In Defense of Indifference The rejection of indifference curve analysis is widely seen as one ofthe Austrians most radical differences with neoclassical microeconomic theory. So far as I can tell, only Mises and Rothbard specifically addressed this issue; Mises in section 1, chapter 2 of Theory of Money 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 crucial fallacy is that indifference cannot be a basis for action.
If a man were really indifferent between two alternatives, he could not make any choice between them, and therefore the choice could not be revealed in action.” Mises goes into detailed critiques of Fisher, Bohm-Ba werk, and a few other theorists who implicitly rely on IC analysis, but again his 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 in toan body of economic thought which purports to be militantly anti-behavioral (see e. g. Rothbard’s intro to Theory and History).
I can have all sorts of preferences that are not revealed in action, nor could they be revealed in action. For example, my preference for ice cream yesterday can no longer be revealed, since I had no ice cream yesterday and any present action regarding ice cream would merely reveal a present preference for it, not a past one. And yet, I have introspective knowledge of my ice cream preferences from yesterday. Similarly, Ican never reveal my preference for products at prices other than the market price, but by introspection I can know them. In precisely the same way, I can know some cases in which I am indifferent.
The Essay on Ice Cream
Of the numerous jobs that I have had in the last few years, only one has maintained a lasting hold on me. I return again and again to the call of serving the same gratifying, palatable treat, that amazing creation called ice cream. With the experience I have had, I could have aspired for a more professional working environment than Frosty's Frozen Yogurt or Baskin Robins. Yet, for some unknown ...
I am often in differen between the colors of clothes; though I pick one color, I know that I would have picked the other if the prices were not equal. Interestingly, Rothbard at one point reverts to some conclusions of IC analysis which are inconsistent with his announced discrete marginal utility approach. Thus on p. 797 of M, E, &S, Rothbard suddenly introduces “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 makes incomprehensible. And once you accept IC analysis, large pieces of modern micro which Austrians have generally shunned have new light shed upon them. Utility functions, for example, can be understood as merely summarizing all of a person’s indifference curves.
While the popular obsession withthe m may still be criticized, there is no principled, methodological objection to them; they may be sterile, but they aren’t incoherent.
