Cardinal utility analysis assumes that the cardinal utility of cash is unchanged and serves simply as a basis of utility. However, in actuality, the cardinal utility of cash does not always stay constant. In fact, there is an almost continual decrease in cash's cardinal utility with an increase in income; hence, there is an increasing tendency for the two to oppose each other.
cardinal utility analysis fails because of its assumption that the cardinal values of money are equal. They are not equal because income increases in accordance with the value of cash. If they were, then there would be an infinite amount of "value" for any item, including demand deposits. If the cardinality of cash were not constant, then the quantity demanded would also decrease with income and the economy could never achieve full employment.
Furthermore, cardinal utility analysis also fails to take into account demand-side effects. For example, when there is a rise in income, people tend to spend more than they earn. This will lead to increased unemployment. The cardinal utility analysis ignores this aspect. It only takes into account aggregate effects of aggregate changes in income.
On the other hand, demand-side effects, which cardinal utility analysis focuses on, have another direction to pursue. Increases in spending power, changes in consumption propensity, and fluctuations in income affect the demand for money. All of these affect the supply curve directly, and so they can alter the cardinal utility curve. If changes in spending power and income are observed over time, then changes in either one of these factors can cause the cardinal utility curve to change direction, and so it can fluctuate in a nonzero fashion.
Finally, demand-side effects are not properly represented by the cardinal utility analysis. To fully understand demand-side effects, we must move away from traditional economics and view them in a broader perspective. By viewing demand-side effects in this way, we can begin to understand why some economic policies will have positive effects, while others will have negative effects. For instance, a rise in corporate profits due to technological improvements will cause some consumers to purchase more goods, which in turn, raises the incomes of those consumers. But, by creating monopoly power, which reduces competition, higher profits are obtained at the expense of lower wages, leading to lower consumer demand.
All of these aspects of demand-side and supply-side effects must be examined in detail if economists are ever to gain a comprehensive grasp of the distribution of value. Of course, the cardinal utility function is only one of many possible approaches to value measurement. Another widely used approach is the theory of comparative advantage. In this approach, economic activity is compared to the level of its relative efficiency, which is called the industry advantage. Still another approach, called the theory of demand evolution, compares how people's preferences change as a result of new information or new technological possibilities.
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