Oskar Lange and Abba Lerner, after other socialist economists, came to defend socialism. Both were disciples of Walras and Pareto. So they took the Walrasian system of equations of general equilibrium as a starting point. These equations were originally conceived for market economies, but Lange supposed that the planner could behave as the famous- infamous Walrasian auctioneer. Lerner stated that the optimum rules, such as “Let production go on until price ceases to compensate marginal cost” could serve as instructions that the planner orders to the socialist firm managers.
This solution did not convince Hayek and Mises that socialism could be efficient: they argued that there are other problems than equilibrium, such as incentive. But Lange, after thanking Mises for having put a substantive question into debate, considers that no argument has been given, proving that socialist planning is impossible. Then the debate stopped and each camp was satisfied with its performance.
Walrasian equations are conceived as a theoretical modelling of a problem, aiming at proving that it has a solution. For a practical use, even leaving aside the solving of these equations, there is the far bigger problem of designing them, even more as their number is immense, so as the number of unknowns. And how to determine their form, their coefficient? Lange’s idea is absurd. Moreover we must not overestimate the meaning and the importance of equilibrium and optimum. As Schumpeter explained, innovation is much more important for welfare.
Lange’s solution is sometime named “market socialism”. But this appellation is misleading because there is no market in his economy except in the brain of the planner when he tries to discover its equilibrium.
More recently, socialist economists have tried to match market and socialism in a new way. But here, market is market with autonomous actors. So planning disappears. Many people, influenced by Marx, think that socialism is unthinkable without planning. But we must be suspicious of habits of thinking. The central piece of socialism is the form of ownership, not the form of circulation of goods. This solution is not a blending of socialism and capitalism. It is another kind of pure socialism: the right one, I think.
To explain these debates, the old one and the recent one, I have written the article “Socialist calculation and market socialism”, published on the “MPRA” site. Access is given by the link:
This paper focuses on the debate held in the twenties and thirties of the last century between libertarian economists and socialist economists, following the denial by the first ones of the feasibility of a socialist economy. This controversy is well known to specialists and has been widely commented. It seemed to me useful to initiate non-specialists in an original way: by having the controversy speaking by itself. We review the main contributions and summarise their arguments with, initially, the bare minimum of personal comments.
Walrasian general equilibrium serves as a reference for the defenders of market socialism in the controversy. But the concept of competition behind this theory is very incomplete; it is purely passive. It follows that the market socialism which emanates from it is not really a MARKET socialism. It is lacking the competition which innovates. Markets for capital goods are also lacking in these models.
Our paper then turns to a new generation of socialist models involving this real competition. We review two models proposed by Bardhan and Roemer and then exhibit a personal model. This type of model is facing a modern criticism whose central concept is the "soft budget constraint"