Background
Cardinal utility represents a measurable conception of utility that implies the numerical values of utility differences are meaningful. Unlike ordinal utility, which only concerns itself with the ranking of preferences, cardinal utility allows for the comparison of the intensity of preferences between different options.
Historical Context
The concept of cardinal utility has its origins in the classical and neoclassical schools of economic thought. Pioneers like Jeremy Bentham and later contributions from economists such as John von Neumann and Oskar Morgenstern, extended the utility concept into measurable terms. The development of expected utility theory also provided a backbone for cardinal utility theory.
Definitions and Concepts
Cardinal utility is a type of utility function characterized by the ability to undergo a positive affine transformation without altering the underlying preference order. A utility function \( U \) remains cardinal if it’s transformed to \( U* = a + bU \), where \( a \) and \( b \) are positive constants with \( b > 0 \). This means that both the original \( U \) and transformed \( U* \) functions represent the same preferences.
Major Analytical Frameworks
Classical Economics
Classical economists laid the groundwork for utility theory, though they often did not explicitly differentiate between ordinal and cardinal utility.
Neoclassical Economics
Neoclassical economics placed a stronger emphasis on mathematical rigor and the measurability of utility which gave rise to the more detailed discussions around cardinal utility.
Keynesian Economics
Keynesian Economics typically prioritizes macroeconomic policies and aggregates, hence utility concepts deal more extensively with broad consumption and savings patterns rather than individual utility assessments.
Marxian Economics
Marxian Economics critiques the utilitarian foundation of capitalist economies, including the assumption that utility can be quantified and maximized, challenging the relevance of cardinal utility.
Institutional Economics
Institutional economics often questions the realism and applicability of utility functions including the measurability hypothesis behind cardinal utility, leaning on broader sociocultural determinants.
Behavioral Economics
Behavioral economics focuses on the empirical findings and psychological insights revealing that human behavior often deviates from the rationality assumed in cardinal utility theory.
Post-Keynesian Economics
Emphasizing aspects like uncertainty, income distribution, and aggregate demand management, post-Keynesian economists often evaluate utility within more complex regulatory frameworks.
Austrian Economics
Austrian Economics emphasizes the subjective nature of value and generally disputes the quantification of utility. Therefore, ordinal utility often overshadows discussions rather than cardinal.
Development Economics
In development economics, cardinal utility may be employed pragmatically for evaluating welfare programs or measuring quality of life, albeit with several methodological considerations.
Monetarism
Within Monetarism, the relevance of utility theory manifests indirectly primarily in the context of consumer behavioral models and preferences.
Comparative Analysis
Comparing cardinal and ordinal utilities provides profound insights into economic modeling. Cardinal utility achieves a measurable scale which ordinal utility lacks, allowing for detailed policy analysis and interpersonal utility comparisons. However, its necessity for certain assumptions and conditions renders it less flexible than ordinal utility in many contexts.
Case Studies
Examining scenarios like lottery choices, insurance purchase decisions and risk assessments provides practical contexts where cardinal utility, and by extension expected utility theory, plays a crucial role.
Suggested Books for Further Studies
- “Theory of Games and Economic Behavior” by John von Neumann and Oskar Morgenstern
- “Microeconomic Theory: A Mathematical Approach” by James M. Henderson and Richard E. Quandt
- “An Introduction to Modern Welfare Economics” by Per-Olov Johansson
Related Terms with Definitions
- Ordinal Utility: A utility concept where only the order of preferences matters without considering the magnitude of the utility difference.
- Expected Utility: A form of cardinal utility where preferences over uncertain gambles are expressed in terms of average utility outcomes.
- Interpersonal Comparisons of Utility: The assessment and comparison of utility levels across different individuals, typically framed within a cardinal utility context.
