In “Why I am not an Austrian Economist,” the neoclassicist Bryan Caplan objects to the Austrian School's rejection of the concept of indifference in economic analysis—which by implication denies the use of indifference curves as economic models. According to the Austrians, action can only demonstrate preference—not indifference—and the situation of an actor being indifferent among several alternatives is outside the scope of praxeological economics.

            Caplan interprets the Austrian view of indifference as an assertion that no preference can exist except as manifested in action. Caplan sees here a contradiction in Austrian theory—which purports to be anti-behaviorist but employs the allegedly behaviorist assumption that only preference embodied in action can be known. Caplan compares the Austrians to behaviorists in that they do not believe that there is more to one’s preferences than one’s action indicates. Caplan alleges that there exist preferences incapable of being revealed in action. His preference for an ice cream cone yesterday cannot be revealed by action, for example, because any present action would be an indication of present—not past—preference. Furthermore, Caplan claims that he can be indifferent among colors of clothes; he nonetheless picks one of the colors but knows that he would have picked the other if prices were not equal. 

            Caplan also alleges that Ludwig von Mises and Murray Rothbard themselves frequently referred to hypothetical preference. Rothbard often drew demand curves in his treatise in order to show the possible valuations of economic actors at other points than that representing the equilibrium price and quantity—at which the exchange actually occurred.

            In “Choice and Preference,” Gene Callahan responds to Caplan’s critique by noting that not every physical quality of a good is of praxeological relevance in considering an actor’s valuations. Only those differences that the actor himself sees as significant can be used as the basis for judgments of preference. It may well be true that the color of clothes has no economic relevance to Caplan—just as the spin of electrons composing the clothes has no economic relevance to virtually every purchaser of them.

            In picking one item of clothing over another, Caplan actually did display another preference: the preference for doing as little work as possible in picking an item of clothing; there might also have been other physical or economic properties besides color that Caplan considered significant when picking the sweater, including texture, weight, style, and price. In picking a sweater on the basis of those characteristics, he certainly demonstrated preference over all the other sweaters.

            Furthermore, Callahan sees Caplan as misinterpreting the Austrian position on indifference. Caplan seems to think that the Austrians view the idea of indifference as nonsensical. Callahan, however, understands that Mises and Rothbard consider indifference to be economically irrelevant. Economics analyzes not internal mental states but choices and actions; a claim that a choice took place on the basis of indifference is self-contradictory. Preferences not acted on might be relevant to psychologists and epistemologists, but not to economists.

            Callahan refutes Caplan’s assertion that action cannot reveal past preference by pointing out that action is temporal: it is aimed toward future satisfaction and must take time to realize. The fact that Caplan purchases an ice cream cone now indicates that he is acting on a preference that originated in his past—from the moment he began to direct himself toward purchasing the ice cream cone. If, yesterday, he allegedly wanted an ice cream cone but did not do anything to pursue one, the economist can only say that Caplan preferred what he actually did do yesterday to the pursuit of the ice cream cone at that time.

            Callahan does not view the use of indifference curves or any other economic models per se as problematic—so long as one keeps in mind the essential assumptions the models make and makes sure that one’s conclusions do not follow from the false assumptions. Indifference curves assume the possibility of goods’ subdivision into infinitesimal units and the possibility of arbitrarily small transaction costs—which is not necessarily true in reality. So long as indifference curves are used in such a way that these assumptions do not skew the realism of one’s conclusions, they are acceptable tools of analysis.

G. Stolyarov II is a science fiction novelist, independent filosofical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, The Autonomist, Le Quebecois Libre, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. His newest science fiction novel is Eden against the Colossus. His latest non-fiction treatise is A Rational Cosmology. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.