The Computational Complexity of Games and Markets: An Introduction for Economists Andrew McLennan∗ University of Queensland December 2011 Abstract This is an expository survey of recent results in computer science related to the computation of fixed points, with the central one beingthat the problemof finding an approximate Nash equilibrium of a bimatrix game is PPAD-complete. This means that this problem is, in a certain sense, as hard as any fixed point problem. Subsequently many other problems have been shown to be PPAD- complete, including finding Walrasian equilibria in certain simple exchange economies. We also comment on the scientific consequences of complexity as a barrier to equilibration, and other sorts of complexity, for our understanding of how markets operate. It is argued that trading in complex systems of markets should be analogized to games such as chess, go, bridge, and poker, in which the very best players are much better than all but a small number of competitors. These traders make positive rents, and their presence is a marker of complexity. Consequences for the efficient markets hypothesis are sketched. Running Title: Complexity of Games and Markets Journal of Economic Literature Classification Numbers G12 and G14. Keywords: Computational complexity, two person games, Nash equilibrium, Scarf algorithm, NP, TFNP, PPAD, FPTAS, Lemke-Howson algorithm, Walrasian equilibrium, arbitrage, asset trading, efficient market hypothesis. ∗School of Economics, Level 6 Colin Clark Building, University of Queensland, QLD 4072 Australia,
[email protected]. McLennan’s work was funded in part by Australian Research Council grant DP0773324. I would like to gratefully acknowledge the comments received at Games Toulouse 2011, and at seminar pre- sentations at the Australian National University, the Institute for Social and Economic Research at Osaka University, and the Kyoto Institute for Economic Research.