The following points highlight the three major criticisms against Marshall’s utility analysis. The criticisms are: 1. Unrealistic Assumptions 2. MU of Money can never be Constant 3. No Formal Distinction between Income and Substitution Effect.
Marshall’s Utility Analysis: Criticism # 1.
Marshall’s utility analysis is based on some unrealistic assumptions. For instance, Marshall assumed that utility derived from a commodity can be measured in cardinal numbers. But, modern economists like J. R. Hicks and R. G. D. Allen had suggested that utility, being a psychological concept, can never be measured in cardinal numbers.
Actually, there is no measuring rod to measure utility derived from the consumption of a commodity. According to them, utility can be measured in ordinal numbers. This means that the consumer is capable of comparing different levels of utility.
A consumer can say that a particular commodity gives him a higher or lower level of satisfaction than another commodity. Of course, he cannot quantify the level of satisfaction. As the law of demand is based on Marshall’s utility analysis, the explanation of the law of demand seems to be inaccurate.
Marshall’s Utility Analysis: Criticism # 2.
MU of Money Can Never be Constant:
Marshall’s assumption of constant marginal utility of money is another unrealistic assumption. And this is the most crucial assumption of the utility theory. According to Marshall, utility from a good can be measured in terms of money.
To measure utility (in cardinal numbers) in terms of money, marginal utility of money must remain invariant. But, like commodities, marginal utility of money also diminishes when stock of money rises. If it is so, measurement of utility in terms of money seems to be irrational.
Marshall’s Utility Analysis: Criticism # 3.
No Formal Distinction between Income and Substitution Effect:
Because of the constancy in the marginal utility of money, Marshall could not distinguish between income effect and substitution effect of a price change. We know that a change in the price of a commodity results in two types of changes—one is the income effect and another is the substitution effect. Marshall considered only the substitution effect and ignored the income effect.
Because of constancy in the marginal utility of money, Marshall ignored the income effect. As Marshall considered only substitution effect, his demand curve is always negative sloping. In other words, Marshall could not explain Giffen Paradox for which the law of demand does not hold.
Because of these criticisms, Marshallian utility analysis failed into disrepute. In the 1930s Hicks and Allen introduced an alternative theory known as ordinal utility theory or indifference theory which is an improvement over Marshall’s cardinal utility theory.