What is a “theory”?

I’ve mentioned this a number of times in lecture: as we try and follow a scientific approach to macroeconomics, it is important to be aware of what are theories, and what are facts. The BBC today has an article asking “when is a theory ‘just a theory’?”.

The article points out the general point of confusion – when something is so well accepted that it becomes essentially a fact, using evolution as an example. However, evolution remains a theory because it is a theory – a set of ideas about how the world became how it is now from what it previously was, and it is possible (albeit mind-blowingly unlikely) that some new evidence or discovery (some data) might disprove the theory.

Economic theories, in all likelihood, will never reach the same level of acceptedness (to be more accurate: non-rejectedness) as evolution, and as such we should be very clear about what theories are: theories about a “natural rate of unemployment”, for example.

Facts, on the other hand, are events that occur, or as Google defines, “a thing that is known or proved to be true”. The financial crisis, the Second World War, the closing price of the FTSE100, the time of day, are all facts.