Lange Model - Criticisms

Criticisms

This model was developed in response to Ludwig von Mises and Friedrich Hayek's criticisms of socialism, stating that the state does not have the knowledge to calculate general equilibrium prices, and that market prices were essential for the state to allocate resources. The model contains underlying principles from the writing of Vilfredo Pareto and Léon 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. This theorem indicates that a socialist economy 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.

Economist Paul Craig Roberts has criticized Lange's theory of socialist planning, saying that it is only an effort at market simulation and is not the socialist alternative it claims to be. Roberts argues that the Lange model abandons the intentions of socialist planning disregards the hierarchical prerequisites of socialist organization. He claims that the model includes only commodity production as an organizational structure and defines socialism only 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.

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 market capitalism.

Economists Don Lavoie and Israel Kirzner claim that Lange proposed an illegitimate simulation of markets. Markets cannot function without genuine rivalry in real markets, and between actual entrepreneurs. Simulated markets cannot match 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.

The primary criticism against socialism is that it could not direct investment efficiently without speculation in financial markets. 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.

The model is sometimes referred to as the "Lange–Lerner" model. 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 payment. Lerner (1944) argued that socialist investment would be politicized.

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.