Ordinal Utility

Chapter 5 deals with the ordinal revolution in utility analysis inaugurated by Vilfredo Pareto around 1900. The fundamental notion of Pareto’s analysis was that of preference, and he conceived of utility as a numerical index expressing the preference relations between commodities. While Pareto’s ordinal approach was highly innovative, his understanding of measurement remained the unit-based one. The second part of chapter 5 reconstructs an important debate on the measurability of utility that took place in Austria from 1907 to 1912. Franz Čuhel and Ludwig von Mises rejected Eugen von Böhm-Bawerk’s idea that it is possible to identify a unit to measure utility, and, independently of Pareto, they advocated an ordinal approach to utility. Especially through Mises’s influence, the ordinal approach to utility rose to prominence among Austrian economists after World War I. The final part of chapter 5 discusses the differences between the Austrian and Paretian approaches to ordinal utility.