When the city is a violent chaotic place, people react accordingly. There are more guards and more traps. There are more rats to take advantage of the abundance of food. Essentially, if you signal to the game that a fight is what you're after, then a fight is what you'll get. The final mission, in particular, is dramatically altered by the level of chaos you've engendered or avoided up to that point.
Additionally, Dishonored has several endings, and chaos is the primary determinant of which of these you'll see.