Theories

People frequently miss use the word “theory.” They often use the word theory when the more precisely mean hypothesis. I will describe these two terms in layman’s words to make a distinction:

THEORY

A theory explains why specific behavior occurred in the past and provides a basis for explaining expected behavior in the future. Sound reasoning or empirical evidence provide the basis for the explanations provided in theory. Although developed rigorously, theories always remain open to disconfirmation.

HYPOTHESIS

An hypothesis speculates about behavior in either the past or the future. The reasoning behind an hypothesis, although possibly sound, has not been subject to rigorous testing, either with logic or experimentation. Well-formed hypotheses may form the basis for the development of theories, but they still don’t fulfill the requirements of theories

This distinction plays an essential role in the development of economics. We can accurately describe economics as a theoretical science (as opposed to empirical science) because the only way to develop sound theories in economics consists of using reason. That fact, however, makes the soundness of economic theory no less valid.

When you hear someone dismisses a statement of economic theory as “only theory,” asked them whether they think the statement refers to a hypothesis or a statement of theory for which they have a disconfirmation.

Never underestimate the importance of theories. We require theories to conduct our day-to-day business. I will expand on this point when I add to this page on theories.

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