TWENTIETH ANNUAL YEAR BOOK— PART VII 599 



produce is marketed in small units and under free competition. Supply 

 and demand works then in setting the price he will receive for his prod- 

 uce, but when he buys on the market, he buys commodities on a closed 

 market where free competition does not enter. 



With this introduction, I want to talk on the three price-making forces. 

 The first of these price-making forces is our old-time friend, supply and 

 demand. Whenever you sell a load of hogs at a disadvantage in the 

 Chicago market and complain about it, the packers and commission men 

 will tell you that the price is low on that day due to supply and demand, 

 and they regard that as an all-sufficient explanation. As a matter of 

 fact, that reply is an insult to our intelligence. If you see an airplane 

 hurtling across the sky and you ask what it is that permits it to stay 

 aloft, and they answer, "The law of gravitation," you will not be par- 

 ticularly enlightened or satisfied with the explanation, even though cor- 

 rect. Our economists have the same problem facing them as Sir Isaac 

 Newton when he grasped the law of gravitation, but he didn't by grasp- 

 ing that law learn how to make an airplane. It took the Wright broth- 

 ers, who proceeded along an entirely different line of reasoning. 



Supply and demand is like locking the stable door after the horse is 

 stolen. Back in January, 1908, we sold hogs for $4.50 on the Chicago 

 market. They told us supply and demand was the reason for the low 

 price, and that doubtless was true, but so far as guiding our future ac- 

 tion that $4.50 price was a lie, for it was telling the farmers that the 

 hog business is not profitable, .and a lot of them took the hint and got 

 out of it. But two years later hogs were selling at $10 a hundred, and 

 that was also a lie, for it told the farmers that the hog business was a 

 fine thing, and a lot of them again took the hint and got into it, with 

 the result that in another year the price was reduced to $6 a hundred. 

 So from long and bitter experience farmers have concluded that supply 

 and demand is a capricious master. Why not make it our servant? 

 Why not develop organized thought as to the future demand and as to 

 the future supply? That, of course, brings in this matter of a research 

 organization. 



The second price-making force I wish to consider is cost of produc- 

 tion. Most farmers, and I think the laboring men as well, look on the 

 cost of production as the thing which should set prices as opposed to 

 supply and demand — to sell at the cost of production, that's the only fair 

 thing, but, unfortunately, cost of production is a will-of-the-wisp — you can- 

 not put your finger down on it. You can find out what it costs Mr. A to 

 produce hogs, and Mr. B, but suppose Mr. C has cholera in his herd and 

 he figures his cost of production at $1,000, for he has just one hog left. 

 You might figure up what it cost the three and determine cost of produc- 

 tion at $50 a hundred. And if you use that as a basis could you use it 

 to enforce prices? I think the only way we can use the cost of produc- 

 tion as a basis for price adjustment is by using what might be termed 

 the ratio method of determining the cost of production. What is the 

 long-time ratio between, say, hogs and com? With reference to hogs 

 and corn, we know that decade after decade the ratio has averaged eleven 

 bushels of corn to 100 pounds of pork. I think that by studying historic 



