Revival Of Cardinal Utility Theory And Its Contributions To Mainstream Economics

Utility theory is the one of the most basic and essential components of economic theory. The history of the utility theory is very long, and roughly speaking, it's development can be divided into two stages, namely cardinal utility theory and thereby ordinal utility theory. After the marginal revolution, cardinal utility theory had become the dominant theory of studying consumer's behavior. Cardinal utility theory says that utility is a sense of psychological satisfaction when the consumer consuming a commodity, and it can be directly measured and summed, hence its size can be expressed by cardinal number. But cardinal utility theory had always been blocked by two problems. One problem is the measurement of utility, that is whether and how to measure utility as subjective satisfaction. And the other problem is the interpersonal comparison of utility, namely whether utility can be compared among different individuals. Obviously, the measurement of utility is more basic, and the interpersonal comparison of utility is derived from the measurement of utility. If these two problems can't get reasonable solution, the suspicion towards cardinal utility theory will be unavoidable.In the 1920s and 1930s, the scholars' suspicion towards cardinal utility theory had been growing. Finally, with the efforts of Pareto, Hicks, Samuelson and other scholars, ordinal utility theory gradually replaced cardinal utility theory, and became a standard analytical paradigm of the mainstream economics. The ordinal utility theory argues that as a kind of psychological phenomenon, utility can't be measured and summed with cardinal number, but only indicate the relative degree of satisfaction level, therefore, utility should be expressed by ordinal number which describes preference.Ordinal utility theory is a kind of qualitative analysis in essence, and it only care about whether the utility of a commodity is more or less than another one, but no longer care about exactly how much the utility of a commodity is more or less than another one. Meanwhile, ordinal utility is to the individual, and its interpersonal direct comparison is meaningless. Therefore, the emergence of the ordinal utility theory is not a solution of the measurement problem and comparison problem of utility, but it tactfully evade the two problems.Although ordinal utility theory has become the standard analytical paradigm of modern utility theory, it is not a perfect theory. In fact, ordinal utility has many mistakes and defects. These mistakes and defects mainly include the following several aspects. Firstly, the integrality method and revealing preference method, with which we can find the ordinal utility, exist circular arguments, because essentially on the one hand, they explain consumer's behavior in preference relation, and on the other hand, preference relation is explained by consumer's behavior in reverse. Therefore, ordinal utility theory can't explain consumer's behavior reasonably. Secondly, there are many inconsistencies between preference maximization and welfare maximization. The ordinal utility theory argues that preference maximization is consistent with welfare maximization, and people will realize the maximization of welfare, when they have chosen the right combination of goods which can realize preference maximization. But a number of studies have suggested that, preference and welfare are often inconsistent. In this case, regulating people' behaviors with preference maximization of ordinal utility theory may not realize their welfare maximization.Therefore, ordinal utility theory' value to guide people's practical activity will be affected by the inconsistencies between preference and welfare. Thirdly, many economic problems won't be solved without cardinal utility theory, hence ordinal utility theory cannot replace cardinal utility theory completely. Ordinal utility theory says that the cardinal property of utility is unnecessary when analyzing consumer's behavior, so it should be removed by the "Occam's Razor". But the idea that it does not require cardinal utility when analyzing consumer's behavior doesn't mean that we cannot use the cardinal utility theory when we research other fields which must consider the strength of preference, otherwise we shall make a so-called "fallacy of misplaced abstraction". These research fields are very much, and this paper mainly discusses three important economic issues:social choice problem, uncertainty problem and diminishing marginal utility problem. This means that the application fields of ordinal utility theory is very limited, hence it cannot replace the cardinal utility theory completely. Fourthly, ordinal utility theory must base its theoretical analysis on the stable preference assumption, but this assumption can't be supported by empirical facts. In microeconomics, we could find out the consumers' preferences by means of integrability or revealed preference when studying consuming behavior. The two methods involve inductive reasoning, which induces the general preferences, no matter past or future, from preferences we have observed in the past. By analyzing the "Hume's Problem" in logics, we could conclude that the necessity of the inductive reasoning implies the tenability of the stable preference assumption, and the stable preference assumption is the specific application of the "Assumption of the Law of the Natural Consistency" in consumer theory. However, both the two assumptions can't be supported by empirical facts, and the stable preference assumption has been falsified by theory and practice, which means that the standard consumer theory can't predict future consuming behavior scientifically.As above mentioned, ordinal utility has many mistakes and defects, so the revival of cardinal utility theory is very necessary. Meanwhile the revival of cardinal utility theory is feasible, this mainly lies in the following two aspects. Firstly, with regard to the logical relationship between cardinal utility theory and ordinal utility theory, ordinal number coming from comparison must take cardinal number as its premise, and thus the existence of ordinal utility theory can't reject cardinal utility theory. Secondly, We should specially point out that with the development of technology, the notion that cardinal utility can't be measured and compared has been challenged. The development of modern neuroscience and psychology has provided a solid foundation for the measurement and interpersonal comparison of cardinal utility. Therefore, we can argue that the revival of the cardinal utility theory is not only necessary, but feasible.With the help of evidence from neuroeconomics, this paper proves that cardinal utility not only exists objectively, but also can be measured and compared objectively. For a long time, because of the limitation of science and technology, it is hard for us to make deep research on human brain, hence economics usually takes brain as a "black box". But recent development of neuroscience shows that by advanced neurophysiological observation apparatus, we have been able to open this "black box", and an emerging interdisciplinary neuroeconomics come into being. The development of neuroeconomics has sufficiently proved that subjective psychological satisfaction has corresponding objective neural basis, and advanced measuring instruments have provided good material conditions to find out and measure cardinal utility. Now, there are massive researches on satisfaction in neuroeconomics, and fresh researches continuously spring up. This series of studies have preliminarily solved two age-old problems in economics, namely the measurement and interpersonal comparison of utility. In neuroeconomics' view, cardinal utility theory is entirely logical. In this case, the development of economics should not cling to old ideas as before, and be blocked by the measurement and interpersonal comparison of utility. So we can conclude that the discovery of cardinal utility in neuroeconomics has provided basic material conditions for the returning of cardinal utility theory to mainstream economics. In addition, except the discovery of cardinal utility, neuroeconomics has made contributions to the mainstream economics in other aspects, and this paper also discusses accordingly.Then this paper sets forth other methods of measuring cardinal utility, namely subjective well-being assessment technology. Although we can measure and compare cardinal utility with modern neurophysiological observation apparatuses, these methods are lack of operability, because the respondents must be in the laboratory. If we want to measure people's utility level more easily, we must find other measurement techniques which are more operable. In this respect, psychology, sociology and other disciplines have developed a series of methods, which could be used in economics. Of course, because the history and research purpose of these disciplines are different, the terms of satisfaction in these disciplines are different also. In this study, we will call satisfaction or cardinal utility by the name of subjective well-being, because this term is very widespread in current psychology and sociology. Here, "subjective" means that happiness is judged by the respondent's own standard. In the past few decades, the measurement technologies on subjective well-being have made considerable progress, and these measurement technologies evolve from singleness to diversity, and from simplicity to detailedness, making the measurement of subjective well-being more objective and accurate. Overall, a more mature technology system about happiness assessment has been set up. The system mainly comprises self-report inventory which is formed by standardized questionnaire, and take other mesaurement methods as supplements. All these mesaurement methods could make comprehensive assessment on the respondent's emotion and cognition about happiness.Finally, this paper discusses the contributions of the revival of cardinal utility theory to the mainstream economics. Compared with ordinal utility theory, the biggest advantage of cardinal utility theory is that it contains more information about the quantity of utility or strength of preference. Due to this advantage, we believe that cardinal utility theory will contribute to the development of mainstream economics in many aspects, such as welfare economics, social choice theory, uncertainty, etc. But as the space is limited, this paper mainly discusses the "happiness paradox", which is more mature than other fields. One of the basic hypotheses in mainstream economics is that utility is an increasing function of income, researches on the happiness paradox indicates that growth of per capita income in the long term may not enhance people's average happiness level or utility level. This "abnormal" phenomenon arouses people's great interests, and scholars have proposed many theories to explain the paradox, including relative income theory, psychological adaptation theory, aspiration level theory, social capital theory, relational goods theory, overworking theory, focusing illusion theory, and other theories. At the same time, these theories appear trends of merging each other and interdisciplinary research, and the effect of happiness level on individual income has begin to be studied.The research on happiness paradox not only deepens our understanding of the relationship between income and happiness, but also gives the government new suggestions about economic growth policy and tax policy. More specifically, the government should pay more attention to the national happiness levels, and should not blindly pursuing economic growth, because our ultimate goal is promoting happiness, however economic growth may not necessarily improve happiness level. Secondly, in order to improve the national level of happiness effectively, the government should properly enlarge financial expenditure to help ordinary people. Thirdly, the government should implement more stricter progressive consumption tax and income tax, and by doing this we can improve the national happiness level due to reducing income inequality and waste of resources and other ways.