Evidence and the Cobweb Hypothesis

On the whole, it's pretty clear that prices and outputs are not as unstable as the cobweb model, it its simplest form, predicts. In particular, there is little or no evidence of "unstable cobweb" cycles in reality.

On the other hand, there is evidence that cobweb-like fluctuations do occur in some markets. What this means is that high prices and low output do seem to alternate with high output and low prices. It seems that producers base their estimates of the future price on many things, but give the current price a special weight in their estimates. This could either be rational or irrational, depending on the weight given to the current price. To the extent that the current price has a somewhat greater weight than other information, we would expect to see some cobweb-like fluctuations -- not as great as the simple cobweb model suggests, but observable, opposite fluctuations in price and output.

There is some evidence for such fluctuations in

agricultural markets
the job markets for engineers
and, as we have seen computer chips.

It's clear that the cobweb theory cannot be applied to just every market -- it should be applied only when supply lags behind the price -- and should be applied with some caution about its more extreme conclusions. On the other hand, when we are dealing with markets like agriculture and computer chip production, cobweb-like fluctuations are a possibility we should be alert for.

However, cobweb fluctuations are (at most) one of the many dimensions of the "farm problem," which we will now consider in more detail.

The "Farm Problem"