How are macroeconomics and the British coastline similar? Mathematician Benoit Mandelbrot could tell us.
Dr. Mandelbrot was the father of fractal geometry and the idea that the closer you look, the more you see. From a distance, the British coastline will appear straight. However, looking closer and closer increasingly reveals indents and zigzags. Consequently, Dr. Mandelbrot believed that it was actually much longer and even infinite. The significance? Something we might think is simple is really complex.
Similarly, in the economic world, most policy decisions sound so logical. When people earn more, they spend and they save the extra income. If government taxes more, then it gets extra revenue.
However, as with the British coastline, looking closer reveals increasing complexity. In “The X Factor of Economics,” referring to the recent stimulus spending, Nobel Prize winner Robert Solow says, “One thousand other things were happening that had an effect on employment and the G.D.P.” With taxes, from a “distance” we see the rich, the middle class, and the poor. Looking closely, though, are countless variables that distinguish workers’ incomes.
Responding, Duke professor Dan Ariely comments, “…So we either simplify the problem and offer a solution, or embrace the complexity and do nothing.”
The Economic Lesson
In a Teaching Company lecture from his 20th Century economic history course, Macalester Professor Timothy Taylor explains why he thinks that the beginning of the 20th century was a turning point for macroeconomic policy. Citing the inception of the income tax, creation of the Federal Reserve, and new federal regulation, he discusses the changing role of government.