Abstract for: Testing Meadows hog cycle theory by laboratory
Commodity prices are known to fluctuate. Cyclical tendencies are described in terms of period lengths, amplitudes, and regularity. Such fluctuations cause problems for producers, consumers, labor, and national economies. Here we take a closer look at the well-known hog cycle, which has been observed in hog markets since major markets were established. The Cobweb theory suggests that the internal working of the market causes these fluctuations. However, this theory has been rejected in economic literature because cycles can be shown to disappear when assuming a simple behavioral decision rules among producers. Furthermore, laboratory experiments have failed to replicate lasting cycles. This has opened up for theories that explain price fluctuations as caused by random, external shocks. However, there exists a more advanced dynamic model of the hog market, which produces lasting cycle, the Meadows model. Here we test this theory by a laboratory experiment. Without random shocks, the experiment produces price cycles similar to the Meadows theory and to historical observations. Meadows' claim that livestock adjustments are driven by current price-cost ratios is not rejected. [Note that in an attempt to ensure first order control of the inventory of pork in the experiment, a misspecification introduced rationing of pork. Still the results are interesting, however, new experiments will be carried out in the near future].