Economic nonequilibrium, instability and chaos

Abstract

In a former article, we have argued in favor of a broader use of nonlinear dynamical analysis in economic theory as a way of studying the processes of change in the economy. We have stressed that this approach allows us to think change in a different way to the one prevalent in economic theory, where evolution is seen just as a smooth, gentle, continuous process. On the contrary, nonlinearity paves the way to the analysis of economic discontinuity, i.e.. abrupt, sharp changes in economic variables, like the October 1987 stock market crash, the currency crises that shattered the Bretton Woods system in the early 70s or hyperinflation processes We posit that this sort of phenomena are better analyzed within the framework provided by nonlinear dynamics. In this paper, we illustrate by means of an oversimplislic example some implications of the adoption of that approach and we further analyze its consequences from a methodological point of view.