‘Unreal Assumptions’ In Economic Theory: The F‐Twist Untwisted

Economic theory is often criticized for the lack of ‘realism’ of its assumptions. Milton Friedman rebutted such criticism with the famous dictum ‘the more significant the theory, the more unrealistic the assumptions’. Friedman's position, often called the ‘F‐twist’, stems from his failure to distinguish three different types of assumption. Negligibility assumptions state that some factor has a negligible effect upon the phenomenon under investigation. Domain assumptions specify the domain of applicability of the theory. Heuristic assumptions are a means of simplifying the logical development of the theory. It is argued that Friedman's dictum is false of all three types of assumption. Finally, it is conjectured that what began as a negligibility assumption may be changed under the impact of criticism first into a domain assumption, then into a mere heuristic assumption; and that these important changes will go unnoticed if the different types of assumption are not clearly distinguished from one another.