“Pure theory” is an explanation of some phenomenon that is always universally true. In contrast, a specific theory is an explanation of a particular event, location, or substance. For example, the pure theory of gravity applies to the whole universe, while a theory of the gravity of the earth specifically explains how the earth’s gravity is based on its mass and shape. In economics, a pure theory of the business cycle applies to all cycles, while a theory of the Great Depression would have the specific causes of that downturn.
Pure theory can be axiomatic-deductive, meaning the theory is derived from some basic premises. The premises are inductive, generalizing from observations. Pure microeconomic theory is derived from premises such as scarcity, diminishing returns, unlimited human desires, the tendency to want goods sooner rather than later, economizing behavior, subjective values, and the uncertainty of the future. These premises are based on general observation, rather than any specific experiments or historical case studies.
The term “theory” is often used to mean a conjecture or a hypothesis. A conjecture is an educated guess, which needs further logic and evidence. A hypothesis is a proposition that needs further testing. A “theorem” is best defined as an explanation whose logic has been verified as sound, and which, for particular theories, has been well tested. Therefore a theory is an explanation that has been warranted by sufficient logic and evidence for a scholar to be confident of its truth.
A conjecture is an educated guess, which needs further logic and evidence. A hypothesis is a proposition that needs further testing. A “theorem” is best defined as an explanation whose logic has been verified as sound, and which, for particular theories, has been well tested. Therefore a theory is an explanation that has been warranted by sufficient logic and evidence for a scholar to be confident of its truth.
When some say that an explanation is true in theory but false in practice, they are defining “theory” as a false conjecture rather than a warranted proposition. Since theory is an explanation of reality, if something is true in practice, the explanation must also be true. Anything true in theory is true in practice, and anything true in practice is true in theory.
Any science must be founded an axioms, or fundamental propositions. These premises are universal to the field. An example in economics is the premise that some goods are scarce, meaning that when the goods are free, the quantity demanded is greater than the quantity supplied. We know the existence of scarcity from general experience.
Pure theory includes both conditional and unconditional propositions. A conditional proposition applies if the condition exists, such as “if a person is narrowly self-interested,” he seeks to maximize profit. Thus economics does not say that all firm owners maximize profit, as there are other goals that generate utility. The theory of profit maximization is conditional on it being a prime goal of a business owner.
The Austrian school of economic thought, especially Ludwig von Mises, bases some of its theory on the concept of human action. Mises called the pure theory of social science “praxeology.” Human beings have ends or goals, which they mentally rank as those of greater and lesser importance. They then economize in the use of means to achieve the more important goals. Thus human action involves purposeful behavior and is based on the fundamental axioms described above.
Universal morality or natural law is also based on premises, namely 1) the biological independence of individual thoughts and feelings; 2) the absence of inherent master-slave biological characteristics; 3) that each person has an individual sense of what is pleasing or displeasing to oneself. From these premises can be derived an ethic universal to humanity. The universal ethic in turn defines voluntary action, and then a pure market economy is defined as one in which there is no legal restriction or cost imposed on voluntary action. Economics therefore includes an ethical component.
The concept of cause and effect is foundational to all science. Every effect has a cause. Ultimately the concept is intuitive. Specific effects have specific causes, whether necessary or sufficient. The pure concept of cause and effect can be related to time, as an effect can follow the cause, but there can also be mutually determining causes and effects. Quantum physics might confound our intuitions, but experience and reasoned intuition warrant cause and effect as the foundation for a theory of pure theory.
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