Lange model
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The Lange model (or Lange–Lerner theorem) is a
This model was first proposed by
The Lange model has never been implemented anywhere, not even in Oskar Lange's home country,
Overview
The model is sometimes called the "Lange–Lerner" model.
The Lange model was developed in response to
Basic principles
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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
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 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 complementary source of income for workers alongside their salaries and wages.[5]
Advantages
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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
Furthermore, because the state uses
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
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 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.[6] 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.[7]
See also
- Economic planning
- Market socialism
- Marginalism
- Socialist economics
- Fred M. Taylor
- Indicative planning
References
- .
- JSTOR 4226984.
- ^ Wolf, Thomas. "The Lessons of Limited Market-Oriented Reform" (1991), The Journal of Economic Perspectives, Vol. 5, No. 4 (Autumn, 1991), pp. 45-58
- JSTOR 1882231.
- ^ 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."
- ^ Milton Friedman, 'Lange on Price Flexibility and Employment', Essays in Positive Economics.
- ^ Duddy, Craig (2021). "A Critique of the Lange Model". SSRN – via SSRN.
Literature
- ISBN 0-618-26181-8.
- 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.
- Stiglitz, Joseph E.(1994). Whither Socialism?. Cambridge, MA: MIT Press. 0-262-19340-X.
- Lo, Dic; Russell Smyth (2004). "Towards a Re-interpretation of the Economics of Feasible Socialism". Cambridge Political Economy Society. 28 (6).
- Lange, O (1935). "Marxian Economics and Modern Theory". Review of Economic Studies. 2 (3): 189–201. JSTOR 2967586.
- Lange, O (1936). "On the Economic Theory of Socialism I". The Review of Economic Studies. 4 (1): 53–71. JSTOR 2967660.
- 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 (1934). "Economic Theory and Socialist Economy". The Review of Economic Studies. 2 (1): 51–61. JSTOR 2967550.
- Lerner, A (1936). "A note on Socialist Economics". The Review of Economic Studies. 4 (1): 72–76. JSTOR 2967661.
- Lerner, A (1937). "Statics and Dynamics in Socialist Economics". The Economic Journal. 47 (186): 253–270. JSTOR 2225526.
- Lerner, A (1938). "Theory and Practice in Socialist Economics". The Review of Economic Studies. 6 (1): 71–5. JSTOR 2967541.
- Lerner, A 1944 The Economics of Control
- Lerner, A (1972). "The Economics and Politics of Consumer Sovereignty". The American Economic Review. 62 (1–2): 258–266.
- Lerner, A (1977). "Marginal Cost Pricing in the 1930s". The American Economic Review. 67 (1): 235–243.
- 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
- S2CID 153391920.
- Rosefielde, Steven (1973). "Some Observations on the Concept of 'Socialism' in Contemporary Economic Theory". JSTOR 150886.
- S2CID 152437398.
Further reading
- Post-Lange Market Socialism: An Evaluation of Profit-Oriented Proposals by James A. Yunker
- Revisiting the Socialist Calculation Debate: The role of markets and finance in Hayek's response to Lange's challenge, by Paul Auerbach and Dimitris Sotiropoulos
- Oskar Lange and the Impossibility of Economic Calculation by D.W. MacKenzie
- Capital and Income in Democratic Socialism by D.W. MacKenzie
- Trial and Error in the Socialist Calculation Debate by D.W. MacKenzie