Is the Market a Test of Truth and Beauty?

ȇȃ Partʺ: Economics

It is also noteworthy that Lange has abandoned the position he held in

On the Economic Ļeory of Socialism.

Of the various instructions which Lerner, Lange, and Modigliani

address to the managers of production, the most important is our old

friend: equate marginal cost and price. But the central planning board

now seems to have lost its job of setting prices by trial and error.

InĻe Economics of Control, Lerner writes:

In each market, whether for factors or for products, prices are raised

whenever the demand for any product or factor is greater than the supply

and lowered when the supply is greater than the demand until a set of

prices is reached in which each demand is equal to the corresponding

supply. (p.ȅȂ)

It is not clear who is to do the raising and lowering. Lerner seems to

leave the task to a market rather than to a Board. But if prices are not

parameters either established by atomistic competition or by some Board,

then the rule “equate marginal cost and price” is not unambiguous.

Professor Morgner has suggested to me that perhaps the idea is to

have each manager operate at the output and sell at the price indicated

by the intersection of his average revenue and marginal cost curves. Some

remarks by Paul A. Samuelson suggest that this interpretation may be

correct:

the decentralized operators in a planned society should refrain from a

literal aping of atomistic, passive, parametric price behavior. Instead of

pretending that demand curves are infinitely elastic when they are not,

the correct shape of that curve is to be taken into account. Ļis does

not mean that the decentralized operators should take account of their

influence on price as a monopolist would. (ȀȈȃȇ, p.ȁȂȁ)

Assuming that the equating of marginal cost and average revenue is
what Lerner, Lange, and Modigliani have in mind, let’s see how this sys-
tem would work:
Ș.Barring extreme coincidences, different enterprises would be try-
ing to charge different prices for the same product. Ļere is no reason for
assuming that the marginal-cost-average-revenue intersections of differ-
ent enterprises would be at the same price.
ș.If managers receive prestige, power, or bonuses according to the
prosperity of their enterprises, they would have an incentive to take