On The Economic Theory of Socialism, by Oskar Lange, is a defense of socialist economy using a neo-classical analysis. One of the main questions that Lange attempted to answer is how is efficient resources allocation possible in a socialist economy.
It would be beneficial to first examine the opponents of socialism. Professor von Mises, a Viennese economist, argued that due to socialist state's lack of prices for capital goods, it would be impossible for a socialist state to have efficient resources allocations; because prices determine the relative importance of various goods. Similarly, Professor Hayek and Robbins argued that in a command economy price determination is theoretically possible but can never be carried out in practice. Hayek and Robbins based their argument on the fact that if prices are to be determined, the Central Planning Unit would need to solve millions of simultaneous equations, which would take a lifetime to accomplish.
Lange answered von Mise's attack by suggesting that the term price should be understood as "terms on which alternatives are offered"; rather than an "exchange ratio" (12). With Lange's generic definition of prices, the absence of a capital market will not prevent the establishment of prices for capital good. Furthermore, with Barone's "The Ministry of Production in the Collectivist State," it was mathematically proven that these prices can have economic significance, and not just be arbitrary. Lange answered Professor Hayek and Robbins's criticism by contending that both market and socialist economy can arrive at equilibrium prices through trial and error. Lange stated that price is quantity related, in the sense that excessive supply of quantity lowers the price, while shortage of supply cause prices to rise. Accordingly, no equations will ever really need to be solved, since quantities at the end of a productive period will naturally reveal the accuracy of the CPU's determined prices; through these trials and error, equilibrium prices will be found. Furthermore, Lange stated that CPU's determined prices will be as significant and object as market economy's prices; since individuals in both economic systems face a "parametric function of prices"(16). The parametric function of prices is simply that an individual has to accept prices as a given. In a perfectly competitive market, this function is obvious; since no one individual can influence market prices. In the socialist economy, the state can impose the parametric function of prices as an accounting rule. As for the minimization of costs and the equality of marginal cost and selling price, Lange thinks that it could be imposed by law.
Lange also argued that the trial and error time, in the determination of prices, would be shorter in a socialist economy. The time would be shorter because the CPU would have broader knowledge of the entire economy. Furthermore, because of the border knowledge, a loss in a sector can be prevented from going into another sector; i.e., damages can be localized. The localization of damages will prevent ripples in economy thus business cycle will not fluctuate as much. Lastly, because of socialist's relatively equal income distribution, social welfare will be maximized.
While Lange's argument sounds logical, it also has many fallacies. First, Lange's contention that equilibrium prices in a socialist economy can be reached through trial and error is false because sectors are heavily interdependent; thus simply raising the price of sector one, in the face of supply shortages, does not necessarily mean that sector 2 can find a solution to cope with the diminished input from sector 1. Second, government's enforcement of cost minimization is economically meaningless, if the prices of inputs do not convey economic significance. Lastly, to choose socialist economy implies an ideological orientation; thus prices will be ideologically fixed. If prices are ideologically fixed, then prices will not have economic significance, nor will it be objective. Therefore, Lange's arguments does not necessarily support socialist economy.
Sources: On the Economic Theory of Socialism, by Oskar Lange
In the 1990's there has been a mass exodus away from socialism to capitalism because it has not performed well in the last 50 years. The failure of socialism in Eastern Europe was not because it is a faulty program, but rather it was implemented badly. Oskar Lange's "On the Economic Theory of Socialism" went over many important aspects of socialism, however one point stands out. Possibly, the way that Eastern European countries were changed from capitalist to socialist economies contributed to the eventual rejection of socialism. In the chapter "On the Policy of Transition", Lange gives his thoughts on how a country should be transformed from a capitalist to socialist country. This paper outlines his views and then attempts to draw correlations between his ideas and what actually occurred in Eastern Europe.
Lange first discussed the order of socialization of the means of industrial production and firms. He believed that these things should be socialized immediately along with banks. Lange foresaw conflicts arising from the government trying to control an enterprise that was still owned privately. The government would have problems when its mandates conflicted with the profit maximizing instincts of businesses.
Capitalist businesses do not put much import on the social welfare of the people and therefore would not be sympathetic to the social concerns of a socialist government. For this reason capitalists and their command government would cause the economy to grind to a halt because of conflict in policies.
Next, Lange discussed the speed of socialization, Gradualism versus shock therapy, and which was more effective. He pointed out that as of 1936, most socialists and communists believed that gradual conversion into socialism was the best method for avoiding economic instability. However, for economists, the only effective method of transition is shock therapy, the immediate turning over of all enterprises to be socialized, from private to public custody. Lange theorizes hat capitalists, when threatened with socialization over a period of time, will respond by unwittingly sabotaging and destroying the stability and profitabilty of their own firms because they no longer have any incentive to balance their debits and credits. Therefore, in order to socialize an economy comprehensively, the government must do it in one quick step. Lange warns against any sort of compromise, concerning the enterprises to be socialized, between capitalism and socialism, because this would effectually make the socialist government powerless and moot. A socialist government must go all the way in its forming of public enterprises and firms. To do otherwise would entertain a collapse of the economy as in Russia during the Bolshevik regime of the early 1900's. Lange closes by saying that "socialism is not an economic policy for the timid" (Lange,et al. p.125)
However, Lange pointed out that the property that is not destined to become public should be left in the hands of the owners and should be protected by a government garauntee that their property won't be taken from them at a later time. The government should make it clear to the populace that socialism is not adverse to all types of private ownership but rather the ownership and property of firms that can cause a counterproductive imbalance in the social welfare of few over many. Monopolies and imbalances such as these are the bane of all socialists.
The people Lange is concerned with in this section of his article are the small private owners and shareholders. As a gesture of good faith suggested by Lange, the new socialist regime should become a vanguard against large monopolies and should seek to build up resistance to economic dominance of a sector by a few select people. This allows the budding socialist leadership to amass a large enough constituency to make its economic policies effective. If a government cannot gain a large support base it will have no effective power and will be at the head of a capitalist country which they are not able to run effectively. Lange mentions a few alternatives in which a socialist government can run a capitalist economy but that strays from the subject at hand.
Looking at Eastern Europe after World War II, one can see whether Lange's theory of transition held. Poland in particular is a good indicator of how Lange's theories stood up against reality. It must be noted however, that Lange's Neoclassicalist views of socialism were studied but never actually implemented because most socialist countries were based on Marxist theories of socialism. Poland was transformed from a capitalist to a socialist economy by the USSR when the Soviets invaded them during the war. The communist party that was in Poland was put in charge of the economy and all vital firms and means of production were made public domain. The handing over of the industrial sector to the communists was done rapidly in Poland which follows Lange's ideas.
Poland also left small owners of private property with their holdings, mostly in the agricultural sector, however this sector of the economy also demonstrates Lange's caveat about the combination of socialist and capitalist systems. The private owners of farm land sought to maximize their profits, but their efforts came into conflict with the policies of the command economy so, according to Lange, it was no surprise that there was a breakdown in production and the government's agricultural supplies suffered. So in these short examples, Lange's theories on the transition of a country to socialism were on the mark.
In conclusion, Lange had extremely insightful theories about the socialist economy, from its inception to its implementation. Lange's brand of socialism sought to pantomime the market as a way to control prices, interest rates, inflation, supply, etc., compared to the Marxists, who sought to combine the actual market mechanism with their command economy. Although his theories were never actually implemented hopefully the brief outline and examples of his stance on transition from a capitalist to a socialist economy above, showed that possibly, Lange's theories deserved more than just the attention of scholars but the notice of leaders and governments and maybe, the collapse of so many economies in Eastern Europe might have been avoided.
"On the Economic Theory of Socialism". Benjamin Lippincott ed. The University of Minnesota Press. Minneapolis, 1938.
Throughout Oskar Lange's essay entitled On the Economic Theory of Socialism, Lange explains to his readers the aspects and views of a socialist system. He strongly believes that when compared to a capitalist system, socialism functions with greater efficiency and superiority on both a political and economical level. He states that Marxian economists have failed to portray that the economics of socialism work out better in everyday practice than the economics of capitalism. On the other hand, several political science and history writers, such as Webbs, Tawney, and Laski were able to construct institutions of their own for a socialist market. The only problem was that they could not concentrate on the economic point of view, which slightly altered and affected their institutions. Lange states that "they have not given adequate attention, from the technical point of view, to the economic advantages and disadvantages of socialism compared with capitalism", hence unless they are able to concentrate and build a case on a strictly economic level, they will never persuade the many "to believe in the state which they advocate".
Socialists have taken the problem from a historical point of view, and stated that nothing could be said about the future until individuals actually face the future. Socialists know that whatever problems arise from socialism, both time and the nature of things work themselves out eventually.
Orthodox economists with few exception have not considered socialist economics, because they have either been absorbed by the actual theory or because they have, from the beginning of their time been devoted to capitalist institutions. Socialist economists simply concentrate on the production of certain goods, whereas communist economists focus on the production and consumption of goods. Thus Lange reemphasizes in his essay the fact that consumer have the "freedom of choice in consumption and the freedom of choice in occupation". As for price, neither mathematics nor a knowledge of the supply and demand function are needed to find the right accounting price. He further states that the price can be established by "simply watching the quantities demanded and the quantities supplied and by raising the price of a commodity or service whenever there is an excess of demand over supply, or lowering it whenever the reverse is the case". This is quite the same effect that is used in a competitive market under capitalism. If the same forces are used in both a socialist and capitalist system, then why even make the effort to change the system.
Even though similar forces are utilized in both markets, according to Lange, he assures his readers that a socialist system is nonetheless much superior than capitalism. He does so by stating two main points. First, he declares that socialism is superior because it is able to reach equilibrium prices by a less amount of trials than a competitive market. This is mainly due to the fact that the Central Planning Board has a much better knowledge of its economy as a whole, than a private entrepreneur would under capitalism. Due to the fact that the Central Planning Board has overall power of its economy, its main incentives are to benefit the economy with accurate decision-making.
In other words, the business cycle will certainly fluctuate over time, but never collapse or bring disorder to its society by creating severe depressions and great unemployment. Second, socialism is superior in its distribution of income. Lange believes that income is distributed to a socialist system with the intention to maximize social welfare, unlike the capitalism. He states, "capitalism distributes according to the ownership of the means of production", which would only benefit the few who own production, and neglect the individuals who simply have their labor.
Throughout Oskar Lange's essay, he makes certain to also explain the problem with a socialist system, which has to do with the sociological aspects, not the economic theories. The main problem has to do with the bureaucratic sector of the market. Lange states that "the efficiency of the public officials should be compared with that of corporation officials under capitalism, and not with the efficiency of private entrepreneurs as managers of production". The socialist government should not pose a threat of socializing an industry, because individuals will have little or no incentives to manage their business adequately, nor invest for future improvement. For example, when "a socialist government socializes the coal mines today and declares that it will socialize the textile industry tomorrow, the textile industry will most likely be ruined before it will be socialized". When an economy transforms from a capitalist system to a socialist system, it is the responsibility of the government to either socialize all industries at once, or altogether seize to be a socialist government. The government has to carry out its plans with 'boldness' and 'strength', if it wants its people to correspond and react with a positive output.
Lange concludes his essay by stating that when a social party comes into power in a capitalist society, financial confusion and economic disorder could collapse the economy if not done his way. He wants to eliminate the wasting of resources that is established by capitalism, using his theory of socialism. He would like for the capitalist economists to observe and really understand his views, so as to ameliorate the situation at hand. Not only is socialism better and more efficient in the eye of Oskar Lange, but with cooperation and time will function in a way that an economy should function to stay efficient for both the consumer and the producer.
1) Oskar Lange and Fred Taylor, On the Economic Theory of Socialism. University of Minnesota Press, New York.
2) Alexander Eckstein, Comparison of Economic Systems. University of California, Los Angeles, 1971.