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April 26, 2018 

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RESERVE REQUIREMENTS: Rules by the Federal Reserve System governing the amount of bank reserves that banks must keep to back up their deposits. Legal reserve requirements came about because banks that practice fractional-reserve banking are sometimes inclined to make too many interest-paying loans and neglect to keep enough reserves on hand to pay their depositors. In principle, the Fed can alter reserve requirements to control the money supply. In practice, however, the Fed prefers to use open market operations or the discount rate.

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THEORY:

An empirically verified, interrelated body of general principles, axioms, and assumptions that is used to explain and understand real world phenomena. Theories are the cornerstone of the scientific method. They generate the hypotheses that are verified against real world data. The construction and refinement of theories, accomplished through the hypothesis verification process, is the primary goal of doing science.
A theory is both the "starting point" for doing science and the "end product" of the scientific method. A theory creates a framework for investigating and explaining the world. It helps make sense out of the happenings of the world by explaining WHY things happen.

A Spotlight

A theory places the scientific spotlight on specific phenomena to be studied. A theory of the market, for example, places the scientific spotlight on voluntary exchanges. A theory of business cycles places the spotlight on macroeconomic instability. The focus provided by different theories establishes order for the scientific method and creates an agenda for continued scientific scrutiny.

Universal Explanation

The best theories are those offering universal explanations about the world. A theory that explains ALL types of consumer behavior is better than one which ONLY explains how consumers behave when on roller skates. In fact, the scientific method is best thought of as the process of identifying general principles that operate WITHOUT exceptions.

The Building Blocks

When building a theory, two types of general principles are involved. Both are essential.

  • Verified Principles: These are principles that have been confirmed through the hypotheses verification process. These are THE fundamental laws of nature that science seeks to identify. The law of demand is perhaps the most noted verified principle in economics and the theory of markets. Although it began as a hypothesis many decades ago, economists have tested and verified it time and time again.

  • Unverifiable Axioms: These are beliefs and values that cannot be directly tested against real world data. Axioms are basic, unverifiable world view assumptions, including personal beliefs, political views, and cultural values, that form the foundation of a theory. One common example of an unverifiable axiom is belief in a supreme being. In other words, God's existence cannot be directly verified. Virtually every scientific theory contains such unverifiable axioms.

A World View

The unverifiable axioms that make up a theory, more often than not, capture a larger world view. This world view generally reflects a specific religious belief, political orientation, and overall philosophy of life. One world view might be the notion that humanity is essentially the "center of the universe." A contrasting world view might be that humanity is nothing more than "an inconsequential speck" floating through the universe.

And Some Politics

Unverifiable axioms comprising theories are also intertwined with political views. With the ever present policy implications of economics, world views are probably as important to economic theories as they are to any other scientific discipline. The basic belief axioms of an economic theory inevitably include world views about the political system, individual freedoms and responsibilities, the nature of humanity, and the role of government.

In particular, while political conservatives have one world view, political liberals have another. These world views are, more often than not, polar opposites. They also reflect philosophical beliefs that are not directly testable.

Perhaps most important of all, an economic theory is generally built upon some sort of political philosophy and world view. That is, they can be characterized as reflecting either a conservative or liberal political view. The underlying political views then influence normative economic policy recommendations implied by the theories.

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Recommended Citation:

THEORY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: April 26, 2018].


Check Out These Related Terms...

     | hypothesis | verification | principle | abstraction | world view | data | empirical | model | phenomenon |


Or For A Little Background...

     | scientific method | science | political views | assumption | cause and effect | positive economics |


And For Further Study...

     | economic thinking | dismal science | economics | seven economic rules | fallacies | seventh rule of complexity | economic analysis | social science | fallacy of false cause | normative economics | consumer demand theory | short-run production analysis | factor market analysis | aggregate market analysis | Keynesian economics | monetary economics |


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