Overcoming the Classical Dichotomy: The General Economic Disequilibrium

This chapter examines Oskar Lange’s significant contributions to economic theory in the early 1940s, focusing on his attempts to bridge the classical gap between monetary and real economic analysis, as well as his critique of Say’s Law. Lange’s work during this period, particularly in “Say’s Law: A Criticism and Restatement” (1942) and “Price Flexibility and Employment” (1944), aimed to integrate money into a comprehensive economic equilibrium theory while challenging neoclassical assumptions regarding automatic market adjustments. Lange argued that Say’s Law, which asserts that supply creates its own demand, is incompatible with a capitalist economy where investment decisions and monetary factors disrupt equilibrium. By rejecting the classical dichotomy, he claimed that money is not neutral and that price flexibility alone cannot ensure full employment, especially in environments of monopoly capital, inelastic expectations and oligopolistic markets. His analysis echoed Keynesian insights on underemployment while remaining within a distinct Walrasian framework. Moreover, Lange’s critique of the Pigou effect demonstrated that wage and price adjustments often fail to restore equilibrium in modern capitalist economies. This reality underscores the need for active fiscal and monetary policies—and ultimately, socialist planning—to promote stability.