Central to economics is the concept of marginal utility. How do we value means and ends that they move from our scales of preferences to demand and supply curves. The theory of marginal utility addressed the value paradox which brought about the question of why people value gold more than water, when they need water to survive and not necessarily gold. With the theory of marginal utility we are made to understand that nobody ever values a whole category of goods, that is, no one values “gold” per se, or “water” per se. We all value specific units of gold or water that enter our purview for action. Therefore, in a desert, water will be more valuable to a man than gold and he will probably be willing to pay his entire net worth for a bottle of water. Hence the marginally utility of any good decreases with the addition of every successive unit of that good .
The value of any commodity to any acting individual is subjective only to that individual. Because of this subjectivity there isn’t an external objective unit by which we can measure that value of the commodity over another commodity for an acting individual. Hence if an actor decides between two alternatives A and B, and picks A, we can say he preferred A over B. But not that he preferred A 3 times more than B. Three times of what? It is only after he makes a choice by acting he demonstrates preference for A over B. We cannot know this until he make a choice by acting.
Any attempt to explain why he chose A over B is outside the scope of economics. Maybe he tossed a coin or was advised by a friend to choose A over B. This is not the concern of the economist. Our analysis begins from the point of demonstrated preference. Hence we can say on his scale of preference A is higher than B. And that is all. All attempts to assign cardinal quantities of some type or another, by the likes of Samuelson, Walras and Morgensten among others, to value are false.
The concept of indifference, introduced by John Hicks has gained a lot of prominence. It states that a person can value two commodities equally, and hence those commodities provide the same level of satisfaction to the acting person. This is fallacious on the following grounds:
- Making a choice among alternatives necessarily demonstrates preference. To act is to choose between alternatives, and to choose is to prefer.
- Hicksian theorists usually give the example of the famous fable of Buridan’s Ass to make their case. It is said that the ass was equidistant to two equally attractive bundles of hay and could not choose, hence it starved and died. This was considered rational behavior. Apart from the absurdity of comparing human action to the behavior of an animal, these theorists seem to forget that there is a third option — to starve to death. There is no way we can know that a person, if they were equidistant to, say 2 pieces of pizza, is indifferent about the 2 pieces of pizza, until they either take one piece or starve to death. Hence if they took one, we must necessarily say they preferred pizza 1 over 2, If they did not take any, and starved to death, we must necessarily say that “starving to death” was more valuable than pizza 1 and 2. Indifference, if a person truly feels this, lies within the sphere of the psychological. Saying someone may be indifferent about two goods is leaving economics and entering psychology.
- If economics has anything to say about indifference it would be that for any equally valued two alternatives those two alternatives are not alternatives per se, but simply part of the same stock of goods, which are equally interchangeable from the perspective of the actor.
- Also the consistency-constancy fallacy is used to make a case for Indifference. This was put forward by Kennedy (Kennedy 1950). Apparently according to Kennedy, if a person is indifferent about A and B over a period of time, we can say that they have selected it 50% of the time. First there is no way to actually know if a person is indifferent about A and B over time, because assuming they choose neither, A and B will never be reflected on their scale of preference, so there is no way to know that A and B were there in the first place. At least not from an economic analysis standpoint.
In conclusion, there is no such thing as indifference in valuing between alternatives. In praxeological economics we begin our analysis from the point of when a preference between alternatives is demonstrated after a choice has been made by an acting individual.
How about a person’s indifference between Coca cola and Pepsi?
This is an interesting position because if a person does not choose between either they do not necessarily starve to death instead they won’t get the refreshing satisfaction from the beverage. While it may be true that a person can feel indifferent about making a “choice” between “Pepsi or Coke’’, it is impossible to know from observation because such “indifference” is still in the person’s head and praxeological economics has nothing to say about it. Hence they have not made a choice at all, as choice necessarily requires action. We postulate about the existence of a scale of preference by a person before an act, and by logical implications we state that when they act whatever they do first will be on the top of their scale of preference. Hence, we make assumptions about preference ex-ante but only know what is truly revealed in a person’s scale of preference ex-post. Except we were there at the beginning of actually “seeing this person be indifferent about Coke or Pepsi ‘’ we would not even know there was a Coke or Pepsi in the first place. All we would know is that the person actually chose to starve or they chose a Pepsi or a Coke among certain alternatives. According to Rothbard “We deduce the existence of a specific value scale on the basis of the real act; we have no knowledge of that part of a value scale that is not revealed in real action.” (Rothbard 2001, 260). It is like when we use the evenly rotating economy to conceptually understand the difference between interest and profit, but we know in real life that there is no such thing as an ERE because if interest rates were guaranteed and never changed there won’t be uncertainty and if there is no uncertainty there is no need for money and if there is no need for money economic calculation come to a halt and society is reverted to a stone age existence. Hence while we can conceptually think that someone can be indifferent about two things, it does not tell us anything about their scales of value until they act by choosing between those things or choose another thing entirely.
I think the major reason why indifference curve has been so successful even making its way to mainstream economics textbooks is the Walrasian general equilibrium mathematical approach in neoclassical synthesis. That is if we can give it a unit we can then make certain assumptions about constants then calculate. While high math can be useful it is important to note that it is most useful in applied fields like finance that attempt to value assets and then create financing structures over long periods of time. Hence the term “value’’ is used carefully here, only in the sense of “exchange value” which is an objective representation of money prices that arises from subjective use values consumers place on that asset. Because when using money prices to make calculations about what an asset would cost over a period of time, you do have an objective unit. But because asset pricing is ultimately arrived at from the subjective evaluations of consumers these “objective models” have to be adjusted as people’s demonstrated preferences change overtime.
References
Rothbard 2001, “Towards a Reconstruction of Utility and Welfare Analysis,” in Economic Controversies
