Economic theories of valuation generally assume that prices of commodities and assets are derived from underlying “fundamental” values. For example, in finance theory, asset prices are believed to reflect the market estimate of the discounted present value of the asset's payoff stream. In labor theory, the supply of labor is established by the tradeoff between the desire for consumption and the displeasure of work. Finally, and most importantly for this chapter, consumer microeconomics assumes that the demand curves for consumer products – chocolates, CDs, movies, vacations, drugs, and so forth – can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products.
Because it is difficult, as a rule, to measure fundamental values directly, empirical tests of economic theory typically examine whether the effects of changes in circumstances on valuations are consistent with theoretical prediction – for example, whether labor supply responds appropriately to a change in the wage rate, whether (compensated) demand curves for commodities are downward sloping, or whether stock prices respond in the predicted way to share repurchases. However, such “comparative static” relationships are a necessary but not sufficient condition for fundamental valuation (e.g., Summers, 1986). Becker (1962) was perhaps the first to make this point explicitly when he observed that consumers choosing commodity bundles randomly from their budget set would nevertheless produce downward-sloping demand curves.