Strange Theoretical Concepts in Economics

Every dollar spent is someone else’s income. This principle is not only fundamental but quite intuitive; it forms the bedrock of economic understanding. Nevertheless, many individuals often overlook this reality, quoting economic behavior in ways that mistakenly view expenditures as a one-way financial void that vanishes into a black hole from which it never returns. This article delves into some of the strangest and least understood theory concepts in economics, exploring why these common yet radical ideas might not be as straightforward as they appear.

The Existence of a Free Market

Is a truly free market even possible? For a market to function, rules must be established. These rules imbue the market with some level of governance, thereby rendering it less than fully 'free.' Someone must write these rules, enforce them, and ensure they are agreed upon by all parties. The notion of a completely free market is a fantasy, especially when considering the reality that even the most morally upright individuals set rules that favor themselves. Thus, the belief that a free market can exist or, by extension, that it is a good idea, is both odd and self-serving.

The Challenge of Modeling Human Behavior

Is it possible to model human behavior using mathematical equations? The natural sciences have long employed equations to model the behavior of the physical world, such as Galileo's studies of falling objects and the motion of celestial bodies. However, when applied to human behavior, the concept of using mathematical equations strikes many as profoundly absurd. How can something as complex and subjective as human behavior be distilled into an equation?

The Black Swan and Variance in Pricing Derivatives

One of the strangest theoretical concepts in economics has to be the use of variance in the pricing of derivatives. This idea might seem outlandish at first glance, yet the reality is that it works. The variance of the price of a share from its mean can indeed be used to calculate the value of options. This method, which attempts to measure the volatility of an asset, is a testament to the insightful yet abstract nature of economic theory. The Bachelier-Paulson model and more recently Black-Scholes model have successfully used this principle to predict and price derivatives, thus opening up a new frontier in financial mathematics.

Does Economic Growth Always Benefit All?

Another bizarre concept in economics is the idea that all economic growth is not necessarily beneficial. It may lead to a widening gap between the rich and the poor, exacerbating social inequality. This reality challenges the traditional notion that economic growth automatically translates to widespread benefit. So, while the economy might grow, the benefits may not be evenly distributed, leading to significant societal divisions and perhaps even greater social strife.

In conclusion, the world of economics is replete with strange and counterintuitive theories. From the very existence of a free market to the complex interactions of human behavior and the abstract but practical application of variance in the pricing of derivatives, these concepts challenge our assumptions and push the boundaries of traditional economic thought. By understanding these enigmatic principles, we can better navigate the complex and often paradoxical world of economics.