A new view of the economy as an evolving, complex system has been pioneered at the Santa Fe Institute over the last ten years, This volume is a collection of articles that shape and define this view—a view of the economy as emerging from the interactions of individual agents whose behavior constantly evolves, whose strategies and actions are always adapting.The traditional framework in economics portrays activity within an equilibrium steady state. The interacting agents in the economy are typically homogenous, solve well-defined problems using perfect rationality, and act within given legal and social structures. The complexity approach, by contrast, sees economic activity as continually changing—continually in process. The interacting agents are typically heterogeneous, they must cognitively interpret the problems they face, and together they create the structures—markets, legal and social institutions, price patters, expectations—to which they individually react. Such structures may never settle down. Agents may forever adapt and explore and evolve their behaviors within structures that continually emerge and change and disappear—structures these behaviors co-create. This complexity approach does not replace the equilibrium one—it complements it.The papers here collected originated at a recent conference at the Santa Fe Institute, which was called to follow up the well-known 1987 SFI conference organized by Philip Anderson, Kenneth Arrow, and David Pines. They survey the new study of complexity and the economy. They apply this approach to real economic problems and they show the extent to which the initial vision of the 1987 conference has come to fruition.

W. Brian Arthur is a Citibank Professor at the Santa Fe Institute. From 1983 to 1996 he was Dean and Virginia Morrison Professor of Population Studies and Economics at Stanford University. Arthur has been associated with the Santa Fe Institute since 1987; he directed its first program: the economy as an evolving, complex system. He currently serves on SFI’s science board and its board of trustees and is well known in economics for his work on increasing return and path dependence. Steven N. Durlauf is professor of economics at the University of Wisconsin at Madison and since 1996 co-director of the economics program at the Santa Fe Institute. He received his B.A. in economics from Harvard in 1980 and his Ph.D. in economics from Yale in 1986. He has published widely in the areas of macroeconomics, econometrics, and income inequality. David A. Lane is professor of statistics in the Faculty of Economics at the University of Modena in Italy. He is a member of the external faculty and the science board of the Santa Fe Institute and is a past co-director of the Institute’s economics program. W. Brian Arthur is a Citibank Professor at the Santa Fe Institute. From 1983 to 1996 he was Dean and Virginia Morrison Professor of Population Studies and Economics at Stanford University. Arthur has been associated with the Santa Fe Institute since 1987; he directed its first program: the economy as an evolving, complex system. He currently serves on SFI’s science board and its board of trustees and is well known in economics for his work on increasing return and path dependence. Steven N. Durlauf is professor of economics at the University of Wisconsin at Madison and since 1996 co-director of the economics program at the Santa Fe Institute. He received his B.A. in economics from Harvard in 1980 and his Ph.D. in economics from Yale in 1986. He has published widely in the areas of macroeconomics, econometrics, and income inequality. David A. Lane is professor of statistics in the Faculty of Economics at the University of Modena in Italy. He is a member of the external faculty and the science board of the Santa Fe Institute and is a past co-director of the Institute’s economics program.

Contents
Introduction
W. B. Arthur, S. N. Durlauf, and D. Lane 1
Asset Pricing Under Endogenous Expectations in an
Artificial Stock Market
W. B. Arthur, J. H. Holland, B. LeBaron,
R. Palmer, and P. Tayler 15
Natural Rationality
V. M. Darky and S. A. Kauffman 45
Statistical Mechanics Approaches to Socioeconomic
Behavior
5. N. Durlauf 81
Is What Is Good for Each Best for All? Learning From
Others in the Information Contagion Model
D. Lane 105
Evolution of Trading Structures
Y. M. loannides 129
Foresight, Complexity, and Strategy
D. Lane and R. Maxfield 169
The Emergence of Simple Ecologies of Skill
J. F. Padgett 199
The Economy as an Evolving Complex System II, Eds. Arthur, Durlauf, and Lane
SFI Studies in the Sciences of Complexity, Vol. XXVII, Addison-Wesley, 1997 XI
Xli Contents
Some Fundamental Puzzles in Economic History/
Development
D. C. North
How the Economy Organizes Itself in Space:
A Survey of the New Economic Geography
P. Krugman
Time and Money
M. Shubik
Promises Promises
J. Geanakoplos
Macroeconomics and Complexity: Inflation Theory
A. Leijonhufvud
Evolutionary Dynamics in Game-Theoretic Models
K. Lindgren
Identification of Anonymous Endogenous Interactions
C. F. Manski
Asset Price Behavior in Complex Environments
W. A. Brock
Population Games
L. E. Blume
Computational Political Economy
K. Kollman, J. H. Miller, and S. Page
The Economy as an Interactive System
A. P. Kirman
How Economists Can Get ALife
L. Tesjatsion
Some Thoughts About Distribution in Economics
P. W. Anderson
Index