Relations, Risks, Portfolio Theory and Key Natural Laws in Economics

Abstract

Economics can be more practical if relationship and risk, as well as scarcity and abundance, are considered key elements in economic analyses. By applying relations and risks through MPT, the long and difficult task of introducing an appropriate economic environment into a balanced pricing model can become a reality. Accordingly, both individual and social rationality can function independently and a strong balancing effect can be established without any governmental intervention in the pricing model. Alternatively, a more philosophical approach is required for revealing the content of key natural laws in macroeconomics. Several ancient conceptual schemes and doctrines that are well known among Chinese people are suggested to serve this purpose. The conclusion from this study is that the evolution of the global economy still complies with key natural laws in macroeconomics; however, severe violation of key natural laws in microeconomics requires immediate remedy.

Microeconomic Natural Law, Portfolio Principle and Economics Textbooks

“…According to Yu [1], by starting from a normative framework and considering relations and risks, the rate of return on investment (ROI) i r  for a nonfinancial product i can be determined using…”

“…This behavioral model links i r  to, in order, i R  , the supply-side content of i r  ; c R  , the supply-side ROI for product i's substitutes or (and) complements that can directly affect product i; and g R  , the supply-side ROI for product i's system variable 2 . After including the system variable g R  , all three coefficients in Equation (1) can be proved econometrically to have the following relationship 3 : 1 2 3ˆˆ1…”

“…As explained in Yu [3] [4], the main proposition of the microeconomic natural law is to endogenize the environmental factor. Achieving this task involves applying the system variable to represent the environmental factor in constructing a model such as Equation (1).…”

“…For different financial assets, when their returns cannot exactly replicate each other, the variable, c R  , in Equation (1) can be removed to yield [1].…”

“…As long as natural resources are necessary to sustain life, natural laws must be relied on to govern economic behavior. After initiating from the risk dimension with a normative framework, the microeconomic natural law automatically endogenizes the necessary environmental variable in the pricing mechanism which can inherently have a strong automatic stabilization effect and be analyzed positively [1] 1 .…”