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Famous Figures and Diagrams in Economics

Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.

Chapter 23: Cobweb Diagrams

Marc Nerlove

Subjects: economics and finance, economic psychology, history of economic thought

Extract

Marc Nerlove HISTORY AND BACKGROUND Mordecai Ezekiel’s 1938 paper made ‘The Cobweb Theorem’ and his famous diagram well-known to every student of economics. Ezekiel was attempting to explain apparently self-perpetuating fluctuations in the prices of some agricultural commodities observed by Hanau (1927), Schultz (1930), and Coase and Fowler (1935). Tinbergen (1930), Ricci (1930), Leontief (1934), Kaldor (1934), and Lange (1935) drew similar diagrams. Kaldor gave the name ‘Cobweb Theorem’ to the phenomenon. Kaldor (1934, p. 132) writes: once allowance is made for the fact that in the real world functional adjustments take time and different forces in the system may operate with different ‘velocities of adjustment’ it may become possible to construct cases – under the assumption that ruling prices are always expected to remain in operation . . . where the successive reactions lead away from, rather than approach, an equilibrium position. As Kaldor points out, the most important assumptions underlying cobweb phenomena are lags in responses and so-called ‘static expectations’.1 Hanau’s aim (1927) was to forecast the price of hogs at the Berlin market. The period of gestation for a piglet is 114 days, or approximately 3.75 months; the period from birth (farrowing) until the hog is ready to be marketed (finished) is approximately six months in the U. S., but it was considerably longer in the Germany of Hanau’s time, on the order of twelve months.2 Allowing for some time to breed a sow, and after some experimentation, Hanau settled on a relation between the supply of hogs for slaughter, and...

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