lange, Oskar Ryszard (1904-1965) she New Palgrave Dictionary of Eeanomic economic aspect, but perhaps at the cost of giving less specific treatment to institutional aspects than the 1934 model. That was probably due to the chief purpose of that study, namely, to disprove Mises’ argument about a theoretical and practical (practical, according to Hayek and Robbins) infeasibility of economic calculus in socialism because of the absence of a genuine market (prices) for capital Many formulations in that classical study indicate that a socialist society's general outlines of economic organization were similar or identical in both the early and classical models. In particular, this is true of the separation of political power from economic management, of its three-level structure — the centre, the branches organized in trusts, individual plants — and of the similar powers of the Central Planning Board (CPB) and the Public Bank. In both models, the centre is expected to react to changes in market factors (prices and wages) and, correspondingly, to changes in employment in the carly model or to changing inventories and emerging shortages in the classical one. The CPB, basically, is to imitate the market. The early model was clearly more ‘market-oriented’ because all prices of goods and services were to be determined by the market. Accordingly, there would be no difference between actual market prices and calculated prices as set by the CPB. lange -lerner mechanism This is a designation commonly used to denote a market-oriented socialism model devised by Lange, who later amended it after public discussion with Lemer. The first, fundamental part of Lange's study was published together with A.P. Lerner’s (1936) critical remarks in the same issue of the Review of Economic Studies, while the second part appeared together with Lange's reply to Lemer (1937). Later on, Lange made the changes necessary to publish his study (together with F.M. Taylor's essay) in book form (1938b). The term is occasionally used in a less restricted sense, to bring out the similarity of Lange's and Lerner's views on other matters concerning socialist economy. The mechanism of socialist economy in the Lange—Lerner blueprint was based on the following assumptions. It has its institutional framework in the public ownership of means of production (for simplicity, the private sector is omitted) and in the free choice of consumption and employment (job and workplace), while consumer preferences - ‘through demand prices’ — are the all-decisive criterion of both production and resource allocation. Under these assumptions, an authentic market (in the institutional sense) exists for consumer goods and labour services. But prices of capital goods and ‘all other productive resources except labour’ are set by a CPB as indicators of existing alternatives established for the purpose of economic calculation. So, apart from market prices, there are also ‘accounting prices’, In order to make their choices, both categories of prices are used by enterprise and industry managers, who are public officials. Production managers in charge of individual enterprises or entire industries make autonomous decisions about what and how much should be produced and how it should be done, while prices are set as parameters outside the enterprises or industries. But since profit maximization has by definition ceased to be a direct goal of economic activity, to ensure that they can achieve effects close to those achieved in free-market economy, production managers must obey two rules. First, they must pick a combination of production factors under which average cost is minimized; and second, they must determine a given industry's total output at a level at which marginal cost is equal to product price. The first rule was expected to eliminate all less efficient alternatives. In combination with the second rule, in so far as it concerns plant managers, it performs the same function as the free-market economy desire to maximize http://www. dictionaryofeconoaics.com.proxy.library.esi EG Asses 108lange, Oskar Ryszard (1904-1965) she New Palgrave Dictionary of Eeanomic profit. This leads to minimization of production costs. The second rule compels production managers to increase or cut the output of a whole industry in accordance with consumer preferences, which is a substitute for free entry in a free competitive economy. These rules lead to an economic equilibrium by the trial-and-error method first described by Fred M. Taylor (1929). The CPB acts like an auctioneer, initially watching the behaviour of economic actors in reaction to a price system it picks at random or — perhaps the best solution — to the historically inherited prices. The behaviour of the system is measured by the movement of inventories of goods. If there is too much of some product at a given price, then its inventory grows, and vice versa. This is regarded as information that the product price should be cut or increased, respectively. This procedure is applied as many times as is necessary to reach equilibrium, providing that this process does in fact converge to the system of equilibrium prices. Accounting prices, then, are objective in character, just like market prices in a competitive system, the difference being that in this case the CPB performs the role of the market. The same trial-and-error way towards equilibrium could also be applied in two other models of socialist economy, one providing for a decreased consumer influence on production programme, the other presupposing none at all. In its extreme version, which for sociopolitical reasons Lange deems untenable, the model might provide no freedom of choice for either consumption or employment. Production plans would be decided by the CPB officials’ scale of preferences. In such a version all prices are basically accounting prices. Consumer goods are rationed, while the place and kind of employment are imposed by command. If production managers keep to the above-mentioned rules, and if the CPB keeps to the parametric price system, then economic calculus is possible even in this version, while prices are not arbitrary but reflect the relative scarcity of factors of production. There is an intermediate model, which provides for freedom of consumption decisions but only within a production plan established on the ground of CPB preferences. In this case, accounting prices of producer and consumer goods reflect the CPB's preference scale, while production managers would rely on them in their decision-making. Market prices for consumer goods would be set by supply and demand. But Lange rejects even this system as undemocratic, saying that the dual system of prices could be applied only when there is widespread agreement that checking the consumption of some products (say, alcohol) while promoting the consumption of other goods (say, cultural services) is in the public interest. But the CPB might conceal its preferences and resort to rationing production goods and resources. Society can defend itself against such practices by creating a supreme economic court, which would be entitled to declare any unconstitutional CPB decision as null and void. In Lange's view, any decision introducing rationing would be unconstitutional. Interestingly, Lange rejects these two versions of socialist economy on account of the potential hazards they carry for democracy, and says not a word about democracy's possible link with economic efficiency. Lange considers the distribution of national income in three aspects. Wages would be differentiated by seeking a distribution of labour services that would maximize society's wealth in general. This happens when differences in marginal disutility of work in different trades and workplaces are offset by wage differences. Wage differentials can be treated as converses of prices paid by employees for differing work conditions, as a simplified form of buying free time, safety or pleasant work (which is easy to imagine assuming that all employees get the same earnings but pay different prices for doing different jobs; the easier and safer a given job, the more one has to pay for it). http://www. dictionaryofeconoaics.com.proxy.library.esi EG Asses 108lange, Oskar Ryszard (1904-1965) she New Palgrave Dictionary of Eeanomic In this sense, the wage differentiation rule can be brought into harmony with egalitarianism. Apart from wages paid by employees, each consumer is paid a public dividend as his or her share of capital and natural resources. At first Lange was inclined to distribute such dividends proportionally to wages. But as Lerner pointed out that such a policy would impart added attractiveness to the hardest jobs, Lange changed his mind, saying there should be no link between procedures for public dividend distribution and wage differentials. The distribution of national income between consumption and accumulation, said Lange, would not be arbitrary when only consumers’ individual savings decide the rate of accumulation. But if savings are ‘corporately’ determined — and Lange at first thought that was typical of a socialist economy — then there would be no way of preventing the CPB from being at least partly arbitrary in its decisions. Emphasizing that resource allocation is guided by formally analogous rules in both socialist and free competitive economies, Lange argued that real allocation in socialism would be different from and more rational than that in capitalism. In his static analysis, he considered the following factors as decisive in judging the relative performance of the two systems. Greater equality of income distribution enhances society's well-being (in the subjective sense, that is, as a sum total of individual satisfactions). Second, socialist economy makes allowances in its calculus for all the services rendered by producers and for all the costs involved, while a private entrepreneur does not care for benefits that do not flow into his own pocket nor for costs he does not have to pay: ‘Most important alternatives, like life, security, and health of the workers, are sacrificed without being accounted for as a cost of production’ (1938b, p. 104). Even the possible flaws that Lange conceded might appear in a socialist economy, such as the arbitrary setting of the rate of accumulation or the danger of bureaucratization of economic life, would be milder than under capitalism, he argued. But the ultimately decisive economic argument in favour of socialism, Lange believed, was the general waste and endogenous tendency towards stagnation generated by modern capitalism's monopolistic tendencies. This question, though, goes beyond the scope of the often-criticized static analysis underlying Lange's classical model. Leaving aside the now enormous critical literature, let us try to answer the question of what Lange himself saw as his model's limitations. Lange anticipated possible charges by critics in the second part of his study, in his discussion of “The Economist's Case for Socialism’: The really important point in discussing the economic merits of socialism is not that of comparing the equilibrium position of a socialist and of a capitalist economy with respect to social welfare. Interesting as such a comparison is for the economic theorist, it is not the real issue in the discussion of socialism. The real issue is whether the further maintenance of the capitalist system is compatible with economic progress. (1938b, p. 110) But as he develops this general idea, Lange clearly uses an asymmetrical kind of argument. Having presented free competitive capitalism as the system that generated ‘the greatest economic progress in human history’, Lange proceeds to show (among other things, by referring to Keynes) that the source of that progress is drying up because of the progressive concentration and monopolization of production. His main point is that corporations, which are capable of controlling the market, attempt to avoid losses due to capital depreciation caused by innovation, and hence they try to check progress in technology. http://www. dictionaryofeconoaics.com.proxy.library.esi © dla) de @ 81:lange, Oskar Ryszard (1904-1965) she New Palgrave Dictionary of Eeanomic Neither a return to free competition nor government control can effectively eliminate this tendency. The only effective solution, then, is the socialization of big capital, the introduction of socialism. But will socialism ensure rapid technical progress? Will the abolition, via socialization, of capitalist monopolies’ well-known tendency to check technological progress automatically dismantle all the barriers to innovation? Or will it amount to substituting new barriers for old? Will the two rules for managers be sufficient to guarantee the adoption of state-of-the-art production techniques? In his classic study, Lange never even asked such questions and only much later did he become aware of them. Towards the end of his life (in a letter to the present writer dated 14 August 1964), Lange wrote: What is called optimal allocation is a second-rate matter, what is really of prime importance is that of incentives for the growth of productive forces (accumulation and progress in technology). This is the true meaning of, so to say, ‘rationality’. It seems that he must have lacked the indispensable tools to solve this question or even to present it in detail. Towards amixed economy Pethaps, the most important difference between the early (Lange-Breit) and the classical models was his new emphasis that ‘the real danger of socialism is that of a bureaucratization of economic life, and not the impossibility of coping with the problem of allocation of resources’. He reassured himself by pointing out that the same danger existed in monopolistic capitalism and that ‘officials subject to democratic control seem preferable to private corporation executives who practically are responsible to nobody’ (Lange, 1938b, pp. 127-8). When he became aware of that danger, which would exist even in a market-dominated brand of socialism, he embarked on a long quest for what he called in the title of one article (1943b), ‘The Economic Foundations of Democracy in Poland’. In the classical study he had already put forward the idea of a Supreme Economic Court whose function would be to safeguard the use of the nation's productive resources in accordance with the public interest, in particular to declare as null and void any CPB decision which was incompatible with adopted management rules. During the Second World War, Lange suggested a number of ideas for better safeguards for democracy, either by substantiating the injunction to take account of consumer preferences (and hence limiting the central economic authority's prerogatives) or by devising institutional guarantees for democratic control of decision-making bodies, or by indicating limits to the socialization of property. There were a number of highlights of the evolution of Lange's views during that period. In his letter to Hayek in 1940 (Kowalik, 1984) Lange gave a more accurate, and perhaps slightly different, description of the CPB's prerogatives for pricing goods and services: Practically, I should, of course, recommend the determination of prices by a thorough market process whenever this is feasible, i.e. whenever the number of selling and purchasing units is sufficiently large. Only where the number of these units is so small that a situation of oligopoly, oligopsony, or bilateral monopoly would obtain, would I http://www. dictionaryofeconoaics.com.proxy.library.esi © dla) de @ 81: