INTRODUCTION

Mainstream discussions of Internet economics often rely on assumptions that were already seriously in doubt by the middle of the twentieth century. As it turns out, the rise of new economic thinking, along with new technology platforms culminating in the Internet, directly challenge many of those chief assumptions.

Twenty years ago, no one would have anticipated the Internet as we know it today. Consumer-grade computer modems were still in their infancy, and the few dial-up online communities that existed were a far cry from the globally connected ‘network of net­works’ that now pervades so much of what we do. In many ways, the Internet was a happy accident. What started out as isolated islands - universities, bulletin board systems, and commercial services - linked together and grew unexpectedly as the result of the actions of millions of unaffiliated people. The underlying software protocols opened up the ability to interact and speak freely across thousands of interconnected networks.

Even with the benefit of hindsight, traditional economics does not allow us to fully understand what led to this success. The digitization of information, dramatic increases in computing power, and declines in the cost of computer storage were all necessary conditions. Nevertheless, they alone are insufficient to explain how the Internet exploded into the thriving marketplace of innovation and economic growth that now pervades the daily life of an increasing number of individuals and organizations worldwide.

Many have tried to explain these phenomena in the language of traditional economic theory. We begin by describing some of the principles of neoclassical economics, and suggest ways in which it fails to fully capture the Internet’s dynamics and growth. We then outline the wave of new economic thinking referred to as ‘complexity economics’, and discuss how it helps to explain why highly networked systems often experience explosive growth. We show that the Internet can properly be understood as a complex adaptive system that also possesses a layered, end-to-end architecture - making it exceptionally well suited to promoting cascades of innovation.

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