In Defense Of Indifference Essay, Research Paper
In Defense of IndifferenceThe rejection of indifference curve analysis is widely seen as one ofthe Austrians most radical differences with neoclassical microeconomictheory. So far as I can tell, only Mises and Rothbard specificallyaddressed this issue; Mises in section 1, chapter 2 of _Theory ofMoney and Credit_; Rothbard in section 9 of chapter 4 of _M,E,&S_. In any case, I think that they are wrong, and I’d like to explain why. The essential objection to IC analysis, on my reading, is merely that itis impossible for _action_ to demonstrate indifference. Action demonstrates preference, not indifference. Rothbard puts it thusly “The crucialfallacy is _that indifference cannot be a basis for action._ If a manwere really indifferent between two alternatives, he could not makeany choice between them, and therefore the choice could not be revealedin action.” Mises goes into detailed critiques of Fisher, Bohm-Bawerk,and a few other theorists who implicitly rely on IC analysis, but againhis basic objection is the same. But why assume that no preference can exist which cannot be revealed inaction? It strikes me as a peculiar importation of behaviorism intoan body of economic thought which purports to be militantlyanti-behavioral (see e.g. Rothbard’s intro to _Theory and History_). I can have allsorts of preferences that are not revealed in action, nor could they berevealed in action. For example, my preference for ice cream yesterday
can no longer be revealed, since I had no ice cream yesterday and anypresent action regarding ice cream would merely reveal a _present_preference for it, not a past one. And yet, I have introspectiveknowledge of my ice cream preferences from yesterday. Similarly, Ican never reveal my preference for products at prices other than themarket price, but by introspection I can know them. In precisely the same way, I can know some cases in which I amindifferent. I am often indifferent between the colors of clothes; though I pick onecolor, I know that I _would have_ picked the other if the prices werenot equal. Interestingly, Rothbard at one point reverts to some conclusions of ICanalysis which are inconsistent with his announced discrete marginalutility approach. Thus on p.797 of _M,E,&S_, Rothbard suddenlyintroduces “substitution” and “income” effects working in opposite directions –a result that can be easily derived from the IC approach, but whichRothbard’s own discrete marginal utility approach makesincomprehensible. And once you accept IC analysis, large pieces of modern micro whichAustrians have generally shunned have new light shed upon them. Utilityfunctions, for example, can be understood as merely summarizing allof a person’s indifference curves. While the popular obsession withthem may still be criticized, there is no principled, methodologicalobjection to them; they may be sterile, but they aren’t incoherent.