[edited on 9/14/2021 for clarity]
The 1932 UK Reorganization Commission for Pigs and Pig Products Report
The Hog Cycle debates all started when the UK Reorganization Commission for Pigs and Pig Products found in 1932 that hog prices followed a 4-year cycle: two years rising and two years falling. The Commission argued that these price fluctuations were due to forecasting errors made by hog farmers and that government intervention could help stabilize hog prices.
Why would forecasting errors lead to cyclical price fluctuations? Let's walk through a price cycle using an example of the model the Commission used, which is often called the Cobweb model (illustrated below). We begin time at period 1 where hog farmers bring Q1 to the market to sell. Supply is fixed at Q1 this period because farmers can't produce more hogs on the spot, so the price that prevails on the market will be P1. Since this price exceeds the marginal cost of production, the individual producer is earning more revenue on each hog they sell than it cost to produce.
After selling all their hogs in period 1, the farmers will go back home to produce more for the next sale period. Suppose, as the UK Reorganization Commission did, that the next sale period is in 2 years because it takes that long to produce hogs ready to sell. When deciding how much to produce, the farmer needs to forecast what the price will be in 2 years. Intuitively, you might think the farmers would use the information available on how demand and supply for hogs will shift over 2 years to forecast this price. However, the UK Reorganization Commission instead argued that hog producers just assume the price of hogs in next sale period (period 2) will be the same as they were during the last sale period (period 1).
Because hog producers earned more revenue on each hog than it cost produce in period 1, each producer will individually increase their hog production hoping to earn even more profit in period 2. However, when the producers return to the market in 2 years, they will find that everyone else increased production too and that quantity supplied is now Q2. As a result, the price will plummet to P2 and the producers will actually lose money on each hog they sell (MC < P2). Not learning their lesson, the hog producers again go home decide how much to produce for period 3 based on the assumption that the price next period will be P2.
Hopefully you see where this is going, even if the hog producers don't. The producers will collectively cut production for to Q3 and prices will go up to P3. Thus, we have a 4-year cycle in hog prices where prices fall for 2 years and rise for 2 years. How long will this cycle continue? That depends on the elasticities of supply and demand. If demand is less elastic than supply, as was believed to be the case in the hog market, then the price swings will continue forever and only get bigger as time goes on. This is why the Commission said government intervention was needed.
Source: Wikipedia
Coase and Fowler (1935) Take the Cobweb Model to the Data
The Cobweb Model is really clever, but does it actually capture the reality of the hog market? Coase and his co-author Ronald Fowler tried to answer that question by evaluating the model's assumptions. The easiest assumption to test was whether it really took 2 years for hog producers to respond to higher prices. To do this, Coase and Fowler (1935) spend a lot time investigating how hogs are actually produced. They found that the average age of a hog at slaughter is eight months and that the period of gestation is four months. So a producer could respond to unexpectedly higher hog prices in 12 months (possibly even sooner since there were short-run changes producers could also make to increase production). If that is the case, why does it take 24 months for prices to complete their descent?
Clearly the Cobweb Model is missing something. Maybe the cycle isn't due to forecasting errors at all. However, Coase and Fowler's critics were not convinced. If it wasn't forecasting errors that were driving the Hog Cycle, then what was? "They have, in effect, tried to overthrow the existing explanation without putting anything in its place" wrote Cohen and Barker (1935). Coase and Fowler (1937) attempted to provide an explanation, but this question would continue to be debated for decades.
The Next Chapter
Ultimately, John Muth (1961) proposed a model that assumed producers didn't have systematically biased expectations about future prices (in other words that they had "rational" expectations). Muth argued this model yielded implications that were more consistent with the empirical results found by Coase and others. For example, rational expectations models generated cycles that lasted longer than models that assumed static or adaptive expectations. So a 4-year hog cycle no longer seemed as much of a mystery. I'm not sure what happened to rational expectations after that. I hear they use it in Macro a bit. Anyways, if you are interested in a more detailed summary of Coase's work on the Hog Cycle, then check out Evans and Guesnerie (2016). I found this article on Google while I was preparing this post and it looks very good.
References
Evans, George W., and Roger Guesnerie. "Revisiting Coase on anticipations and the cobweb model." The Elgar Companion to Ronald H. Coase (2016): 51.
Coase, Ronald H., and Ronald F. Fowler. "Bacon production and the pig-cycle in Great Britain." Economica 2, no. 6 (1935): 142-167.
Coase, Ronald H., and Ronald F. Fowler. "The pig-cycle in Great Britain: an explanation." Economica 4, no. 13 (1937): 55-82.
Cohen, Ruth, and J. D. Barker. "The pig cycle: a reply." Economica 2, no. 8 (1935): 408-422
Muth, John F. "Rational expectations and the theory of price movements."Econometrica: Journal of the Econometric Society (1961): 315-335.
