gpowell,
A requirement that a decision maker must be "far from indifferent" violates the utility maximization assumption. If one state is preferred to another and this state is achievable, then the economic decision maker will choose it – even if it is arbitrarily close to being an indifferent state.
There are several issues.
When I use the words "far from indifferent", I am saying the last good purchased with limited cash produced a psychic profit, with the satisfaction in use of the good purchased exceeding the satisfaction of the cash price paid if it had instead been held for purchases in an uncertain future. If I had started with more or less cash, my last actual purchase would have resulted in a smaller or larger psychic profit, respectively, even though no measurement is possible. My last purchase was the result of an actual and substantial subjective preference, and I wouldn't allow the transaction to be reversed without being forced to do so involuntarily.
Assume that I am willing to pay $2.50 to buy a can of pumpkin pie filling to bake a pie with a pie shell that I already have in the cupboard. The market price for a can is $5.00. My choice is to pay $2.50 too much for the satisfaction of baking and eating a pumpkin pie or to hold $2.50 more in cash than I would have preferred. The reachable states cannot be indifferent because the good to be purchased is indivisible. But even if I could buy half a can, that would not solve the problem because half a can is useless in baking a full pie, and a half sized pie can't be baked with my existing full sized shell. My satisfaction is also indivisible.
Alternately assume that the market price is $2.50 for a can of pumpkin pie filling and that a can of cherry pie filling is also $2.50. Further assume that I am indifferent between the satisfactions to be derived from baking and eating pumpkin and cherry pies if their prices and costs are the same.
It is the Austrian claim that action cannot be the result of indifference, so there must be an explanation for why my grocery bag contains either a can of pumpkin or cherry pie filling and why I am not still stuck in the store aisle pondering a choice. The answer is that apparent indifference inherently brings into play a second choice, i.e. whether to either pick and buy one of the two pie fillings by any means necessary, or to not buy either at all. Since this final choice is definitely rationally inferior to either of the filling choices, one filling will definitely be chosen.
mises.org
Should Indifference Curves Be Banished?
I’d like to close by noting that there is nothing objectionable, as far as I can see, in the mere notion of indifference curves. Here, some Austrians may part ways with me. The bone of contention will be whether a model, to be of any use, must be “essentially” realistic, or whether an admittedly unrealistic model may have its purposes. I hold that, so long as we don’t forget the unrealistic assumptions we have made, we are free to make what models we will and then see what insight, if any, they yield.
Indifferences curves depict the limit of a process in which we have assumed:
all goods can be divided into arbitrarily small units;
humans take such infinitesimal amounts into consideration when choosing;
and the transaction costs in any exchange can be made arbitrarily small.
If we keep the above (admittedly unrealistic) assumptions in mind then indifference curves can be used in much the same way as other limit constructs. However, they bear only a distant, very abstract resemblance to real economic activity. Not only are goods not perfectly divisible physically, but human considerations when choosing are even lumpier. When picking breakfast, I typically might choose between having two eggs or a bowl of cereal. The fact that if I were a preference-maximizing computer I would choose 1.0374 eggs and .462 bowls of cereal has only a remote bearing on what I will have for breakfast.
Regards, Don |
