lange - September 28 Notes on Langes On the Economic Theory...

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September 28: Notes on Lange s On the Economic Theory of Socialism Part 1 The Present State of the Debate Lange asserts that “Mises’ contention that a socialist economy cannot solve the problem of rational allocation of its resources is based on a confusion concerning the nature of prices.” He borrows the following definitions from Wicksteed: Narrow definition of price: “the money for which a material thing, a service, or a privilege can be obtained” Broad definition of price: “the terms on which alternatives are offered to us” As economists, we solve constrained maximization problems. In other words, we make choices given a set of constraints. Lange identifies the following 3 factors as essential to economic decision making: 1) What the preferences are 2) “The terms on which alternatives are offered” 3) Knowledge of the amount of resources available
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The first comes from consumer demand and 3) can be easily estimated. Mises claimed that 2) is unknown to the planning authority in a socialist commonwealth. After all, how can we calculate the cost of government projects if we don’t have information about prices of raw mat erials? Lange challenges this view by claiming that once we know 3), all we need for 2) is knowledge of production functions. Clearly, the planning authority’s knowledge of productions is as good (or bad) as that of capitalist entrepreneurs. Hence, Mises’ argument stems from a misunderstanding that prices in the narrower sense are needed for efficient allocation of resources; in reality prices in the broader sense suffice. Who do you agree with? From here, Lange proceeds to describe other common beliefs about social planning. Friedrich Hayek and Lionel Robbins,
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This note was uploaded on 12/29/2010 for the course ECON 4313 taught by Professor Staff during the Fall '08 term at Minnesota.

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lange - September 28 Notes on Langes On the Economic Theory...

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