Lange model

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.

The planning board simulates a market in capital goods by a trial-and-error process first elaborated by Vilfredo Pareto and Léon Walras.

[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.

The Lange model was developed in response to Ludwig von Mises and Friedrich Hayek's criticisms of socialism during the socialist calculation debate.

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.

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.

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.

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.