The Measurement of Social Welfare

By Jerome Rothenberg | Go to book overview

CHAPTER 7
Preference Threshold and Cardinal Utility

7-1. Introduction

With the contributions of Hicks and Allen in the 1930's the indifference curve approach to consumer demand came into general analytic usage. Under this approach ordinal properties of utility indices were deemed necessary and sufficient to rationalize all forms of consumer behavior then incorporated in economic theory. This supplanted the approach stemming from Jevons and Menger, under which analytic conclusions were based on cardinal properties of utility. The empirical implications of cardinal utility were deemed by many economists too controversial to stand at the base of demand theory. If less restrictive assumptions could "explain" all that was desired of a theory of consumer behavior, then such assumptions were preferable (by Occam's razor). A sizable literature was generated by the controversy over whether (1) the indifference curve approach did indeed eschew cardinal properties of utility, or (2) it could "explain" all that was desired.1 The outcome of this controversy was that the indifference curve (or preference) approach did not involve cardinality 2

____________________
1
For example, R. G. D. Allen, "The Determinateness of the Utility Function," Review of Economic Studies ( 1935); J. M. Clark, "Realism and Relevance in the Theory of Demand," Journal of Political Economy ( 1946); Frank Knight, "Realism and Relevance in the Theory of Demand," Journal of Political Economy ( 1944); Oskar Lange, "On the Determinateness of the Utility Function," Review of Economic Studies ( 1934), to mention but a few of the journal articles.
2
As employed in this paper, a cardinal index of utility is one for which at least a simple ordering of both preferences and preference intensities is defined, and intensities are relatable to a common unit. See Section 7.2 below for a fuller discussion.

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