I've been reading the debate occasioanlly in the Quarterly Journal of Austrian Economics and even overheard some arguments about the topic, but I must admit I never quite understood the conflict. Can anyone explain why Austrians have a problem with indifference curves?
When it comes down to it, the issue is due to the idea that preference can only be inferred as being demonstrated through action. All else is hot air and speculation, since from an epistemological point of view, we cannot in any reliable way make inferences about preferences aside of this, and it is somewhat naive to rely on survey results etc (for fun, I always suggest economists should ask people if they cheat on their spouses). It has been retorted by some (Nozick, Caplan), that the Austrians are being hypocritical since they use indifference to define the very concept of a good. A response by Hoppe (which I am pretty much in accord with), is that preference is over what the actor regards as relevant in his choice, not perhaps superficial, physical or other characteristics identified by an outside observer.
A sophisticated neoclassical might respond then that all their doing is saying the same thing with regard to all the points on the indifference curve, and in a sense they're not actually violating anything the Austrians are saying since constrained optimisation of a utillity function given a budget set (that forms a flat hypersurface) picks out a unique demand solution if the indifference curve is smooth and convex. The actual decision is between bundles of varied preference (and when you allow for nonsatiation of wants, will conveniently be at the tangency of both curves/surfaces). It's then perhaps somewhat ironic, that while in principle allowing for indifference "in principle" neoclassicals are smart enough to usually make the conditions on their mathematical treatment so confined and limiting(regardless of their lack of realism) that the ambiguity and indeterminancy of solutions that would otherwise result are avoided (e.g. if the indifference sets were not convex, or the budget surface was not of a nice flat or convex shape itself). Also, inevitably as a result, a lot of nontrivial discontinuous phenomena involving marginal utillity theory properly understood (given that the ordinal ranking of means only follows as a result of the ordinal ranking of ends) are sidestepped and ignored, usually under the pretense that they can be ignored once you look at large sample sets. What is furthermore strange is that the propisitions of utillity monotonically increasing utillity at a diminshing rate pay actually no essential role in deriving demand solutions in the neoclassical approach (unlike in Bohm Bawerk's Austrian price theory). A big hoohah is usally made by many microeconomics lecturers and textbooks about the fact that the marginal rate of substitution is invariant under monotonic transformations. It certianly is. But the fact is trivially obvious that it is invariant under all functional transformations given the chain rule of high school level calculus given that it is the ratio of 2 partial derivatives (I have honestly wondered sometimes if me, Hicks and possibly Samuelson were the only ones who realised something this glaringly obvious).
In some ways, given what I've said above, perhaps the Austrians (especially the latter ones) have wasted much breath and ink in focusing on what essentially is a side issue, since indifference along with the other assumptions of standard neoclassical microeconomics are simply a limited means to reproduce the same basic results of price theory in a fashion that superficially and visually looks quite sophisticated and impressive to the mathematically neophyte layman. This takes attention away from the more serious problems and issues regarding omniscience and circularity involved when treating the problems of price theory are treated utillising a framework that involves equilibrium constrained optimisation in the Walrasian manner. This is what Mises really focused on in his critique of the Walrasian school, and it makes sense given the (Plain State of Rest) price theory he employed and inherited from his mentors Menger and Bohm Bawerk (but unfortunately much neglected in its development since, aside of Rothbard's incomplete re-exposition and synthesis with Wicksteed's price theory in MES, 1962), shows how prices are determined in a competitive process between buyers and sellers, without requiring any assumptions about correct expectations, prior coordination etc on the part of market participants. Understanding Hayek's work on information I think can be improved given a sound knowledge of Bohm Bawerk's price theory too, since it allows us to realise how the price formation process must lead to and inform the constant revision of plans and expectations on a market, since most buyers and sellers have max bid prices not near the equilibrium price (aside of the marginal buyer and seller, between whose bids the zone in which the clearing price is determined).
In any case, sorry for the volumnous post, I hope it helped!
"When the King is far the people are happy." Chinese proverb
For Alexander Zinoviev and the free market there is a shared delight:
"Where there are problems there is life."
The essential problem with them is that no one is ever completely indifferent when it comes to choices. I'm sure that if you analyze the many choices that you make in any particular day, this will become abundantly clear.
My latest example involves QuickBooks. I'm working on organizing my year-end finances and realized that I want to learn more about this program. I like to learn how to use computer programs by reading books (a bit old-school, perhaps, but that's me). I could have bought a book but I found one at the local library that will serve my needs. I would rather drive the extra couple of miles to the library than to pay to download the eBook version to my Kindle or to buy it at the bookstore around the corner.
In other words, indifference curves fail to take into account the true complexity of decision making. The adherents to indifference curve theory think that I buy yellow dress shirts without realizing that I buy pale lemon yellow dress shirts because the 1984 book Color for Men says that I look best in them and that I only bought that book because Dressing the Man demonstrated how important clothes of the proper color are in how I look.
I recently blogged about the importance of knowing the details related to real estate decisions in CapStruc Advisors, PI.
abskebabs:A response by Hoppe (which I am pretty much in accord with), is that preference is over what the actor regards as relevant in his choice, not perhaps superficial, physical or other characteristics identified by an outside observer.
Here is the Hoppe article that discusses this:
http://mises.org/daily/2003