Friday, June 12, 2009

The Indifference Principle

In a previous post, I stated how I disagree with my peers over what constitutes the core principles of economics.  Arguing indifference curves and production stages are not core principles, I argued the Indifference Principle (IP) is a core principle.

The IP was articulated in Steven Landsburg's The Armchair Economist, but is not a discovery. It is a succinct description for how economists think about market behavior.  The principle states that unless there are unusual talents or tastes, all actions must be equally desirable.  To illustrate how the IP is a core principle, consider how many economic questions it explains with parsimony.

The IP explains
  • Why landownders benefit from farm subsidies when land is fixed
  • Why consumers benefit from farm subsidies when land is not fixed
  • Why the price of corn and sorghum move in tandem
  • Why the prices of commodities between regions do not exceed transportation costs
  • Why stock prices and commodity prices are efficient
  • Why sunny days are not necessarily the best time to go to the zoo
  • Why crop prices increase between harvests
  • Why compensating people for building in areas where floods will predictably occur make everyone worse off.
  • Why rent-seeking often eliminates any potential benefit from government subsidies.
  • Why rent-seeking limits the ability of government to correct for market failures.
These are economic questions students in introductory economics courses should be able to address.  The IP allows one to address them, but indifference curves and isoquants do not.