The Chapter 4 of the textbook discusses the ideas of Karl Marx: distributive justice and political constrains on economic outcome.
As mentioned by Screpanti, after the October Revolution, the idea of central planning as the economic basis of socialism entered into the programmatic documents of many Communist parties. Any acceptance of the market mechanism was presented as a temporary concession, basically justified by the backwardness of the socio-economic conditions and the difficulties of the transition from capitalism to socialism. In this sense, as it’s mentioned in the textbook, the socialist ideal aims to combine the collective ownership of the disembodied means of production with the limited private ownership of the embodied means of production to deliver an equitable distribution of consumption.
Screpanti and Zamagni also point that the liberal thought entered the debate about planning and the market when Frederich A. von Hayek brought to light an article written by Ludwig von Mises in 1920, in which the possibility of rational economic calculation in socialism was categorically denied: without a free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation. Then, the gist of von Mises’ argument was that exchange relationships among goods, and therefore the formation of their prices, presuppose that ownership rights on the goods have been previously established.
Abba Lerner and Oskar Lange gave the most vigorous reply to the arguments of von Mises and von Hayek. They tried to identify a ‘practical’ solution in the famous iterative ‘trial-and-error’ procedure, according to which the central planning office would undertake the same function as Walrasian markets.
Lange formulated two alternative models. In the first, consumer goods and labour services are allocated by means of the free market, while in the other, inputs are assigned accounting prices. The equilibrium values of both sets of prices should be determined by means of a single iterative procedure. At each stage of the process, the planner announces a vector of non-negative prices and tries to minimize the average cost of production by employing a combination of factors for which the marginal product in value of each factor equals its price and to fix the production level at the point in which the marginal cost equals the price set by the central planning office. Similarly, by treating the announced prices as parameters, the households maximize their utility function. In this way, the functions of the demand for goods and of the labour supply are obtained. For each good and service, the planner aggregates the proposals received from the firms and households. If, for one good or service, there is positive (negative) excess demand, its price is increased (decreased). The new price vector is announced to the firms and households and the process is repeated, until all the excess demand vanishes The procedure was exactly the same as Walras’s tatonnement.
Later in 1958, in another model, Oskar Lange did not assume the existence of any free market. The demand for consumer goods and the supply of labour are obtained by the planner starting from a social welfare function derived from individual preferences. The iterative process only endeavours to determine accounting prices and has a virtual nature. Once planned production has been carried out, the consumer goods can be sold on the real markets at actual prices that may not correspond to the accounting equilibrium values.
Finally, Screpanti and Zamagni establish that these ideas developed by Lange about market socialism were attacked from two points of view. First by those opposed to the adoption of the market in the socialist system, and the second by those who did not accept socialism, as, we mentioned above, the ideas of von Mises and von Hayek. The first type of criticism made use of the consideration that what the model of market socialism ensures is, at the most, static, certainly not dynamic, efficiency; the model had nothing to say, for example, about the problem of the full utilization of potential resources. Such an objective can be achieved only by central planning, which would have been necessary, in any case, to avert the strong elements of instability linked to the problems posed by economies of scale. This was the argument put forward by, among others, Maurice Dobb in 1939 and Paul Baran in 1952—an argument which was, in the end, to force Lange himself to revise some points of his model.
Screpanti, Ernesto and Stefano Zamagni. (2005) An Outline of the History of Economic Thought. New York, USA: Oxford University Press. pp. 295 - 298.
Pancs, Romans (2017). Lectures on Microeconomics. The Big Questions Approach. México: ITAM. pp. 151 & 171.