecoverable. explainssuch disappointing results as those in [10.then it becomes possible to see the observeras inextricably with the Is economic life random or deterministic? Is the glass half-full or halfup phenomena. and the net result is a wash." which is one of the main criteria of differentiation of types of stochastic behavior. thesis that chaotic models "save" deterministic law is itself a bit of empty?The much-trumpeted wishful Mandelbrothas often claimed. For instance. i."Economic variates have often been noted to display forms of self-similarityas regardstime-scale. Once one is open to the pervasivenessof bound seemingly randomphenomena. As Grassbergerand Procaccia [30. The ubiquityof Levy stable distributions of economic variates such as prices and incomes suggests that fractal attractorsin phase space may ultimatelyhave some import for economic explanation. and has been a theme of his work since his "Premature FractalManifesto". ratherthan any recalcitrance of the data.e.304 Philip Mirowski of the physicists.and hence the distinctionmeaningless. IV. the estimatedLiapunovexponents may get at the "stretching"in phase space. 322] we find the downbeatprognosticationthat "it is an irresolvablequestion whethermacroeconomicfluctuationsare generatedby high dimensional chaos or infinite dimensional. All of this does not botherthe physicists much since their theories tell them when to expect each particulareventuality. stochasticprocesses". in that differentforms of randomnessbecome hopelessly tangled. As for the Grassberger-Procaccia method of using the correlationintegralto arrive at an estimate of the dimension of a strange explainedabove. but no one has known what to make of the observation[69]. Economists wedded to finding an unspecific "deterministic" explanationadopting a quasi-phenomenologicalapproachto economic time series are not so well-equipped or wellprepared. Chaos Comes to Economics It seems to me that the most sophisticatedeconomists concernedwith the chaos literatureare alreadybeginning to sour on the vauntedpromise that it would reconcile determinismand randomnessin neoclassical economics. in Brock and Malliaris [ is a techniqueseverely compromisedby the presence of "noise" precisely because the fine geometricdetail of a self-similarattractor is "fuzzed" out by extraneousshocks. And even worse. Liapunovexponents cannot even be defined in the presence of other sorts of "noise". the dimensionality of strangeattractors does not exhaust the universe of forms of randomness.

Baumol.and HalbertWhite. 322].Mechanism. c. Mandelbrot'sheritage is not a mere matter of "stylized facts" that neoclassicals may choose to ignore when it suits them [11. edited by Donald Albers and G. 1985 v.1987.New York:CambridgeUniversityPress. We may finally have arrivedat the criticaljuncturein humanintellectualhistorywhere our images of the naturalworld are so very anomic and frighteningthateconomistscan no longerseek to imitate physics. 1989. and A. "DeterministicChaos and FractalAttractorsas Tools for Nonparametric Dynamical and Modelling. and Nicholas Gonedes. and the reciprocalof Planck'sconstant1/h ."Journalof EconomicTheory. "Interviewwith Benoit Mandelbrot" People. ErnstBerndt. On the contrary. "DistinguishingRandomand DeterministicSystems." Journalof Business.William. The chaos literature insteadrevealsthe curious symbiosis of randomnessand determinism [9]. Fall 1974. a mannerparallelto thatpredictedby a famous physicist: . "IteratedFunctionSystems and the Global Construction Proceedingsof the Royal Society of LondonA. 6."MathematicalComputation of Fractals. 2. 501-10. what the chaos literaturewill not do is augmentor save neoclassical economic theory. William.if followed to their bitter conclusions. Randall. Perhaps themoststriking of this of infinite andobservational feature precision computational willbe quantized reformulation is thatall physical variables [24. 168-95.lawlike orderin the economic sphereindependentof the machinations and beliefs of the economic actors. the blurringof the boundariesbetween order and chaos. Alexanderson. Barnsley." 4. 1983."Journal of EconomicPerspectives. This theory will but as constitutingthe very substrate have to allow for randomnessnot as erroror perturbation. . "Why Mournthe Passing of Determinacy?". onassumptions thatsomething twice foundered wasinfinite whenin . Newtonian has dynamics fact it was not: the speed of light. 7. 399. of economic experience in a mannernever dreamedof by the advocatesof rationalexpectations. so there is some hope for this procedureto be used as a taxonomic device. 3. . Bausor. and Ping Chen.Stabilityand Chaos in DynamicEconomics. Donald and G. as long as it is subordinateto a coherenteconomictheory.DynamicEconometric Modelling." Econometrica. Economic Inference. "LiapunovTechniquesin EconomicDynamics and ClassicalThermodynamics. William and Jess Oldand New Questionsin Physics. . However.and Economic Applications. New York:Plenum. 9. without thisinfinite thecontinuum becomes. "Chaos:Significance. 1988. meaningless precision.Winter 1989.Michael and Stephen Demko. Brock. edited by A.Universityof Massachusetts. Neoclassical theory exists to paint a portraitof a deterministic. May 1971. 46-47]. 275-96. . 1987.June 1988.Boston: Birkhauser. Blattberg. Albers.DifferentialEquations. Alexanderson. 77-106. 10. "Regressionwith Non-GaussianStable Distrubances.. Malliaris. editors.. "A Comparisonof the Stable and StudentDistributionsas StatisticalModels 8. It will also affect the type of mathematicsused in economic explanations. which is why I predict that it will prove as hot a potato as Mandelbrot'soriginalwork." Unpublished manuscript..physically speaking. Barnett. Holland.TO CHAOS FROMMANDELBROT 305 the Grassberger-Procaccia procedureof plottingthe log of the correlationintegralagainst log of "distance" really differs very little from Mandelbrot'soriginal procedureof plotting the log of price differences against the log of lags.New York:North11. since it would underminetheir role and functionin social life. infinity namely theory . Hermann. for Stock Prices. 243-75. References in Mathematical 1.. October 1986. 5. van der Merwe. chaos models would renderorthodoxtheory meaningless. 244-80. Robert and Thomas Sargent. Complexity in classical theassumption nowrevealsa thirdtacitlyassumed dynamics.

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