I was fumbling around through a couple of lectures on the Mises website, and I ran into one of Robert Nozick's criticisms about Austrian economics. One of the things he deals with is how the Austrian concept of indifference is incompatible with the law of marginal utility. I read Block's reply to this, and personally, along with Block I find it "one of the most brilliant and creative criticisms that has ever been levelled against any aspect of Austrian theory."
"the Austrian theorists need the notion of indifference to explain and mark off the notion of a commodity, and of a unit of a commodity. . . . Without the notion of indifference, and, hence, of an equivalence class of things, we cannot have the notion of a commodity, or of a unit of a commodity; without the notion of a unit ("an interchangeable unit") of a commodity, we have no way to state the law of (diminishing) marginal utility. (1977, pp. 370–71)"
Essentially Nozick is saying that the without the concept of indifference, Austrians can't say two means constitute the same good. Since Rothbard classifies goods as two things of "equal servicability", doesn't choosing one of the goods imply that you are either 1)indiferent about which one you choose, or 2)preferring one over the other, implying that one gives greater utility and that they are not the same good? If you reply to Nozick with 1, it means you are accepting indifference, and if you reply with 2, you are basically saying that there is no such thing as a good in economics, which would tear the entire Austrian edifice down.
My own fashioned reply to this is that classifying two means as the same "good" is to rank them on a value scale while preferring one of the same units of a good (A) to another (B) is to choose between them. For example, someone is making a sandwich and needs two loaves of bread (considering two loaves of bread as one good), and opens up the plastic containing the bread and picks two loaves from it. In his mind, since each two loaves of bread is one good, there are five interchangeable units of the good in the container. So he ranks the 1st unit of the good on the top of his value scale, right under the distutility of utilizing labor/time in taking the bread out, and then the other bread goods ranked under it, implying that he will only take one unit of the bread because he does not need the others since the effort/time is too much (in essence he's plain saving the rest, but that deals with time preference, which doesn't really pertain to the situation). Since the goods give equal servicability, he ranks them accordingly and in this particular situation he only needs one since the benefits are greater than the costs (he doesn't need any more sandwiches, so he ranks additional units of the bread lower since the servicability they provide to his specific ends get less and less).
But when he chooses the 1st unit of the good, he prefers unit of bread good A to the others (lets simply say the utility of choosing A was greater because it was on top of the others). In order for him to choose between the two goods, he must rank them in terms of utility (he can't be indifferent or else the Austrians would lose the argument) with bread good A providing a greater service of utility (its closer) to the other bread goods (it takes time to fish through the wrapper and get the others). Clearly he prefers one unit of bread to the other unit of bread, implying choice and two different levels of utility, but when he considers them the same good he ranks them according to their equal servicability as he is not choosing between units of the good.
Anyway, I'd be interested to hear other's people's replies. From looking at some of the Austrians who've replied to Nozick's conundrum, it seems to be a question they had to think about and reformulate the Austrian approach to counter. Most criticisms are responded by Austrians like "You don't understand this, and this is why...", whereas this is something that they actually had to think about because I don't think Mises or Rothbard ever considered Nozick's question.
Can someone briefly explain to me why mainstream economists think indifference is a relevant concept?
Also, I don't see why this...
... poses a problem for Austrians. I mean, why can't we just accept this, and say two goods are homogenous if the actor is indifferent between them. Why does this even need a rebuttal?
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If two things are the same commodity, they must be equivalent, and consumers MUST be indifferent with respect to their choice of either. Austrians reject this, asserting that a consumer's choice is an ad hoc display of preference. But if two commodities are equivalent, you can't have a greater preference for either.
The answer is that "commodity' is a convenient abstraction. Widgits may be equivalent in make, but are not equivalent in accessibility or other factors. Even choosing between two widgits on my right or left is not a choice between two equivalent commodities because I'm right handed. Its up to consumers to decide what counts as a "commodity".
If two things are the same commodity, they must be equivalent, and consumers MUST be indifferent with respect to their choice of either.
Equivalent in the mind of the actor involved, I agree. Equal serviceability.
Austrians reject this, asserting that a consumer's choice is an ad hoc display of preference. But if two commodities are equivalent, you can't have a greater preference for either.
I don't see how this is a rejection of the first point. I want a sweater, but I am indifferent to whether it is blue or green. In my mind, they are goods of equal serviceability (the colour has no relevance for how much utility they will bring me). So the law of marginal utility applies to sweaters as a homogenous class. The fact that I bought the blue sweater is not a display of my preference for a blue sweater over a green one. It is a display of my preference for a sweater over no sweater. By observing me, you don't know whether my preference was for a blue sweater, or just any sweater.
I don't think this is the "answer" (in fact, I don't see what the problem is). I don't see how the law of marginal utility can work without the idea of commodity. If you prefer the widgit on your right because its easier for you to reach, then this means we can't consider the two widgits as units of the same good (they are not of equal serviceability to you). So the law of marginal utility doesn't apply (and never applies), and we can't say anything about the utility you will receive if you pick up the left widgit after you have picked up the right one. It might as well be two completely different objects we are talking about. That cannot be right. Commodity must be a real category, not a 'convenient abstraction'.
I've just re-read Hoppe's note again (I read it last night). What I've said above is a paraphrase of what he is saying. The answer you gave was Block's answer. I prefer Hoppe's. As he says though, this is a useful note of clarification, a slight improvement on Rothbard and Mises. I was imagining some major hole in Austrian theory that Nozick had found, but Hoppe's clarification is how I always understood it anyway. No observer of an action can fully understand the nature of that action, because he cannot know the actor's purpose.
Just as we apply praxeology to a world where humans exist, and there is diversity of people and land, and leisure is prefered to labor, etc, we also are applying it to a world where some objects, in the mind of humans, form a class of goods of equal serviceability. In this real world, where people do think in this way, the law of marginal utility applies. If we lived in a world where humans never consider two objects to have equal serviceability, then in that world there would be no law of marginal utility, because there would be no concept of homogenous goods.
trulib:I don't see how the law of marginal utility can work without the idea of commodity.
trulib:It might as well be two completely different objects we are talking about.
trulib:It is a display of my preference for a sweater over no sweater. By observing me, you don't know whether my preference was for a blue sweater, or just any sweater.
trulib:That cannot be right. Commodity must be a real category, not a 'convenient abstraction'.
Well what I mean by a real category is that people must really think of things in terms of interchangeable units. If they didn't, then the term 'supply' wouldn't make any sense. So we wouldn't get very far in economics without assuming that people do really think in terms of different objects being of equal serviceability, i.e. without the concept of indifference. I am using the term commodity to mean "a set of goods with equal serviceability from the point of view of the actor". Hence I call it a real category. You are defining it as a homogenous class of goods, which is the same thing. So maybe I misunderstood what you meant by convenient abstraction.
So Block would say that when I made a choice to go to the shop and get a sweater, I was considering sweaters as a homogenous class of goods. Then when I get to the shop, suddenly sweaters stop being a homogenous class of goods, and I differentiate them based on their accessibility, choosing the top one. So indifference only applies before the action took place, so is out of scope of praxeology. The fact that I picked that particular sweater was because it was the one on top, hence I was no longer considering all the sweaters to be homogenous at the moment I picked one up.
Hoppe would say that I was considering the pile of sweaters to be comprising a homogenous set of goods throughout the action, even while picking up one of them.
It does seem rather ad hoc to emphasize differences in accessibility, and to consider a homogenous set of goods suddenly "heterogenized" when a choice is made to take one unit and not another. I don't think this is necessary.
The act of "picking up a blue sweater" or "picking up the sweater on the top of the pile" is just not what Hoppe calls a 'preferred description' of the action; the preferred description is "picking up a sweater" since this captures the essence of the action and its purpose, and leaves out details that were insignificant from the point of view of the actor; i.e. that which the actor was indifferent about. The fact that I picked up the one on top of the pile merely reflects me trying to minimize the costs of the action, not a reflection of me suddenly considering the goods heterogenous.
>>The act of "picking up a blue sweater" or "picking up the sweater on the top of the pile" is just not what Hoppe calls a 'preferred description' of the action
I think rather that Hoppe's point is that it may or may not be. When someone is picking up some particular sweater, you don't have access to the 'preferred description' of the action that involves that observed behaviour in quite the same way as when you specify a preferred description when you pose a hypothetical scenario.
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trulib:Well what I mean by a real category is that people must really think of things in terms of interchangeable units. If they didn't, then the term 'supply' wouldn't make any sense.
trulib:You are defining it as a homogenous class of goods, which is the same thing. So maybe I misunderstood what you meant by convenient abstraction.
trulib:So indifference only applies before the action took place, so is out of scope of praxeology.
trulib:It does seem rather ad hoc to emphasize differences in accessibility, and to consider a homogenous set of goods suddenly "heterogenized" when a choice is made to take one unit and not another. I don't think this is necessary.
trulib:The fact that I picked up the one on top of the pile merely reflects me trying to minimize the costs of the action, not a reflection of me suddenly considering the goods heterogenous.
(I can't quote for some reason, but I am quoting Sieben)
This dilema has posed quite a problem to me for some time. Although I find Block's answer a somewhat weird and cumbersome approach, it is really the only logical and bulletproof way to think about the problem. Austrians have really only three direct answers to Nozick's challenge, either they accept indifference entirely (clearly a loss and againist major tenets of Austrianism), except indifference when choosing between the "same good" (skirting the issue), or maintain indifference in only the psychic realm and that every action can only express differing preferences.
At first I was convinced that individual's could be indifferent in choosing between goods they considered the same commodity. Although this approach somewhat settles the matter nicely, it can't really defend itself well. Take the individual above who is at a clothing store and picks the top sweater off of a pile. He may consider all the sweaters homogenous but when the action occured he picked the sweater off of the top pile. But if he was indifferent between them all, why did he pick the top one? If he was truly "indifferent" between them he would stand there and not pick any of them, but in the end he picks one. The top sweater was closer to him and therefore a different good because it didn't have the same servicability as the others. It was closer and had a different subjective use in terms of getting the sweater off the table and into the actors cart. If the individual then decides to buy two sweaters (at the price it can buy two on its "demand curve") it takes another sweater off and then puts them both in his cart, now the sweaters are "sweaters in the cart" and the actor will be indifferent between them until a choice is made to deal with them (but of course their value is different according to the Law of MU). I think the best way to think of a homogenous supply of goods, as Sieben puts it, is "goods floating side by side in our heads".
I don't really think its a problem if indifference is a psychic phenomenon, because utility and value scales are also psychic phenomenons.
I don't know why its never used be a better example of indifference is calling a coin flip. When I said "tails" i don't really prefer tails, i just want to make a choice. This is what I prefer.
"If both the left and right water holes are equally atractive, and he can find no reason for preferring one or the other, the ass or the man will allow pure chance, such as a flip of a coin, to decide on either one. But on one he must and will decide." (MES 310).
In the end, you act towards whatever scenario tails entailed (pun intended :) ). You prefer scenario T to scenario H. If not, then you would have flipped the coin again hoping for a heads or just picked the heads.
Also relevant to this discussion is this paper by Ben O'Neill, "Choice And Indifference: A Critique of The Strict Preference Approach":
http://mises.org/journals/qjae/pdf/qjae13_1_4.pdf
I gave O'Neill's paper a quick read, and I still think he skirts the issue and somewhat redefines traditional Austrian economic points. The problem that I've always had with indifference (and something that plagued me when trying to think about it) is that it doesn't really answer the question as to why something was chosen. Even O'Neil dismisses the notion to some other field of science, saying:
"Lest there be any possible misunderstanding, it is important to note that the non-strict preference approach, resting on the praxeological interpretation of indifference, does not explain why the actor chooses the particular equally optimal action that is chosen. However, it does explain the fact that one of the equally optimal actions will be chosen, and that this necessitates some selection between the equally optimal actions. Under this view, the particular choice from among equally optimal actions is a matter that is outside the domain of praxeology and economics. It is an economically irrelevant choice in that it does not affect any of the satisfactions anticipated to be gained from action. The explanation of the particular choice from among equally optimal actions, if such is thought to be necessary at all, must arise from some other source, whether this is psychology, neuroscience, or some other field."
Which doesn't seem to answer the question at all and banishes it to some other field of science. If an individual is in a grocery store and wants to buy a box of "Cheerios", and then goes to the section where the Cheerios are, and sees "Cheerios on the left" and "Cheerios on the Right", he still will pick one, implying differing degrees of servicability, and hence different goods. But then the subjective notion of a good changes and now he has "Cheerios in his shopping cart" or just "Cheerios" in his mind. Although the approach is cumbersome and can imply ever-changing notions of a good, I think its the only way that the problem can be directly handled. The idea of a "good" is something that is in the actor's mind and can easily change minute by minute.
Also, even though indifference is a "psychic phenomenon" much in the same way "utility" and "value scales" are, I don't think that the Law of Marginal Utility isn't a praxeological concern now. Rothbard does leave out the notion of choice when describing the diminishing utility rankings of horses, saying that an individual sucessively finds one horse, then another, and then another. When talking about increasing utility rankings, the decrease in supply is from something that happened to the units (a horse died?) and now the individual shifts the horse in the sixth end to the higher ranked ends.
I wonder if Rothbard ever directly encountered Nosick's critcism.
Indifference has sexy curves.
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This dilema has posed quite a problem to me for some time.
Me too. I still feel as though Hoppe has the right answer. While Block's defense may not be wrong, I think his defense is not needed, given Hoppe's.
Tossing a coin is a better example because it removes the issue of accessibility. So the question we ask is: why did you choose Heads?
Block would say that although you were indifferent before the action, at the moment you called Heads, you considered Heads and Tails to be two different goods, and valued one over the other, for some reason. What reason? Who knows? Is Heads slightly easier to say than Tails??!! This is indeed weird and cumbersome.
Hoppe would say that the question doesn't really make sense, since "choosing Heads" was not the actual action, i.e. not the preferred description of the action. The preferred description was "choosing Heads or Tails". The reason for this action was to try to win a coin-toss; simple. So to the question "Why choose Heads?", the answer is "Because this will enable me to achieve my end of choosing Heads or Tails".
Is this skirting the issue? I don't think so, because it is very easy to ask a question by giving a non-preferred description of an action, and getting an answer similar to this. For example, the preferred description of the action I am doing right now is posting in an internet forum. Ask me why I am doing this and you will get a meaningful, interesting answer. Ask me why I am sitting at my desk, or why am I pressing buttons on a keyboard, or why I am looking at a computer screen, and the answer will be "Because they are means to enable me to achieve my end of posting in an internet forum."
What this means (I think) is that we don't need to think in terms of goods going from homogenous to heterogenous at the moment of action (although it may be useful to think of it that way), we just need to make sure that are using preferred descriptions of actions.
Utility itself is implied by the action axiom. Value scales arise because of the assumption of diversity among humans and environments. Indifference arises because humans tend to think in terms of goods, of various objects having equal serviceability to them. This is another assumption we must make, I believe, if we are to begin discussing "supply" and "demand".