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Lange model
The Lange model (or LangeLerner theorem) is a neoclassical economic model for
a hypothetical socialist economy based on a combination of public ownership of the
means of production with a trial-and-error approach to determining output targets and
achieving economic equilibrium and Pareto efficiency. Within this model, the state
owns non-labor factors of production, with final goods and consumer goods allocated
through markets. Ineconomic theory, the Lange model states that an economy in
which all production is performed by the state or some other analogous public body,
but in which there is a functioning price mechanism, has similar properties to a
hypothetical market economy under perfect competition, in that it achieves Pareto
efficiency. In contrast to models of capitalism, the Lange model is based on a direct
allocation, by directing enterprise managers to set price equal to marginal cost in order
to achieve Pareto efficiency; while in a capitalist economy managers are instructed to
maximize profits for private owners while competitive pressures are relied upon to
indirectly lower the price to equal marginal cost.
This model was first proposed by Oskar R. Lange in 1936 during the socialist
calculation debate, and was later expanded upon by several other economists,
including H. D. Dickinson, Abba P. Lerner and Fred M. Taylor. Although the model
was called "market socialism" by Lange and Lerner, the Lange model is actually a
form of planned economy where a central planning board allocates investment and
capital goods with markets reserved for labor and consumer goods. Instead of an
actual market for capital goods, the central planning board simulated a market in
capital goods through a trial-and-error process first elaborated by Vilfredo
Pareto and Lon Walras.
[1]

The Lange model has not been adopted or implemented in some form in any part of
the world, even in Oskar Lange's home country of Poland, which in the post-war era
had the Soviet model of central planning thrust upon it, which precluded even minimal
experimentation with Lange-style market socialism.
[2]

Contents
1 Overview
2 Basic principles
2.1 Institutions
2.2 Trial-and-error price adjustments
2.3 Central planning board
2.4 Social dividend
3 Advantages
4 Criticisms
5 See also
5.1 Contributors
6 References
7 Further reading
Overview
The model is sometimes referred to as the "LangeLerner" model.
[3]
Abba
Lerner wrote a series of articles that had great influence over Lange's thinking. For
example, Lerner (1938) caused Lange to re-write his 1936 and 1937 articles on market
socialism, before they were re-published as chapters in a 1938 book. Lerner (1938)
influenced Lange's thinking on social dividend payments. Lerner (1944) also argued
that investment in the Lange model would inevitably be politicized.
This model was developed in response to Ludwig von Mises and Friedrich Hayek's
criticisms of socialism during the Socialist calculation debate. Mises' and Hayek's
criticism stated that any body that owns and consolidates a society's means of
production will not be able to acquire the knowledge needed to calculate general
equilibrium prices, stating that market-determined prices were essential for the
rational allocation of producer goods. The model contains underlying principles from
the writing of the neoclassical economists Vilfredo Pareto and Lon Walras. Lange's
theory emphasizes the idea of Pareto efficiency, which states that a situation is Pareto
efficient if there is no way to rearrange things to make at least one individual better
off without making anyone worse off. In order to achieve this Pareto efficiency,
however, a set of conditions must be formulated through a number of sequential
stages. This idea of deriving a set of conditions which ensures the preferences of
consumers are in balance with the maximum amount of goods and services being
produced is emphasized by Walras. The theorem indicates that a socialist economy
based on public ownership could achieve one of the principal economic benefits of
capitalism - a rational price system - and was an important theoretical force behind the
development of the concept of market socialism.
Basic principles
The Lange model suggests three levels of decision-making. Firms and households
represent the lowest level, with industrial ministries as the intermediate level, and the
highest level of decision-making is made up of the central planning board. The central
planning board sets the initial price of consumer goods arbitrarily and informs the
producing firms of these prices. The state-owned firms would then produce at the
level of output where marginal cost is equal to price, P = MC, so as to minimize the
cost of production. At the intermediate level, industrial authorities represented by the
industrial ministries are responsible for determining the sectoral expansion of
industry. At the lowest level of decision making, households decide how to allocate
income and how much labor to supply by choosing between work and leisure.
Institutions
The key institutions of the Lange model include the central planning board (CPB),
industrial ministries that are responsible for their specific economic sector, and state
enterprises based on democratic management by their employees.
Trial-and-error price adjustments
Because prices are set by the central planning board "artificially" in order to achieve
planned growth objectives, equilibrium between supply and demand is originally
unlikely. To produce the correct amount of goods and services and create a balance,
the Lange model posits a trial-and-error method. If a surplus in the supply of a
particular good arises, the central planning board lowers the price of that good.
Likewise, if there is a shortage of a particular good, the price is raised by the central
planning board. This process of price adjustments takes place until equilibrium
between supply and demand is met.
Central planning board
The central planning board (CPB) has three major functions in the Lange model: First
it instructs firms to set price to equal marginal cost, secondly it uses the trial-and-error
process to attain market-clearing prices for goods and services, and finally, it reinvests
the economic profit derived from state enterprises into the economy based on a target
rate of growth. The central planning board would also be responsible for distributing
social dividends among the population.
Social dividend
The central planning board is responsible for the allocation of social dividends in
addition to its price-setting role. Because all non-labor factors of production are
publicly owned by a state entity, the distribution of the rents and profits of these
resources accrues to the public. The profits and rents would be used to finance a social
dividend scheme based on the individuals' share in the income derived from the
socially owned capital and natural resources, providing a complimentary source of
income for workers alongside their salaries and wages.
[4]

Advantages
An advantage is public control over investment. The rate of economic growth would
be largely state-determined due to the investment ratio being one of its major
determinants. In addition, Lange argued that externalities could be better accounted
for as a result of the state's ability to manipulate resource prices. Because the state
controls all firms, they could easily factor the cost of an externality into the price of a
certain resource. Because the decisions are made by higher rather than lower levels, it
is argued that these decisions are less likely to have undesirable environmental
consequences.
Furthermore, because the state uses marginal cost pricing and determines entry,
monopolies, and the accompanying lack of allocative efficiency and x-efficiency can
be avoided under Langean socialism.
The model claims to solve another main criticism of capitalism. Lange believed that
his model would reduce cyclical instability because the state would control savings
and investment, consequently eliminating a major source of inefficiency, inequality
and social instability that arises from violent cyclical shifts under capitalism.
Criticisms
The Lange model has been criticized by various economists, both socialist and non-
socialist.
Abram Bergson has criticized the Lange model on the ground that the costs of
monitoring compliance of the price equals marginal cost criterion would be higher
than the costs of enforcing profit maximization within firms.
Economist Paul Craig Roberts has criticized Lange's theory of socialist planning,
saying that it is only an effort at market simulation and not the socialist alternative it
claims to be, thus it is merely an imitation of capitalism. Roberts argues that the
Lange model abandons the intentions of socialist planning because it disregards the
horizontal organizational structure and co-operative prerequisites of socialist
organization. He claims that the model only includes commodity production as an
organizational structure and defines socialism merely in terms of property rights.
According to Roberts, the commodity production embodied in the system of exchange
of Lange's model is exactly what was intended to be eliminated by socialist planning -
specifically, the fundamental focus of socialist planning was to establish a system
of production for use.
[5]

Recently the economist Joseph Stiglitz has criticized the theorem for replicating many
of the alleged errors of neoclassical economics. He suggests that because of economic
problems resulting from costs of information and missing markets, market economies
solve problems in a manner different from that described by the neoclassical analysis.
Therefore, according to Stiglitz, the Lange model is a poor description of how the
price mechanism will work in a market socialist economy to the same extent that
neoclassical economics is a poor description of how market capitalism actually
functions.
Economists Don Lavoie and Israel Kirzner claim that Lange proposed an illegitimate
simulation of markets. Markets cannot function without genuine rivalry in real
markets. According to their perspective, simulated markets cannot match the
performance of real markets.
Economist DW MacKenzie claims that the model has been misunderstood. The trial-
and-error model aims at simulating spot markets. Mises (1920) suggested that socialist
officials could simulate pricing in spot market. The trial and error proposal is
irrelevant to the real problem of planning investment because inventories
of future goods never exist. Lavoie and Kirzner both argue that Lange's trial and error
proposal is illegitimate. Mackenzie argues that the trial and error proposal is
irrelevant: the Lange model fails because it aims at simulating the wrong markets.
The primary criticism against socialism is that it could not direct investment
efficiently without speculation in financial markets.
[citation needed]
Ludwig von Mises
denied that socialist officials could simulate the pricing of future capital goods in
financial markets. The Lange model focuses on central planning of investment and
social dividend payment. Citizens in Lange's proposed state are paid a "social
dividend" as equal owners of capital. The absence of private dividends means that
there is no stock market to regulate industry. Lange admitted in several places that
socialist officials would direct investment arbitrarily. Lange also admitted that
arbitrary investment would come at the expense of consumer welfare. Lange
compensated for his concessions by arguing that capitalism also leads to arbitrary
investment. According to Lange, capitalism is arbitrary in the way it concentrates
wealth in the hands of a few. Since investment is directed by the savings of the rich,
capitalism allocates investment according to the arbitrary dictates of a few economic
elites.