THE SOVIET ECONOMIC REFORM

THE rapid rate of Soviet economic development, begun in 1921-1922, was based upon Lenin's theory that socialism and communism could be built in our country if public ownership of the means of production was established and the economy was centrally planned.

Lenin conceded that the period of so-called "military communism" (1918- 1921) had represented an attempt to establish socialism without market relations or trade, but on the basis of direct exchange of commodities between town and countryside, and that this attempt had been necessitated by the foreign military intervention rather than having been carefully worked out. Later Lenin pointed out that this had been a mistake, but a mistake that was quite understandable and even helpful. In order to find out the strength of a fortress it was first necessary to try to capture it by direct frontal attack. If this failed, there was no use in persisting in one's mistake; a long siege of the fortress had to be begun. Lenin concluded that the attempt could succeed if enthusiastically supported, but it would have to be based on economic accountability and personal material incentives for the working people.

Thus was laid the cornerstone for the building of socialist society, as a new, planned form of commodity production based on the law of value and commodity-monetary relations. It is important to bear in mind, however, that in the U.S.S.R. the law of value does not operate spontaneously, that is, anarchically, but within the framework of proportions and rates fixed in the overall economic plan. This is why the operation of the law of value never did and does not lead to economic anarchy, unemployment or crises and depressions. Just as the means of production could not be privately owned for gain, so the operation of the law of value under socialism has not led and cannot lead to the polarization of poverty and wealth and the creation of antagonistic class contradictions.

But the law of value leads to the formation of profits. Many persons in the West cannot understand how profit can be compatible with socialism. Here, too, we may cite history. At one time Lenin demanded that all Soviet enterprises shift to economic accountability.1 They should operate on a "commercial basis," as he put it. Lenin urged that commercial accounting not be ignored and that battle be joined against the prejudices that hindered it and against adverse recollection of the past.

Lenin's comment about the view advanced in Bukharin's "The Economy of the Transitional Period" is quite characteristic. Bukharin had written that production under capitalism was production for the sake of profit, while production under proletarian rule was production to meet the needs of the public. He ought, said Lenin, to have made clear that under proletarian rule the surplus product does not go to capitalists but to all the working people and to them alone.

Thus, to acknowledge the necessity of commercial operations and profit- making is to acknowledge the operation of the law of value and of the commodity-monetary mechanism in the process of building socialist society.

Actually, these principles have operated throughout the history of the Soviet state, but we must admit that in particularly critical periods, i.e. in the years of intensive industrialization and collectivization, in World War II and in the postwar reconstruction, the operation and requirements of the law of value were restricted and sometimes even ignored. These periods demanded the utmost concentration of resources and centralized rationing of them. Moreover, since the Soviet Union was not receiving long-term financing and credits from outside, it had to restrict consumption of the available resources in order to make the necessary huge investments. This violated the principle of equivalent exchange between town and countryside, between people and state; in other words, the requirements of the law of value were not adhered to in many respects.

Such actions can be historically explained. They were, moreover, supported by the enthusiasm and heroically selfless efforts of the majority of the Soviet people. Sacrifice and enthusiasm are an immense force in the development of society (just as of the individual) at critical moments of life. But they cannot function for an unjustifiably prolonged time. Lofty virtues per se, they can become faults if reliance is placed on their effects for too long. They cannot provide the foundation for a massive daily and continuous improvement in the sphere of production, distribution and trade. We must not forget that if restrictions on consumption are long continued, they undermine the incentive to work, and this retards the very process of accumulation for the sake of which consumption has been restricted.

A certain disregard of the requirements of the law of value, observable over a number of years, began to inhibit the growth of efficiency in production in the 1950s and 1960s. Although rates of growth were on the whole quite high in the U.S.S.R., it was evident that we were not making use of all the possibilities and advantages inherent in the socialist system. The substitution of voluntarism and naked administrative fiat for economic stimuli produced distressing disproportions, a lower efficiency in utilizing our fixed assets, deterioration of the quality of goods, and, as a result, insufficient growth of the working people's property. This is why the objective necessity arose to revise the methods of management and bring them into greater conformity with current tasks. This gave rise to the economic discussion of 1962-1964, followed by the decision to carry out an economic reform in successive stages over a three-year period.

II. THE FIRST RESULTS

The essential principle of the reform, now in operation for more than a year, is that what is advantageous for society as a whole should be advantageous for each industrial enterprise. Toward this end a number of measures are being adopted, including: increasing the independence of enterprises; appraising their work by the criterion of profitability; introducing payment for production assets; raising the material incentives for personnel, in ratio to the enterprise's performance, out of profits; increasing the enterprises' direct contracting with one another for the supply of goods; and establishing economically based, as opposed to arbitrarily set, prices.

Last year 704 enterprises, employing more than 2,000,000 persons, or more than 10 percent of the Soviet industrial labor force, shifted to the new system of operation. For industry as a whole the volume of output rose 8.6 percent in that year, profit increased 10 percent and labor productivity rose 5.2 percent; but the 704 enterprises which changed over to the new methods of management showed a gain of more than 10 percent in sales volume, approximately 25 percent in profit and 8 percent in labor productivity. These are average data; at individual enterprises the results were higher. This means that even now, though the economic reform has not reached its full potential, it is already putting vast latent production reserves to work. A total of more than 2,200 enterprises, including almost all the instrument manufacturing plants, many light-industry factories and mills, and ferrous and nonferrous metallurgical plants are now operating under the new system of planning and incentives.

From the manager's viewpoint, the reform has thus far brought much that is advantageous but also many cares. The pleasing aspect is that the amount of supervision by superior agencies has been reduced and the possibilities of showing initiative have increased. Practically speaking, the manager now requires supervision only in settling and gaining approval of key goals in his factory's plan; he must also be provided with up-to-date information on technical and economic developments, and, most important, must be helped in solving the practical problems of obtaining supplies for major construction and the introduction of new equipment and machinery. In principle, the manager settles all day-to-day questions independently and directly with his suppliers, clients and transportation agencies.

As for the manager's cares, they have multiplied, for under the old system, though he had far less freedom of action, his task was essentially simpler, since everything was decreed from above. His responsibility consisted merely in carrying out instructions. Now he has to search, experiment and take risks; and this is not easy, particularly at the initial stage of the reform, when the enterprises transferred to the new system of management operate in an ocean of others which still are working in the old manner. This simultaneous coexistence of two systems of management creates certain difficulties.

Most questions are now decided at the enterprises themselves and with the broad participation of the workers. It has become much easier to apply proposals for rationalization, since the needed resources are available at the enterprises themselves, out of their own profits. Finally, the wages and bonuses received by the workers have increased substantially.

The data reported indicate that in many instances bonuses issued for the first half of 1966 rose 20 percent, 30 percent, 40 percent or more over those in the corresponding period of the previous year. It is true that in the opinion of many economists one should judge not merely by the percentage of increase but also by the absolute amount of the bonuses, which still seems insufficient. On the other hand, the rapid rate of growth will naturally lead to an increase in the absolute size of bonuses and in total personal earnings.

III. THE ROLE OF PROFIT IN THE SOVIET UNION

The question of profit has been widely discussed in recent times in the U.S.S.R.-not because profit was previously unknown there or was being introduced for the first time, but because prior to the reform profit was not employed as the chief criterion or overall indicator of the effectiveness of an enterprise. Profit was only one of many required indicators which were set as goals. These indicators established as targets for the enterprise included gross volume of output, an excessively detailed list of the items to be produced, cost reduction, number of employees, output per employee, average wage, etc. The number of obligatory targets fettered initiative. Often the enterprises concerned themselves primarily with increasing gross volume of output, since their performance was judged above all by that and not by the amount of output sold, as is now the case. In addition, enterprises gave little heed to the ultilization of production assets. Trying to find the easiest way to meet the assigned volume of output, they asked and received from the state, free of charge, a great deal of equipment and new structures which they did not always use rationally and fully.

Much of this is explained by the fact that for a long time the Soviet Union was the world's only socialist country. It was faced with the task of creating industry as fast as possible and providing for the country's defense. No thought was given at that time to the quality or attractiveness of goods, not even to production cost or profit. This was entirely justified, for the Soviet Union not only withstood the war of 1941-1945 but played a decisive role in ridding the world of fascism. This was worth any price. It was our "profit" and, if you please, the "profit" of the whole civilized world.

But, as Lenin said more than once, our virtues, if carried too far, can turn into faults. This is what happened in our country when the practices of management by administrative fiat were continued into the period after our country had entered the stage of peaceful economic competition with the developed countries of the West.

Success in this competition cannot be gained by the old methods of administrative and excessively centralized management. It was necessary to change so as to give the enterprises themselves a material stake in the better utilization of their assets and in providing the best possible service to their consumers. To do this the enterprises obviously had to be relieved of the excessive number of planned targets and their work had to be judged, first, by how they fulfilled the contracts for deliveries of commodities and, if they did this, secondly by their profit level.

Profit sums up all the aspects of an enterprise's work, including quality of output, since the price for better goods is correspondingly higher than for outmoded or relatively inefficient items. But it is important to note that profit is neither the only nor the chief goal of production. We are interested above all in output of specific commodities to satisfy consumer and producer needs. Profit is used as the chief index of, and incentive to, efficiency of production, as a mechanism for appraising and stimulating the work of an enterprise and also as a source of accumulation and investment.

By means of bonuses drawn from profits we wish to encourage enterprises to draw up their own plans which would be good-that is, advantageous-alike for society and themselves; and not only to draw up such plans, but to carry them out, something which should be encouraged at the expense of the profits. It is not a question of weakening or discarding planning, but, on the contrary, of reinforcing and improving it by drawing the enterprises themselves into the planning process, for they always know better than anyone their own real potentialities and should study and know the needs of their clients.

The introduction of contract relations with consumers or clients (for the contractual relationship now exists in a number of light industries) does not at all signify a change to regulation by the anarchy of the market. Effective consumer demand can be predicted more easily in our country than in the West, since we know the wage fund of the urban population and the earnings of the collective farmers. Hence, we can draw up well-based balance sheets of the public's income and expenditure. The total volume of purchasing power is a figure which lends itself easily to planning. But specifically which goods are to constitute this total, what are to be the colors of the clothing, which styles are to be used and how best to organize their production-this is not the prerogative of centralized planning. It is, rather, a matter for agreement between trade outlets and producers. Thus, our market requirements, the calculation of public demand and the planning of production not only are integral, they should support and supplement each other.

What is the difference between "capitalist" and "socialist" profit, in my opinion? The difference will be best understood if we consider: (1) how the profit is formed; (2) what it indicates; and (3) how it is spent.

From the viewpoint of private enterprise, all profit belongs to the capitalists alone. To justify this, there was long ago devised a theory that three factors-capital, land and labor-create value. Joseph A. Schumpeter, in his "Theory of Economic Development," wrote that profit is the excess over production cost. But this "cost" includes "payment" for the entrepreneur's labor, land rent and interest on capital, as well as a premium for "risk." Over and above this, profit should reward the entrepreneur if, by a fresh combination of production elements, he reduces the production cost below the prevailing average level of expenditures.

The nature of this "combination of elements" can be perceived from the fact that in the private enterprise system most profit is now derived from redistribution of income in the market in the process of exchange. It is common knowledge, for instance, that big profits are most easily obtained by the advantageous purchase of raw materials, by a monopoly-controlled raising of retail prices, by unequal exchanges with underdeveloped countries, by the export of capital to countries with low wage levels, by a system of preferential duties and tariffs, by the increase in stock-market prices through capitalization above profit, and, finally, by military orders.

In our country all these sources of profit are precluded by the very nature of socialism, under which there is neither private ownership of the means of production nor holding of stock (and hence no stock market). The level at which labor is paid depends on the productivity of the labor and is regulated by law. Prices of raw materials and supplies are planned; the market cannot be taken advantage of in purchasing raw materials or hiring labor. Nor is it possible to take advantage of market conditions to raise the prices of finished goods. Exchange with other countries is conducted on a basis of equality and by long-term agreements.

In the Soviet Union, by virtue of the very nature of the mode of production and distribution, profit indicates only the level of production efficiency. Profit is the difference between production cost and the factory sale price. But since in our country the price represents, in principle, the norms of expenditure of socially necessary labor, any increase in profit is an index of relative economy in production. Higher profits in the Soviet Union are based solely on economized hours of working time, economized tons of raw materials and supplies and fuel, and economized kilowatt-hours of electricity. We do not justify profits obtained from chance circumstances, such as excessively high prices, and do not regard such profits as being to the credit of the enterprise. Rather do we consider such profit the consequence of insufficiently flexible price setting. All profits of this kind go into the state budget; from such profits no bonuses are granted to the enterprises.

Now let us see what is done with profit in the U.S.S.R., that is, what it is spent on. First of all, no private individual and no enterprise as a group of private individuals may acquire profit. Profit may not be invested arbitrarily by any persons or groups for the purpose of deriving personal income.

Profit in our country belongs to those who own the means of production; that is to say, to society, to all the working people as a whole. All profit in our country goes first of all into the planned expansion or improvement of social production, and next into providing free social services to the public, such as education and science, public health services, pensions and stipends. A part is spent on the administrative apparatus and, unfortunately, quite a large part on defense requirements. We would be happy to dispense with the latter expenditures if a program of universal disarmament were adopted.

Profit used to be given insufficient importance in our country because of a certain disregard of the law of value. Some Soviet economists incorrectly interpreted this economic law as an unpleasant leftover of capitalism; they held that the sooner we got rid of it the better. Disregard of the requirements of the law of value led to the establishment of arbitrarily planned prices-prices which, moreover, remained in force for overly long periods. Prices thus became divorced from the real value of goods; profit varied greatly from enterprise to enterprise, and even from article to article within the same general group of goods. In these circumstances profit did not reflect the actual achievements of the producers. Because of this, many economists and managers began to regard profit as something totally independent of the enterprise and therefore an unreliable barometer of economic management. It is this mistake that many of our economists, including the author, are now trying to eradicate. And our economic reform is aimed at this. We have no intention of reverting to private enterprise; on the contrary, we want to put into operation the economic laws of socialism. Central planning is entirely compatible with the initiative of enterprises in managing the economy profitably. This is as far from "private enterprise" as the latter is from feudalism.

The law of value is not a law of capitalism, but of any form of production for the market, including planned commodity production, which is what socialism is. The difference from capitalism is that ends and means are reversed. Under capitalism, profit is the basic aim, whereas satisfaction of the needs of the public is the means of attaining that aim and is secondary. Under socialism, on the contrary, the aim is to satisfy the needs of the public, and profit is the means toward that end. This is not a verbal distinction but the crux of the matter, since in our conditions profit does not work counter to social needs but helps to satisfy them.

IV. THE REFORM AND THE PROBLEMS

The first stage of the economic reform has confronted us with certain difficulties in realizing its basic principles-difficulties which appear to be inherent in this period of the reform. The transfer of the first 704 enterprises to the new system was not immediately accompanied by substantial changes in their relations with the superior agencies, with other enterprises, with agencies supplying materials and equipment, etc.

Necessary changes have not been fully put into effect in the methods of planning production at the level of the ministries and industry administrations-particularly in the method of setting goals for enterprises. Due to lack of experience, sometimes the same old sharply criticized targets were simply made the new ones. For example, output has been considered as being the same as sales volume; and the assortment of items produced has not always been determined in consultation with the consumer or clients on the basis of direct contract arrangements. Instances of the inevitable deviation of practice from theory could be multiplied, but they all are due to the fact that the reform as yet covers only a limited number of enterprises. It is to be assumed that everything will gradually take proper shape.

The 1966 experience of working by the new method did show that, on the one hand, enterprises are becoming more dynamic and independent in their economic life, but, on the other hand, that the superior agencies frequently have been incapable of freeing themselves fast enough from old habits and from superfluous regimentation of the work of plants and factories. The inertia of thought, views and ideas which was so characteristic of some executive agencies over a long period has proved more persistent than had been expected.

The reform puts the old established relationships in industry to a severe test. The enlargement of the rights of enterprises is an important condition of the reform. In many cases, however, the superior agencies have proved insufficiently prepared for this development. Sometimes this has taken the form of the old bureaucratic ills-inflexibility, irresponsibility and lack of initiative, reliance upon the formality of issuing orders instead of working out economic as opposed to administrative methods of influencing production,

Perhaps one of the most significant consequences of the economic reform is the growing influence of industrial enterprises on the superior agencies. The reform is destroying and will continue to destroy many established patterns, including the distrust shown by executive agencies for production organizers and economists at the enterprises.

Unquestionably, the reform has strengthened anti-bureaucratic views and the tendency of enterprises to strive for independence. This, however, does not in the least signify that the principle of democratic centralism in the management of our economy is being abandoned. To strengthen and intensify central planning of production by combining it with the initiative and full economic accountability of enterprises is to realize the principle of democratic centralism.

The reform has not yet sufficiently permeated the administrative interrelationships between enterprises and superior agencies. This is indeed a complicated process of many steps. Complaints and mutual dissatisfactions are inevitable. First of all, the reform requires a sharp improvement in the qualifications of those engaged in the management process. If the economic and organizational level of management is low, the efficiency and profitability of the enterprise are generally low. The point of the reform is to raise production efficiency, increase labor productivity and open wide the road to rapid technical improvement. As it goes on, the reform inevitably will foster the selection and promotion of the more able, both below and at the top, to executive managerial positions. The reform will not tolerate the retention of anything that is obsolete and that has failed to justify itself in our methods of management. 1 Translator's note: "Economic accountability" is the term used to describe unsubsidized, self-contained operation of a factory. The plant "accounts for itself" and does not require state support or intervention except for certain plan goals set for it.

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