The Chaos System is one of the game's main features, and is meant to track the state of Dishonored's world. The more violence you cause, the more chaotic the game's world becomes. If it becomes chaotic enough, NPCs will start attacking each other and rats might start swarming the area.
Changes in the Chaos System might also have other subtle consequences. NPCs might not want to talk to you if you have done violent things, or more guards might be patrolling an area. It is up to the player to do whatever they want; they can go and cause mayhem and destruction everywhere, or they can take the path of not killing a single person during the game.
Low Chaos means that Corvo uses stealth to slip by guards and other enemies, so he remains undetected throughout the game. Also, he does not kill anyone in the game, including the big targets.
High Chaos means that Corvo has no regard to using stealth to sneak around. He goes around, killing anyone and anything in his path, as he makes his way towards his objectives.