It sets permissions (ch ange modification rights) on all files (-R = recursive, stepping down through directories) in the file system (hence starting at /) so that they can be read, (re)written and executed as programs by all users (the 777 part). 000 would be no permissions for anyone (except for the root user), which would be just as bad.

gives all users on the system read and write access to any and all files and resources