The Economics of Fickleness

Small Cause, Big Effect

The book’s title refers to the notion that a butterfly flapping its wings in Venezuela, say, might spell the difference several months later between a hurricane and a balmy day along the eastern U.S. seaboard. The book’s thesis is that interactions among economic agents sometimes introduce nonlinear effects (small causes, disproportionately large consequences) that make long-range precise predictions all but impossible. This is most certainly not to say that rough, qualitative predictions are impossible.

Governments, says Ormerod, “should do very much less in terms of detailed, short-term intervention,” but rather should search for the broader patterns and not respond to ephemeral and short-lived shifts in supply and demand or human tastes and preferences.

Not only do most orthodox economists take too little notice of the influence we exert on each other, but many don’t sufficiently appreciate the unpredictable consequences of the interconnectedness of economic variables. Interest rates have an impact on unemployment rates, which in turn influence revenues; budget deficits affect trade deficits, which sway interest rates and exchange rates; an increase in some quantity or index positively (or negatively) feeds back on another, reinforcing (weakening) it and being in turn reinforced (weakened) by it.

Divergent Paths

I wrote about using nonlinear dynamical systems to model such interconnections in my 1995 book A Mathematician Reads the Newspaper. For illustration, I described a simple instance of one: Imagine approximately 30 round obstacles are securely fastened to the surface of a pool table in haphazard placement. Hire the best pool player you can find and ask him or her to place the ball on the table and take a shot toward one of the round obstacles. Then ask for the exact same shot from the exact same spot with another ball. Even if the angle on the second shot is off by the merest fraction of a degree, the trajectories of these two balls will very soon diverge considerably, magnified by each succeeding bounce. Soon, one of the trajectories will hit an obstacle that the other misses entirely, at which point all similarity between the two trajectories ends.

The sensitivity of the billiard balls’ paths to minuscule variations in their initial angles is not totally unlike, say, the dependence of one’s genetics on which a zig-zagging sperm cell reaches the egg.

Consider also the disproportionate effect of seemingly inconsequential events — the missed planes, serendipitous meetings and odd mistakes that shape and reshape our lives.

Human interactions and interconnected economic variables strongly suggest that the economy is less susceptible to precise, long-range forecast than many believe.

Professor of mathematics at Temple University, John Allen Paulos is the author of several books, including A Mathematician Reads the Newspaper and, most recently, Once Upon a Number. His Who’s Counting? column on ABCNEWS.com appears on the first day of every month.

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