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

model for a hypothetical socialist economy based on public ownership of

the means of production and a trial-and-error approach to determining output
targets and achieving economic equilibrium and Pareto efficiency. In this model,
the state owns non-labor factors of production, and markets 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 under perfect competition. Unlike models of capitalism, the Lange
model is based on direct allocation, by directing enterprise managers to set price
equal to marginal cost in order to achieve Pareto efficiency. By contrast, in a
capitalist economy managers are instructed to maximize profits for private
owners, while competitive pressures are relied on 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 expanded by economists like H. D. Dickinson
and Abba P. Lerner. Although Lange and Lerner called it "market socialism", the
Lange model is a form of planned economy 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 and Léon Walras.[1]
The Lange model has never been implemented anywhere, not even in Oskar
Lange's home country, Poland, where Soviet-type economic planning was
imposed after World War II, precluding experimentation with Lange-style
economy.[2] Some parallels might be drawn with the New Economic
Mechanism or so-called Goulash Communism in Hungary under Kádár, although
this was not a pure Lange-model system.[3]

Contents

 1Overview
 2Basic principles
o 2.1Institutions
o 2.2Trial-and-error price adjustments
o 2.3Central planning board
o 2.4Social dividend
 3Advantages
 4Criticisms
 5See also
 6References
 7Further reading

Overview[edit]
The model is sometimes called the "Lange–Lerner" model.[4] 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 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.
The Lange model was developed in response to Ludwig von Mises and Friedrich
Hayek'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 Vilfredo Pareto and Léon Walras. 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 market socialism.

Basic principles[edit]
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A chart to show how the model would hypothetically function.

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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 marginal cost 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[edit]
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[edit]
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[edit]
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[edit]
Apart from setting prices, the central planning board allocates social dividends.
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
complimentary source of income for workers alongside their salaries and wages.
[5]

Advantages[edit]
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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 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 and x-efficiency.
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[edit]
Milton Friedman 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 logical grounds by
pointing out that any system which posits state ownership of enterprise requires
the continuous intervention by force from the state as any time an individual
started a private enterprise the state must either shut it down or seize it, or use
force to deter individuals from starting private enterprises in the first place.[6]
[page  needed]

https://en.wikipedia.org/wiki/Lange_model