Criticism of Indifference curve analysis

Some of the major criticisms regarding indifference curve analysis:

The indifference curve analysis is no doubt regarded superior to the utility analysis, but critics are not lacking in denouncing it. The main points of criticism are discussed below.

(1) Old Wine in New Bottles:Professor Robertson does not find anything new in the indifference cure technique and regards it simply ‘the old wine in a new bottle’.

It substitutes the concept of preference for utility. It replaces introspective cardinalism by introspective ordinalism. Instead of the cardinal numbers such as 1, 2, 3, etc., ordinal numbers I, II, III, etc. are used to indicate consumer preferences. It substitutes marginal utility by marginal rate of substitution and the law of diminishing marginal utility by the principle of diminishing marginal rate of substitution.

Instead of Marshall’s proportionality rule or consumer’s equilibrium, which expresses the ratio of the marginal utility of a good to its price with that of another good, the indifference curve technique equates the marginal rate of substitution of one good for another to the price ratio of the two goods. Thus this technique fails to bring a positive change in the utility analysis and merely gives new names to the old concepts.

(2) Away from Reality:With regard to the assertion that the indifference curve technique is superior to the cardinal utility analysis because it is based on fewer assumptions, Prof. Robertson observes: “The fact that the indifference hypothesis, the more complicated of the two psychologically, happens to be more economical logically, affords no guarantee that it is nearer to the truth.” He further asks, can we ignore four- feeted animals on the ground that only two feet are needed for walking?

(3) Fails to Explain the Observed Behaviour of the Consumer:

Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.

(4) Indifference Curves are Non-transitive:

One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.

It is only when utility difference is zero that the relation between any two or more points on an indifference curve is symmetrical. 

(5) The Consumer is not Rational:

The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.

(6) Combinations are not based on any Principle:

Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.

(7) Limited Analysis of Consumer’s Behaviour: Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety. Changes in the tastes of the consumer or his indulging in speculative purchases also affects his preference for the goods. These exceptions make the indifference analysis a limited study of consumer behaviour.

(8) Two-Goods Model Unrealistic:

Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants. But the difficulty is that in the case of more than three goods geometry fails and economists will have to depend upon complicated mathematical solutions for analysing the problem of consumer behaviour.

(9) Fails to Explain Consumer’s Behaviour in Choices Involving Risk or Uncertainty:

Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations. If there are three situations, A, В and C, the consumer prefers A to В and С to A and out of which A is certain but the chances of occurring В or С are 50-50 . In such a situation, the consumer’s preference for С over A can only be measured quantitatively.

(10) Based on Unrealistic Assumption of Perfect Competition:

The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.

Despite these criticisms, the indifference curve technique is still regarded superior to the Marshallian introspective cardinalism.