On the Economic Theory of Socialism by Oskar Lange (An Outline Summary)

Chapter I. The Present State of the Debate
• “Dedicated” to Ludwig Von Mises who maintained that prices cannot be rationally determined under socialism.
• Three things are required for determination of price:

  1. Preference scale which guides acts of choice
  2. Knowledge of the terms on which alternatives are offered
  3. Knowledge of the amount of resources available

• 1) and 3) are clearly as available in socialist societies as in capitalist ones.
• The remaining question is 2): Are data on price available to socialist administrators? Von Mises says (dogmatically) “No!” Lange insists that the administrators of socialist economy will have the same or better information available to them as capitalist entrepreneurs.
• Mises confuses the narrow meaning of price as “exchanged in a market” with the broader meaning of “index of alternatives”.
• Barone (1908) showed that prices can be determined by equilibrium analysis in a socialist society by trial and error.
• Hayek (1935) admits that prices in socialism are not “logically contradictory” but Robbins (1934) insists that determination of prices by solving thousands of equations is not practicable.
• Taylor (1928) showed that a socialist economy would solve the problem of prices by trial and error in the same way as a capitalist one.

Chapter II. The Determination of Equilibrium on a Competitive Market
• The chapter attempts to outline a theory of prices in a competitive economy (one with a large number of individuals and free entry and exit from trade) in “equilibrium”.
• Conditions of equilibrium:

  1. All individuals attain their maximum positions (subjective condition). Consumers maximize utility, producers maximize profit, owners sell to highest bidder.
  2. Prices are determined by supply = demand (objective condition). Prices are constants for consumers.
  3. Consumer income = wages + profits (zero in equilibrium)

• Walras (1926) showed how prices in equilibrium are determined by successive trial.

Chapter III. The Trial and Error Procedure in a Socialist Economy
• Lange’s socialist society is characterized by freedom of choice by consumers and consumer preference is the guide for production and allocation of resources; that is, there is a market for consumer goods and labor, but no market for capital goods.
• The rest of the chapter follows Taylor (1928) in arguing that the trial and error practice followed by the entrepreneur in a capitalist society is exactly the same as that followed by the socialist administrator.

Chapter IV. The General Applicability of the Trial and Error Method
• The trial and error procedure is the same even in a socialist system where consumer choice is rationed and there is no freedom of choice of occupation.
• Lange does not recommend such a system. It is undemocratic and “incompatible with the ideals of the socialist movement”.

Chapter V. The Economist’s Case for Socialism
• “Rules of consistency” in allocating resources force capitalist entrepreneurs and socialist planners to act the same.
• But there are differences between socialist and capitalist societies:

  1. Only socialist society can distribute incomes so as to attain social welfare because in capitalism distribution is determined by private ownership of productive (community) resources. The argument uses marginal utility theory (Marshall). Lange rejects the classical labor theory of value.
  2. A socialist price system is more “comprehensive” than a system based on private ownership of the means of production. A socialist economy can take into account “externalities” like pollution of the commons, which private owners can ignore (to the detriment of society as a whole).
  3. Lange thinks that the “business cycle” can be eliminated by socialist planning.
  4. Factors 1) and 2) make socialist society superior “from the economist’s point of view.”
  5. The arbitrariness of the rate of capital accumulation is not really a disadvantage of socialist economy. It is irrational to make saving dependent on distribution of income, as it is in capitalist society (the capitalists are the ones that save/accumulate). Capitalist society is prone to Keynesian liquidity traps. This can be avoided in socialism.
  6. The real danger of socialism is bureaucratization. But monopolistic financial capitalism has the same problem. In monopoly capitalism there is a tendency to maintain the value of existing investment and “creative destruction” slows or stops.
  7. Capitalism’s dilemma: holding back technical progress (to conserve the value of investment) leads to loss of profit and chronic unemployment which can only be remedied by public investment (Keynes); while continuing technical progress leads to instability due to the tendency of monopoly capitalists to protect the value of investments. (??)
  8. Public investment can’t solve this because, without expropriating the capitalists, it will be they that control the investment, not the public (Koch brother’s politics).

Chapter VI. On the Policy of Transition
• Should the transition from capitalism to socialism be gradual or rapid? Rapid!
• “Socialism is not a policy for the timid.”

About Randal Samstag

Randal has an undergraduate degree in political philosophy, but has a graduate degree in engineering and has earned his bread for 30 years working on municipal and community water supply and wastewater collection and treatment systems in the US, Caribbean, Latin America, and Asia.
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4 Responses to On the Economic Theory of Socialism by Oskar Lange (An Outline Summary)

  1. Pooyaka says:

    I just finished this book. I read it because I was interested to know if scientifically Socialist state is possible. The answer this book gives seems plausible. But I’m not an economist, so I can’t be sure if that is really the case and if the arguments are still held true. What’s your opinion on this? Do you know of other books on this issue that are more contemporary?

    • Pooyaka,

      Thanks so much for the note. This outline was put up as a guide for discussion of the book by a bunch of folks seeking the answer to the same question that you put, “if scientifically Socialist state is possible.” As Yogi Berra famously put it, “Prediction is difficult, especially about the future.” Theoretical discussion of what a future socialism might look like is quite rarely done. I once asked the question at a gathering of the searchers who I have mentioned above, “What is ‘interest’ in socialism?” The whispered aside by one of the more senior members of the group was, “Not much.” My question, of course, had been whether interest would be charged for loan of money in a future socialist society. The joke came by juxtaposition of the other meaning of the word ‘interest’ (to care whether the thing lived or died.)

      As to your question, “What is your opinion of this?”: I think Lange gives a credible argument for the concept that a managed economy can come up with rational and fair prices for goods. Lange, of course, was convinced by the modern critique of the labor theory of value and based his argument on a marginal utility theory of price instead. In this he is in the company of other prominent economists who are sympathetic to socialism, but who find the labor theory of value to an ineffective theory of price. These include one of the founders of the marginal utility revolution, Leon Walras, and Joan Robinson, who I had the good luck and privilege to have as a teacher. By the way, another one of the senior members of this discussion group recalls an all-night session with Lange himself during the period when Lange was at the United Nations and our friend was a graduate student at Columbia.

      As for more modern defenses of socialism, the first thing that I think of would be the series of books, The Idea of Communism, edited by Douzinas and Zizek, which contain articles presented at conferences first organized by the Birbeck Institute of Humanities in 2009. Zizek’s last entry in the first volume of the series gives his vision for a communism of the future. I quoted Zizek from his new book Event in a recent review here. I think that Polanyi gives a credible argument against von Mises and his lesser followers in his magnum opus, The Great Transformation, which I have also reviewed (here.) Polanyi does not prefer a managed economy along the lines of the Soviet model, but a mixed one that includes private firms but with state protections (both of and from the firms) and interventions.

      Another writer who tries to “split the difference” between competitive and managed economies would be George Monbiot, who writes for the Guardian. His blog is here. A slightly older (2003) book by him that is worth looking at would be Manifesto for a New World Order. I note that he doesn’t list this book on his blog page.

      Regards,

      Randal

  2. Pingback: Thoughts on the Labor Theory of Value | Notes from my library

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