The Lange model (or Lange–Lerner theorem) is a neoclassical

economic model An economic model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed ...

for a hypothetical

socialist economy Socialist economics comprises the economic theories, practices and norms of hypothetical and existing socialist economic systems. A socialist economic system is characterized by social ownership and operation of the means of production that m ...

based on public ownership of the

means of production In political philosophy, the means of production refers to the generally necessary assets and resources that enable a society to engage in production. While the exact resources encompassed in the term may vary, it is widely agreed to include the ...

and a trial-and-error approach to determining output targets and achieving

economic equilibrium In economics, economic equilibrium is a situation in which the economic forces of supply and demand are balanced, meaning that economic variables will no longer change. Market equilibrium in this case is a condition where a market price is es ...

and

Pareto efficiency In welfare economics, a Pareto improvement formalizes the idea of an outcome being "better in every possible way". A change is called a Pareto improvement if it leaves at least one person in society better off without leaving anyone else worse ...

. In this model, the state owns non-labor factors of production, and market simulations are used by the planning organs to allocate final goods and consumer goods. The Lange model states that if all production is performed by a public body such as the state, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical

market economy A market economy is an economic system in which the decisions regarding investment, production, and distribution to the consumers are guided by the price signals created by the forces of supply and demand. The major characteristic of a mark ...

under

perfect competition In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoret ...

. Unlike models of capitalism, the Lange model is based on direct allocation, by directing enterprise managers to set price equal to

marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is increased, i.e. the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it ...

in order to achieve Pareto efficiency. By contrast, in a capitalist economy, private owners seek to maximize profits, while competitive pressures are relied on to indirectly lower the price, this discourages production with high marginal cost and encourages

economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of Productivity, output produced per unit of cost (production cost). A decrease in ...

. This model was first proposed by Oskar R. Lange in 1936 during the socialist calculation debate, and was expanded by economists like H. D. Dickinson and Abba P. Lerner. Although Lange and Lerner called it "

market socialism Market socialism is a type of economic system involving social ownership of the means of production within the framework of a market economy. Various models for such a system exist, usually involving cooperative enterprises and sometimes a mix ...

", the Lange model is a form of

centrally planned economy A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, ...

where a central planning board allocates investment and capital goods, while markets allocate labor and consumer goods. The planning board simulates a market in capital goods by a trial-and-error process first elaborated by

Vilfredo Pareto Vilfredo Federico Damaso Pareto (; ; born Wilfried Fritz Pareto; 15 July 1848 – 19 August 1923) was an Italian polymath, whose areas of interest included sociology, civil engineering, economics, political science, and philosophy. He made severa ...

and

Léon Walras Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economics, mathematical economist and Georgist. He formulated the Marginalism, marginal theory of value (independently of William Stanley Jevons and Carl ...

. The Lange Model is in practice a type of

and not a type of

. The Lange model has never been implemented anywhere, not even in Oskar Lange's home country,

Poland Poland, officially the Republic of Poland, is a country in Central Europe. It extends from the Baltic Sea in the north to the Sudetes and Carpathian Mountains in the south, bordered by Lithuania and Russia to the northeast, Belarus and Ukrai ...

, where

Soviet-type economic planning Soviet-type economic planning (STP) is the specific model of Planned economy#Central planning, centralized planning employed by Marxism–Leninism, Marxist–Leninist socialist states modeled on the economy of the Soviet Union. The post-''pere ...

was imposed after World War II, precluding experimentation with Lange-style economy. Some parallels might be drawn with the New Economic Mechanism or so-called Goulash Communism in

Hungary Hungary is a landlocked country in Central Europe. Spanning much of the Pannonian Basin, Carpathian Basin, it is bordered by Slovakia to the north, Ukraine to the northeast, Romania to the east and southeast, Serbia to the south, Croatia and ...

under Kádár, although this was not a pure Lange-model system.

Overview

The model is sometimes called the "Lange–Lerner" model. Abba Lerner wrote a series of articles that greatly influenced Lange's thinking. For example, Lerner (1938) caused Lange to re-write his 1936 and 1937 articles on

, before they were re-published as chapters in a 1938 book. Lerner (1938) influenced Lange's thinking on

social dividend The social dividend is the return on the natural resources and capital assets owned by society in a socialist economy. The concept notably appears as a key characteristic of market socialism, where it takes the form of a dividend payment to ea ...

payments. Lerner (1944) also argued that investment in the Lange model would inevitably be politicized. The Lange model was developed in response to

Ludwig von Mises Ludwig Heinrich Edler von Mises (; ; September 29, 1881 – October 10, 1973) was an Austrian-American political economist and philosopher of the Austrian school. Mises wrote and lectured extensively on the social contributions of classical l ...

and

Friedrich Hayek Friedrich August von Hayek (8 May 1899 – 23 March 1992) was an Austrian-born British academic and philosopher. He is known for his contributions to political economy, political philosophy and intellectual history. Hayek shared the 1974 Nobe ...

's criticisms of socialism during the socialist calculation debate. The critics argued that any body that owns and consolidates a society's means of production cannot acquire the information needed to calculate general equilibrium prices, and that market-determined prices were essential for the rational allocation of producer goods. The Lange model contains principles proposed by neoclassical economists

and

. Lange's theory emphasizes the idea of Pareto efficiency: a situation is Pareto-efficient if there is no way to rearrange things to make any individual better off without making anyone worse off. To achieve Pareto efficiency, a set of conditions must be formulated in stages. This idea of deriving conditions to ensure that consumer preferences are in balance with the maximum amount of goods and services 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

Basic principles

The Lange model suggests three levels of decision-making. The lowest level contains firms and households, the intermediate level contains industrial ministries, and the highest level is the central planning board. The board sets the initial price of consumer goods arbitrarily and informs the producing firms of these prices. The state-owned firms then produce at the level of output where

equals price, P = MC, so as to minimize the cost of production. At the intermediate level, industrial ministries determine the sectoral expansion of industry. 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 for each economic sector, and state enterprises managed democratically by their employees.

Trial-and-error price adjustments

Because prices are set by the central planning board "artificially" aiming to achieve planned growth objectives, it is unlikely that supply and demand will be in equilibrium at first. To produce the correct amount of goods and services, the Lange model suggests a trial-and-error method. If there is a surplus of a particular good, the central planning board lowers the price of that good. Conversely, if there is a shortage of a good, the board raises the price. This process of price adjustments takes place until equilibrium between supply and demand is achieved.

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 adjusts prices 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 also distributes social dividends to the population.

Social dividend

Apart from setting prices, the central planning board allocates

s. Because all non-labor factors of production are publicly owned, the rents and profits of these resources belong to the public. The profits 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 complementary source of income for workers alongside their salaries and wages.''On the Economic Theory of Socialism'', by Lange, Oskar. 1936. The Review of Economic Studies, Vol. 4, No. 1: "It seems, therefore, convenient to regard the income of consumers as being composed of two parts: one part being the receipts for the labour services performed and the other part being a social dividend constituting the individual's share in the income derived from the capital and the natural resources owned by society."

Advantages

The Lange economic model has a number of theoretical advantages. One advantage is public control over investment. The rate of economic growth would be largely state-determined and a major determinant would be investment ratio. Another advantage argued by Lange was that

externalities In economics, an externality is an indirect cost (external cost) or indirect benefit (external benefit) to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced ...

could be better accounted for, thanks to 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 decisions are made at 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, Langean socialism can avoid monopolies and the accompanying lack of

allocative efficiency Allocative efficiency is a state of the economy in which production is aligned with the preferences of consumers and producers; in particular, the set of outputs is chosen so as to maximize the Economic surplus, social welfare of society. This is a ...

and x-efficiency. The model claims to solve another main criticism of

capitalism Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...

. 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

Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and ...

criticized the Lange model on methodological grounds. According to Friedman, the model rested on "models of imaginary worlds" rather than "generalizations about the real world", making the claims of the model immune to falsification. He also criticized the model on ethical grounds, pointing out that governments would be quick to shut down or seize firms that do not align with targets mathematically proposed by the system, thus limiting true economic freedom. Other criticisms include how the Lange model assumes that market data is static and can be 'given' to central planners and that humans are passive and neutral in their preferences.

References

Literature

* * Kowalik, Tadeusz (1987). "Lange-Lerner mechanism," '' The New Palgrave: A Dictionary of Economics'', v. 3, pp. 129–30. * Roemer, John (1994). '' A Future for Socialism'', Verso Press. * * * * * Lange, O 1937 On the Economic Theory of Socialism II ''The Review of Economic Studies'' V4 N 123-142 * Lange, O 1938 On the Economic Theory of Socialism B Lippincott ed. University of Minnesota Press * Lange, O 1940 Letter to FA Hayek, translated by Thadeusz Kowalik * Lange, O 1942 Economics of ''Socialism Journal of Political Economy'' 50(2):299-303 * Lange, O 1957a Political Economy of Socialism, reprinted in ''Kowalik'' 1994 * Lange, O 1957b. Role of Planning in a socialist economy, reprinted in ''Kowalik'' 1994 * Lange, O 1967 The Computer and the Market in Socialism, Capitalism, and Economic Growth Feinstein Ed. Reprinted in ''Economic Theory and Market Socialism'' T Kowalik ed. Edward Elgar pub. * * * * * Lerner, A 1944 The Economics of Control * * * MacKenzie, DW, 2006 Oscar Lange and the Impossibility of Economic Calculation, Studia Economicze * MacKenzie, DW Social Dividends, Entrepreneurial Discretion, and Bureaucratic Rules * MacKenzie, DW Capital and Income in Democratic Socialism * MacKenzie, DW Trial and Error in the Socialist Calculation Debate * * * {{cite journal , last= Shleifer , first= Andrei , author-link= Andrei Shleifer , author2=Robert W. Vishny , year= 1994 , title= The Politics of Market Socialism , journal= The Journal of Economic Perspectives , volume= 8 , issue= 2 , pages=165–76 , doi = 10.1257/jep.8.2.165 , s2cid= 152437398 , url= http://nrs.harvard.edu/urn-3:HUL.InstRepos:33077903 , doi-access= free , url-access= subscription