Subject: In Defense of Indifference The rejection of indifference curve analysis is widely seen as one of the 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 it is 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-Bawerk, 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 in action? It strikes me as a peculiar importation of behaviorism into an 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, I can 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. I am often indifferent 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 which Rothbard'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 with them may still be criticized, there is no principled, methodological objection to them; they may be sterile, but they aren't incoherent. --Bryan Caplan --Department of Economics --Princeton University