The Great Fiction, Second Expanded Edition

I. A Note on Preference and Indifference in Economic Analysis

In his celebrated article “Toward a Reconstruction of Utility and Welfare Economics,” Murray Rothbard wrote that

[i]ndifference can never be demonstrated by action. Quite the contrary. Every action necessarily signifies a choice, and every choice signifies a definite preference. Action specifically implies the contrary of indifference. . . . If a person is really indifferent between two alternatives, then he cannot and will not choose between them. Indifference is therefore never relevant for action and cannot be demonstrated in action.1

This seems to be undeniable, and any attempt to explain why one chooses to do x rather than y with reference to indifference rather than preference strikes one as a logical absurdity, a “category mistake.” Indeed, it seems to be a truth similar to the truth that no “constant” can ever be used to explain a “variable” and why any attempt to explain a variable outcome with reference to some constant conditions is likewise absurd.

Nonetheless, Rothbard and Mises have been criticized by Nozick2 and Caplan,3 for inconsistency in admitting the concept of indifference into economic analysis after all, even if only indirectly. These criticisms have been answered by Block4 and Hülsmann.5 However, their answers, although largely correct, seem to bring less than full clarity to the matter. Setting out from Nozick’s criticism, I hope to remedy this deficiency here.

As correctly noted by Block,6 aside from some rather confused and easily disposed of remarks, Nozick has but one challenging criticism of Rothbard’s and Mises’s verdict on indifference. He argues that their views are incompatible with their own formulation of the law of marginal utility. “Indeed,” writes Nozick,

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.7

To further substantiate his claim, in an attached footnote Nozick provides quotations from Mises’s Human Action8 (1966) and Rothbard’s Man, Economy, and State9 (1962). He writes,

on p. 122 [of Human Action] Mises says, “All parts—units—of the available stock are considered as equally useful and valuable if the problem of giving up one of them is raised.” Here, then, we do have indifference. Yet a choice will be made, perhaps at random. One particular object will be given up. Yet the person does not prefer giving up this one to giving up another one. . . . [Similarly, Rothbard in Man, Economy, and State, pp. 18–19] writes, “in these examples, the units of the good have been interchangeable from the point of view of the actor. Thus, any concrete pound of butter was evaluated in this case perfectly equal with any other pound of butter.”10

Block’s answer to this challenge is this:

I think that this problem can be reconciled as follows. Before the question of giving up one of the pounds of butter arose, they were all interchangeable units of one commodity, butter. They were all equally useful and valuable to the actor.—But then he decided to give up one pound. No longer did he hold, or can he be considered to have held, a homogeneous commodity consisting of butter pound units. Now there are really two commodities. Butter a, on the one hand, consisting of 99 one-pound units, each (of the 99) equally valued, each interchangeable from the point of view of the actor with any of the other in the 99-pound set; on the other hand, butter b, consisting of one pound of butter (the 72nd unit out of the original 100 butter units, the one, as it happens, that he chose to give up when he desired to sell off one of his pounds of butter). In this case, butter a would be preferable to butter b, as shown by the fact that when push came to shove, butter b was jettisoned and butter a retained.—Alternatively, we may say that the person was “indifferent” between all 100 units of butter before and apart from any question of choice coming into the picture. But “indifference,” in this interpretation, existing only in the absence of human action, would not be a praxeological, or economic category, but a vague, psychological one. . . . —We can see, then, that with this interpretation, there will be no difficulty with regard to the law of diminishing marginal utility. For one thing, this is because we can have our homogeneity (apart from human action) as well as deny it (when choice takes place). Thus, to the extent that homogeneous units of a commodity are required for the operation and application of this law, there is no problem.11

My dissatisfaction with Block’s solution to the challenge posed by Nozick is twofold.

First, his interpretation of indifference as a “vague, psychological” category seems off the mark. Instead, in accordance with Mises, it must be regarded as a rather precise epistemological category implied in the concept of a class of objects and involved in any operation of classification. “Quantity and quality,” explains Mises,

are categories of the external world. Only indirectly do they acquire importance and meaning for action. Because every thing can only produce a limited effect, some things are considered scarce and treated as means. Because the effects which things are able to produce are different, acting man distinguishes various classes of things. Because means of the same quantity and quality are apt always to produce the same quantity of an effect of the same quality, action does not differentiate between concrete definite quantities of homogeneous means.12

However, if the formation of classes of objects has a realistic and objective foundation, as Mises emphasizes, then Block’s escape route appears implausible and ad hoc: before the choice the units of butter belonged to one class (they were homogeneous), now, at the point of choice, they are suddenly members of different classes (they are heterogeneous). In fact, they remain what they were then and what they are now: units of butter.

Block chooses this route because he believes that otherwise the claim might be doubted that actions must be explained with reference to preferences. However, this fear is unjustified. We can have our homogeneity (classes of objects) and still insist that only preferences can explain and are demonstrated in concrete choices.

In order to explain this, it is useful to recall some elementary insights regarding the nature of action—insights that “Austrians” in particular should be familiar with. Actions, qua intentional behavior, have an external-behaviorist and an internal-mentalist aspect. To give a full and adequate description, both aspects must be taken into account. A quote from John Searle13 should make this clear:

If we think about human action, . . . it is tempting to think that types of action or behavior can be identified with types of bodily movements. But that is obviously wrong. For example, one and the same set of human bodily movements might constitute a dance, or signaling, or exercising, or testing one’s muscles, or none of the above. Furthermore, just as one and the same set of types of physical movements can constitute completely different kinds of actions, so one type of action can be performed by a vastly different number of types of physical movements. . . . Furthermore, another odd feature about actions which makes them different from events generally is that actions seem to have a preferred description. If I am going for a walk to Hyde Park, there are any number of other things that are happening in the course of my walk, but their descriptions do not describe my intentional actions, because in acting, what I am doing depends in large part on what I think I am doing. So for example, I am also moving in the general direction of Patagonia, shaking the hair on my head up and down, wearing out my shoes, and moving a lot of air molecules. However, none of these other descriptions seem to get at what is essential about this action, as the action it is.14

Before the backdrop of Searle’s observation regarding an action’s preferred description, we can now proceed to propose a simple yet elegant solution to Nozick’s challenge. Keep in mind that, in the above example, “going for a walk to Hyde park” and “moving in the general direction of Patagonia” are behaviorally identical phenomena, but the latter is not part of the preferred description though it might be under different circumstances. In his reply to Nozick, Block fails to provide the preferred description.

If the 100 pounds of butter are indeed homogeneous, and I give away one pound (be it in exchange for money, as a present, or for whatever other reason), then it is simply not a part of my action that it is unit 72 that I give away (even though that may be a behaviorally correct description of what I do), just as in the above case it is not a part of my action that I move in the general direction of Patagonia. Instead, the correct (preferred) description is that I give away a unit of butter, thus demonstrating that I prefer this dollar—or more likely a dollar—or maybe a “thank you” from my neighbor to a unit of butter. On the other hand, if it is part of the correct description of my action that it is the 72nd unit of butter that I give away (rather than any other), then and only then are we dealing with heterogeneous pounds of butter (and my action then demonstrates that I prefer a dollar, that unit of butter or a “thank you” to this unit of butter).

Other alleged puzzles concerning ice cream, sweaters, drowning children, and Buridan’s ass can be solved in a likewise manner.

To say that I am indifferent to strawberry and vanilla ice cream is to say, for instance, that a correct description of my action should simply speak of ice cream or something cold and creamy. Getting a strawberry ice cream in exchange for a dollar is then simply not a part of the description of my choice. Instead, my choice demonstrates that I prefer an ice cream or something cold and creamy to a dollar. On the other hand, if getting a strawberry ice cream is part of the correct description of my action, then it is absurd to say that I am indifferent between strawberry and vanilla ice cream.

Similarly, if I am indifferent to blue and green sweaters, then my choice concerns simply a sweater, or a dark colored sweater; and getting a green (or blue) one is not part of the correct description of my action. Instead my choice demonstrates my preference of a sweater over a (or this) shirt or to something else.

Likewise, a mother who sees her equally loved sons Peter and Paul drown and who can only rescue one does not demonstrate that she loves Peter more than Paul if she rescues the former. Instead, she demonstrates that she prefers a (one) rescued child to none. On the other hand, if the correct (preferred) description is that she rescued Peter, then she was not indifferent as regards her sons.

Lastly, consider Buridan’s ass standing between two identical and equidistant bales of hay. The ass is not indifferent and yet chooses one over the other, as Nozick would have it. Rather, it prefers a bale of hay (whether it is the left or the right one is simply not part of the preferred choice description), and thus demonstrates its general preference of hay to death.

II. Further Notes on Preferences and Indifference: Rejoinder to Block*

In response to Block’s foregoing criticism of my previously published note on the subject of preference and indifference in economic analysis, I will first summarize our agreements. Then I will reconstruct our differences in the form of a fictive dialogue between Block and Hoppe to conclude that Block has failed to grasp my argument due to his amazing admission that “I do not give two hoots about whether or not we achieve a correct description of someone’s actions.”

Assume that Block has several ten dollar notes and I have several sweaters. We agree that it is possible and perfectly legitimate for Block to say that each of his notes is “perfectly substitutable” for any other, that they are “homogeneous” goods, or that one is “indifferent” toward one note vis-à-vis any other. Whether or not this statement is true (or false) depends on Block’s perception. It is true if Block does indeed view each note as “equally serviceable” (given some defined goal or end) as compared to any other; and it is false if he considers them as not equally serviceable (in which case they are heterogeneous goods). The same holds for Hoppe and his sweaters.

Second, we agree that every action, and more specifically, every interpersonal exchange demonstrates, expresses, reveals or manifests a preference (or rather: opposite preferences).

Further, we agree that the law of marginal utility, i.e., the proposition that as the supply of a homogeneous good increases (decreases) the marginal utility decreases (increases), holds true.

Now to our differences: Assume that Block affirms that he considers each of his dollar notes as equally serviceable (as a supply of homogeneous notes), and Hoppe likewise affirms that he considers each of his sweaters as perfectly substitutable for any other. Then an exchange of one ten-dollar note against one sweater takes place. How is this exchange to be analyzed?

Block: First, this exchange demonstrates that I prefer a sweater to a ten-dollar note and you prefer a note to a sweater. Second, it demonstrates that I value one note less (the one that I actually give up) than the others (those that I keep) and that the same holds true for you and your sweaters—after all, it is one particular note that is being exchanged for one particular sweater and there must be a reason why it is this note and this sweater rather than that.

Hoppe: I agree with your first statement, but not with the second. In fact, with your second statement you become entangled in a logical contradiction, because on the one hand you have affirmed that you consider all of your notes as homogeneous and on the other hand you now affirm that they are not homogeneous (but you value one note less than another).

Block: Admitted, this is a contradiction if you put the matter in this way. But I don’t put it thus. Rather, I say that I considered the notes as homogeneous before the action (exchange), but later, at the moment of choice, I considered them as different or heterogeneous. Thereby the contradiction disappears.

Hoppe: What, however, if you say that you consider them to be homogeneous notes while (at the exact same moment when) the exchange takes place? Aren’t you then contradicting yourself? Aren’t you then saying simultaneously both: that your notes are homogeneous and that they are not homogeneous? Further: Assume that you affirmed the law of marginal utility while we exchanged a ten dollar note for a sweater and said “I herewith give up one of my equally serviceable notes in exchange for one of your sweaters and consequently the marginal utility of a ten dollar note for me is now higher than otherwise would have been the case.” Given what you have argued at the outset: that your exchange of a note for a sweater demonstrates, not only your preference of a sweater to a note, but also your preference of some notes (those you keep) over others (the one that you give up)—aren’t you then involved in a logical contradiction? Surely, not both statements can be true: your affirmation of the law of marginal utility and your particular description of the exchange. Isn’t your affirmation then falsified by your description of our exchange or vice versa?

Block: I must admit that I am running into difficulties here with my argument. But aren’t you running into similar difficulties with yours? First: How can you accept only the first part of my analysis but deny the second? After all, it cannot be denied that it is one particular note and one particular sweater that are being exchanged. And second: If you don’t accept the second part of my analysis, aren’t you then saying in effect that indifference is and can be demonstrated by action? And how do you reconcile this with Murray Rothbard’s dictum (on which we agree) that “indifference can never be demonstrated by action”?

Hoppe: First off, I am of course not saying that the second part of your analysis of our exchange is incorrect under all circumstances. If you had one note that you regarded as distinct (heterogeneous) from all of your other notes, and I had a sweater that I regarded as distinct from all of my other sweaters, then it would be entirely correct for you to say that our exchange demonstrated your preference of my sweater to this one particular note (as compared to all of your other notes). But by assumption, this is not the situation we are supposed to analyze. Rather, the question is whether or not your analysis is correct if, as per assumption, you have affirmed that you consider all of your notes as non-distinct, homogeneous, and equally serviceable in the pursuit of some given end.

     Now to your question: I reject the second part of your analysis, because it involves a contradiction, as I have just explained again. If you consider the notes as homogeneous, then the correct description of our exchange is that a—any one—note has been exchanged against a—any one—sweater (but not: this note against this sweater); and this logically implies that, in fact, it happens to be one particular note that is being exchanged against one particular sweater. So there is no problem regarding your first quarrel.

Block: Yet how about the more serious second problem I have with your analysis?

Hoppe: That problem is readily solved, too.

     Not everything that behaviorally “happens” is the result of a choice (my original reference to Searle was intended to make precisely this point). If I choose to walk from point A to B, for instance, this walk must begin (and end) with either my left foot or my right foot; that is, behaviorally, my walk can be described as either left-right-left-right, and so on, or as right-left-right-left, and so on. But while this or that particular sequence of steps may be the result of a deliberate choice on my part, it needs not be so (and it typically isn’t). It may just “happen” to be this sequence rather than that without me choosing either one (i.e., demonstrating a preference of one lead leg over the other). How do we determine what is the result of choice and what isn’t? Obviously, not by mere “observation.” Rather, we must inquire of the actor in order to reach a (correct) description of his action. Did he choose to put his left or his right foot down first or did it merely happen that it was one foot rather than the other? The answer depends on the correct description of the action in question; and what is or isn’t the correct description of the action depends on the perception and conceptualization of the action by its very actor: on his description of his goal and his means available to satisfy this goal.

     This applies also to the case at hand. It is incorrect to infer, as you do, from the mere fact that one particular note is being exchanged against one particular sweater that this must be the result of a choice. It may well be a coincidence, and the choice was actually one of a—any one—note against a—any one—sweater. What is or isn’t the case depends on you, on your description of your action. And what is the description that you have given of your action? You have stated that you gave up one note viewed as equally serviceable to several other notes in exchange of a sweater. Yet to state this is to say that you did not choose between one note and another (notwithstanding the fact that one particular note must have been factually selected).

Block: Yet how can you reconcile this analysis with Rothbard’s dictum?

Hoppe: Quite easily; for this is how Rothbard continues his statement: “if a person is really indifferent between two alternatives, then he cannot and will not choose between them.”15 Note that Rothbard does not say here that there is no such thing as indifference. To the contrary, his statement clearly implies that he thinks there is—only that if and insofar as there is indifference, then no choice is involved. This is exactly what I am saying: if you are indeed indifferent toward your notes, i.e., if you believe each of them to be equally serviceable in the pursuit of some given end, then you do not choose between them; and that you do not choose, because you regard your supply of means as homogeneous, can even be verified. For if you are indeed indifferent, then you would be willing to allow me (or any third party) to select the note that you are willing to give up in exchange for a better-liked sweater; and this is to say, quite literally, that you did not choose between your notes. If a choice was made at all, it was a choice made by someone else. Insofar as you are concerned, your choice is one between a—any one—note and a sweater.

Block: So what, then, is the role of “indifference” in economic analysis?

Hoppe: Whenever we act, we employ means to achieve a valued end. This end is a state of affairs that the actor prefers to the actual (and impending) state of affairs. Both states of affairs, at the beginning of action and at its conclusion, are constellations of means (goods) at an actor’s disposal, describing the circumstances or conditions under which he must act. On the one hand, indifference is part of the description of such circumstances and conditions (the start- and end-points of action). On the other hand, preferences (choices) explain the change in these circumstances that an actor wants to achieve through the disposal of means. Any complete analysis of action must involve both: a description of the start- and endpoint of action as well as an explanation of the change occurring from one point to another due to preference-demonstrating action. Both concepts, preference and indifference, are therefore necessary and complementary parts of every economic (praxeological) analysis.

To explain: The world we human actors must deal with is a world of means (goods). More particularly, it is a world made up of heterogeneous goods. Not every good is suited to reach the same end. We do not inhabit a world made up of some “wonderdough” or “manna” that is equally well-suited to satisfy every conceivable human end. Instead, some goods can satisfy some ends but not others (or not equally well). On the other hand, we also do not live in a world made up exclusively and entirely of heterogeneous goods, such that each particular good can satisfy one and only one specific end. Rather: Our—the real—world is characterized by heterogeneity and homogeneity: by heterogeneous goods composed of multiple (enumerable and quantifiable) homogeneous units, such that each unit is capable of bringing about the same desired end-effect.

Accordingly, every praxeological analysis must begin and end with “indifference” (homogeneity). Every analysis must begin with a description of the starting-point of action; and this involves a specification of the present supply-constellation of homogeneous units of heterogeneous goods at an actor’s disposal. This is where indifference (homogeneity) first comes into play. Second, every analysis must then explain the change in this constellation that an actor wants to effect by disposing of (some of) these goods in exchange for other more highly valued ones. Here preference enters the scene. Finally, at the conclusion of every analysis must be a description of the results of action (which are at the same time the initial conditions for the action); and this description again must be about a (new and different) supply-constellation of homogeneous units of heterogeneous goods (resulting in a new and different value-scale of the actor).

* Originally published in the Quarterly Journal of Austrian Economics 3, no. 4 (Winter 2005): 87–91.

• 1Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in idem, The Logic of Action, vol. 1 (Cheltenham, Eng.: Edward Elgar 1997), pp. 225–26.
• 2Robert Nozick, “On Austrian Methodology,” Synthese 36 (1977): 353–92.
• 3Bryan Caplan, “The Austrian Search for Realistic Foundations,” Southern Economic Journal 65, no. 4 (1999): 823–38.
• 4Walter Block, “On Robert Nozick’s ‘On Austrian Methodology,’” Inquiry 23 (1980): 397–444; and idem, “Austrian Theorizing: Recalling the Foundations,” Quarterly Journal of Austrian Economics 2, no. 4 (1999): 21–39.
• 5Jörg Guido Hülsmann, “Economic Science and Neoclassicism,” Quarterly Journal of Austrian Economics 2, no. 4 (1999): 3–20.
• 6Block, “On Robert Nozick’s ‘On Austrian Methodology,’” pp. 423–25.
• 7Robert Nozick, “On Austrian Methodology,” Synthese 36 (1977): 353–92.
• 8 Ludwig von Mises, Human Action: A Treatise on Economics (Chicago: Henry Regnery, 1966).
• 9Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1962).
• 10Nozick, “On Austrian Methodology,” p. 390.
• 11Block, “On Robert Nozick’s ‘On Austrian Methodology’,” pp. 424–25; and similarly Block, “Austrian Theorizing: Recalling the Foundations,” pp. 22–24.
• 12Mises, Human Action, p. 119.
• 13John Searle, Minds, Brains and Science (Cambridge, Mass.: Harvard University Press, 1984), pp. 57–58.
• 14See also Hoppe, Economic Science and the Austrian Method (Auburn, Ala.: Mises Institute, 1995), pp. 40–44.
• ** Orginally published in the Quarterly Journal of Austrian Economics 3, no. 4 (Winter 2005).
• 15My emphases.