Lange Model

The Lange model is a neoclassical economic model of a hypothetical socialist economy combining public ownership of the means of production with a trial-and-error approach to determining output and achieving economic equilibrium. Within this model, the state owns non-labor factors of production, with final goods and consumer goods allocated by markets. In economic theory, the Lange model states that an economy in which all production is performed by the state, 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. 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, in contrast to a capitalist economy, where managers are instructed to maximize profits for private owners and competitive pressures indirectly lower the price to equal marginal cost.

This model was first proposed by Oskar R. Lange in 1936 and later expanded upon by several other economists, including H. D. Dickinson and 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 elabored by Vilfredo Pareto and Léon Walras.