Lange model is a neoclassical economic model for a hypothetical socialist economy based on public ownership of the means of production and a trial-and-error approach to determining output targets and achieving economic equilibrium and Pareto efficiency.
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The Lange model states that if all production is performed by a public body such as the state, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical market economy under perfect competition.
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Unlike models of capitalism, the Lange model is based on direct allocation, by directing enterprise managers to set price equal to marginal cost in order to achieve Pareto efficiency.
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The Lange Model is in practice type of centrally planned economy and not type of market socialism.
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Lange model has never been implemented anywhere, not even in Oskar Lange's home country, Poland, where Soviet-type economic planning was imposed after World War II, precluding experimentation with Lange-style economy.
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For example, Lerner caused Lange model to re-write his 1936 and 1937 articles on market socialism, before they were re-published as chapters in a 1938 book.
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Lange model was developed in response to Ludwig von Mises and Friedrich Hayek's criticisms of socialism during the socialist calculation debate.
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The Lange model contains principles proposed by neoclassical economists Vilfredo Pareto and Leon Walras.
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Lange model's theory emphasizes the idea of Pareto efficiency: a situation is Pareto-efficient if there is no way to rearrange things to make any individual better off without making anyone worse off.
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Key institutions of the Lange model include the central planning board, industrial ministries for each economic sector, and state enterprises managed democratically by their employees.
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Lange believed that his model would reduce cyclical instability because the state would control savings and investment, consequently eliminating a major source of inefficiency, inequality and social instability that arises from violent cyclical shifts under capitalism.
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Lange model criticized the model on logical grounds by pointing out that any system which posits state ownership of enterprise requires the continuous intervention by force from the state as any time an individual started a private enterprise the state must either shut it down or seize it, or use force to deter individuals from starting private enterprises in the first place.
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