Giffen Behavior, Income Effects and Austrian Price Theory
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Karl-Friedrich Israel
Abstract
Austrian price theory is riddled with inconsistencies surrounding the neoclassical income effect and Giffen behavior. It has sometimes been argued that neither the income effect nor Giffen behavior exist. This paper first argues that Giffen behavior is possible and can perfectly well be explained within the framework of Austrian price theory in the tradition of Mises. Moreover, it shows that income effects are real. They are merely an outgrowth of the law of diminishing marginal utility applied to money. The paper also outlines the expenditure approach to income and substitution effects as an alternative conceptualization that does not require any reference to quantifiable and measurable notions of utility, or an unambiguous and objective notion of real income.
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