1. Increasing Returns in the Economy Lagrange Prize talk April 18, 2008, Torino W. Brian Arthur Santa Fe Institute and PARC

2. © 2008 W. Brian Arthur 2 Economics: an equilibrium discipline Diminishing returns ensure a balanced, predictable outcome

3. © 2008 W. Brian Arthur 3 But high tech markets work differently … They show increasing returns: (if a technology gets ahead it gains further advantage) Reasons: Big development costs, network effects

4. © 2008 W. Brian Arthur 4 Consequences If one firm gains advantage it can dominate Not predictable which one Not necessarily “best” outcome Many possible “solutions”--a problem for economics

5. © 2008 W. Brian Arthur 5 How to solve this (Arthur 1989) See increasing returns situations as random processes and deal with them that way (Required development of nonlinear stochastic process theory)

6. © 2008 W. Brian Arthur 6 Fits in with Complexity “A radical remaking of economics” Complexity = Elements adapting to the situation these elements together create