Income and Substitution Effects: A Rejoinder to Professor Joseph Salerno

Abstract

Professor Joseph Salerno (2019) has commented on my recent reconstruction of the income effect from a causal-realist perspective (Israel, 2018b). In this rejoinder, I clarify my position and show that the main points of criticism in Salerno’s response are unfounded. In particular, I show that my argument does not involve a claim of greater “realism of assumptions” and it by no means contradicts the law of demand. Moreover, I work out in more detail the similarities and differences of my approach to the standard neoclassical decomposition of income and substitution effects. I show that my approach is closer to the Slutsky decomposition as opposed to the Hicks decomposition.