Economic Reform

A. Birman, Profit Today. October 1967

 

Original Source: Kommunist, No. 10 (October 1967).

The numerous arguments have died down. The economic reform has entered the period when whole branches, and not only in industry, join in the new system of planning, management, and material incentives. The general opinion is unanimous: the decisions of the 1965 March and September plenary meetings of the Central Committee of the CPSU and the 23rd Party Congress correspond to the vital requirements of the national economy at the present stage of development.

Fears that a reduction in administrative control would weaken economic discipline and lead to then overfulfillment of product mix indices and other undesirable consequences in the economy have been proven unfounded. On the contrary, the qualitative and quantitative indices of enterprises which work under the new conditions have improved significantly. Internal reserves are exploited more successfully, technical progress takes place more rapidly, and the active participation of workers in the management of production increases. “The Reform in Action” – this column, appearing in the pages of newspapers daily -has become the forum of advanced experience; it is studied, implemented, and developed more deeply and broadly.

The new stage of the reform has brought new problems, which, in turn, call forth new discussions. Some “old” questions are now being asked in a new way. For example, we will have to closely examine and more deeply elucidate the essence of a number of economic categories, above all, profit under socialism. And then, it seems to us, certain tenets and definitions concerning profit in a socialist economy will have to be relegated to the historical archives along with formulations denying the existence of commodity production under socialism or affirming the absence of obsolescence of the basic means of production, etc.

The Essence of Profit

Not one of the categories in the political economy of socialism has inspired such a cautious attitude as profit. Not only non-specialists but many professional economists, who fully agree that it is necessary to increase labor productivity, economize on materials, and make more effective use of production capacities, protest when it is argued that all these aims are united in the general demand for an increase in profitability. The objections amount to saying that in principle profit cannot be a final index of the quality of the work of enterprises, that profit is not a category inherent in socialism at all, and that it opposes cost accounting to planning.

It is easy to understand the widespread prejudice against profit. Under capitalism the pursuit of profit constantly increases the exploitation of workers, creates wars, and deforms the lives of hundreds and hundreds of millions of people.

But there exists a profound difference between profit under socialism and capitalist profit, and it is not only incorrect but positively harmful to apply to socialist society the content of concepts and relations proper to the other social formation. The directives of the Five-Year Plan provide that industrial profits in 1970 will exceed the 1965 level by more than 100%.

At the same time, the suspicious attitude toward profit and profitability which is still apparent in a number of cases cannot but hinder the fulfillment of the targets of the Five-Year Plan. For example, one cannot urge, “Don’t get carried away by profit” in a lecture or seminar and then go into the shop and demand an increase in profitability. In order to prevent this, one must thoroughly investigate the nature, essence, place, and role of profit under socialism. Within the limits of a single article, we will confine ourselves only to a discussion of certain, mainly disputable, questions.

The creation of communist abundance of material and spiritual goods requires, of course, an increase in the gross social product. We need more fuel, metal, building materials, machines, and consumer goods. But the growth of social production should proceed not on an extensive, but on an intensive basis, that is, in such a way that the expenditures of social labor per unit of output decrease and the additional return from the application of this labor increases.

For Marxists, it is an indisputable truth that socialist society cannot develop without receiving part of the social product as a surplus product. This principle was deeply grounded and brilliantly formulated by Marx in Critique of the Gotha Program. It is equally indubitable that during the construction of socialism and the gradual transition to communism the economic process takes place under conditions of commodity-monetary relations, when the consumption of the output produced is preceded by its sale, that is, commodities are converted into money. Hence it is inevitable that that part of the output which represents surplus labor is also converted to money, basically taking the form of profit, by which we mean the monetary expression of the value of the surplus product created in the process of socialist production.

But why profit? It is known that, say, under capitalism the surplus product has several different forms. So why should this particular form of the surplus product be the most important for socialism? There are at least two reasons for this.

The first is that in contrast to turnover taxes, whose size, at a given rate, depends only on the volume of output sold, profit expresses and reflects all sides of the organization of the economy. Every achievement or every failure in the organization of labor, the utilization of fixed and working capital, the observance of payment discipline, the quality and assortment of output – in short, any step in the work of the enterprise – is immediately expressed in profit, with a plus or minus.

The second reason is that profit as an index of economic efficiency appears not only in its absolute form but also in its relative form through the level of profitability. In this capacity, it characterizes the efficiency of production outlays and the degree of utilization of funds – that part of the national wealth which the state has handed over to the given enterprise for its disposal and use.

It is well known that value is determined by socially necessary labor and not by individual outlays at each enterprise. But the quantity of socially necessary labor for the manufacture of a certain volume of output also depends on capital per worker. Although the surplus product is created only by live labor, its expression in monetary (converted) form during the development of commodity -monetary relations must reflect the level of capital per worker of an enterprise. Hence, from the viewpoint of cost accounting the surplus product represents a ratio not only to wages but also to the total funds allotted to the enterprise.

By selling their output and recouping their outlays, enterprises form monetary accumulations. Whether these will all take the form of profit, as in almost all heavy industry, or whether they will be divided into profit and turnover tax, as in a number of branches of light industry and the food industry, will depend exclusively on the relationship between the amount of monetary accumulations formed in each given branch and its need for resources for expanded reproduction. The production of electricity or benzene belongs to group “A” to the same extent as the manufacture of mineral fertilizers and lumber procurement. But the energy systems and Central Petroleum Marketing Board [Glavneftesbyt], having a surplus of monetary accumulations, relinquish part of them in the form of turnover tax, while chemical combines and the timber industry do not pay turnover tax, since their profitability does not exceed the level necessary for financing expanded reproduction.

Frequently, a difference between profit and turnover tax is seen in the fact that profit expresses the efficiency of the work of the enterprise, while turnover tax primarily takes the form of accumulations transferred to the given branch from other branches through the price mechanism. It seems to us that this assertion is only relatively true. The profit of a machine-building plant is determined to a great extent by prices for raw materials and supplies, on the one hand, and prices for the output produced, on the other. But under the given conditions the total profit and, especially, the level of profitability actually do depend to a great extent on the quality of work of the enterprise, while the total turnover tax depends only on the volume of output sold and the tax rates in effect.

Let us now investigate the question of profit and the aim of socialist production. The decisions of the 23rd Congress of the CPSU have aimed our economy in the direction of a considerable increase in accumulations during the current five-year period. In evaluating the work of enterprises, we shall use total profits and the profitability level more and more frequently.

Does this mean that the acquisition of profit represents the aim of socialist production? By emphasizing that the aim of socialist society will not be to obtain profit but to satisfy the needs of the people, Marx and Engels thereby fundamentally contrasted communism to capitalism; they expressed this contrast in the most vivid and intelligible form. This definition remains absolutely correct even today from the standpoint of the contrast of socialism to capitalism. But what are the role and place of profit in socialist economy? This question requires special investigation. Let us try to make the following comparison. For example, may one say that the aim of socialist production is to increase labor productivity or improve the use of fixed capital? May one say that the aim of socialist production is to increase crop capacity? Of course not. The aim of production under socialism is to satisfy the constantly growing needs of the people on the basis of the uninterrupted development and improvement of productive forces and production relationships in order to make the gradual transition from the first to the second phase of communist society. Does it follow from this that an increase in labor productivity or in crop capacity is of no importance for the building of communism? The answer is obvious. Obtaining profit is not the aim of communist construction but a means, a source of resources, for attaining this aim.

We cannot agree with the fact that some of our textbooks represent obtaining profit in the socialist economy as something contradictory to the satisfaction of the constantly growing needs of the people. We must categorically protest such a statement.

Moreover, it is important to encourage a drive to obtain the maximum possible profit (while fulfilling all the qualitative indices of the plan, of course). The directives of the Five-Year Plan provide for more than doubling the profits in industry. And scarcely anyone will protest if, for example, industrial profits in 1970 increase by2.5 or 3 times. And such a drive is, again, completely comprehensible and logical.

In the present situation, when it becomes a practical aim to completely abolish taxes on the population, profit (and its variant – the so-called turnover tax) remains the only source of supporting the nonproductive sphere and socialist accumulation. In a situation where the basic nomenclature of products is planned in physical terms and prices are set by the state, an increase in profit means an increase in the efficiency of social production in a generalized monetary form.

One should also bear in mind that obtaining and using profit make it possible for the interests of the state, the enterprise, and each worker to be combined and to coincide most fully. Whether more or less turnover tax is paid will not directly affect the enterprise or its workers and employees. However, from each ruble of profit, many kopecks will go to funds of development, bonuses, and socio-cultural measures at the enterprises. Long-term loans taken to modernize equipment will be repaid out of profit. Part of the profit will go into local budgets in the form of deductions and will turn into services and free material benefits for the workers.

For all that, we naturally understand the fundamental difference and antithesis between profit under socialism and profit under capitalism. Surplus value which comprises profit under capitalism expresses the antagonistic relationships of the exploitation of the workers by the capitalists. Surplus product realized in the form of profit under socialism is part of the national income that is regularly used to satisfy the needs of society.

We have different ways and means of obtaining profit and different aims in using it. Under capitalism, profit is the result of inhuman intensification of labor, speculative price maneuvers, and all the other methods organically inherent in capitalism. The growth of profit in socialist enterprises is the result of implementing the achievements of technical progress, improving the organization of production, raising the qualifications of workers, and improving the planning of the national economy. As to the utilization of profit, here, too, the difference is perfectly obvious.

In socialist society profit remains at the disposal of the people, while under capitalism it increases the gulf between the living standards of the ruling classes and of the workers. The acquisition of profit under capitalism furthers the reproduction of capitalist production relationships, while under socialism profit serves as an important means of realizing the chief aim – the building of communism.

The Higher Form of Profitability

In this connection it is interesting to analyze the question of the so-called higher form of profitability. It is well known that for many years this term was vulgarly understood to mean the justification of losses in the current activity of many enterprises and entire branches. This understanding of the existence of a higher form of profitability has now been condemned by everyone.

But have we not thrown out the baby with the water? Does a higher form of profitability as something distinct from the profitability of individual enterprises exist under socialism?

We all agree that the socialist mode of production, based on social ownership of the means of production, the complete unity of interests of the workers and society as a whole, and planned development, possesses tremendous advantages over the capitalist system. They consist in the fact that under socialism there exists and is utilized in practice the possibility for a more rational territorial distribution of productive forces, accelerated implementation of technical discoveries, a more expedient distribution of labor among individual branches of production, etc. In other words, not only do individual enterprises and branches have the objective conditions for more efficient work, but the reproduction process as a whole is carried on incomparably more expediently and more productively than under capitalism. Hence, these advantages are not abstract, but perfectly concrete and real in nature, and they must be manifested concretely and in reality. In a situation of commodity- monetary relations, when the result of social labor takes the form of commodities and, in the process of circulation and turnover, these commodities assume a monetary form, it is very obvious that the stated general advantages of socialism over capitalism should find a concrete form of manifestation. And we believe that this form is the higher form of profitability.

Wherein is it concretely manifested? Evidently, in the fact that each enterprise approaches the struggle for profitability not only from its own standpoint as a producer or consumer, but also from the standpoint of the whole national economy. If we do not make use of the opportunity to proceed from the general national economic optimum in each specific case, we simply rob ourselves. The most important fundamental advantages of the socialist economy over the capitalist economy, namely, social ownership of the means of production and planned development, are in that case far from fully utilized by us in economic practice.

Therefore one must demand that there be nothing in economic activity which would place the interests of the enterprise or of individual workers in contradiction to the interests of the whole society. However, such cases exist and they are known to everyone. In his book For All and for Oneself, the aircraft designer and Hero of Socialist Labor, 0. K. Antonov, half jokingly and half seriously suggests an index of “costs to you” [tebestoimost’] instead of the index of enterprise cost of production [sebestoimost’]. He thereby emphasizes that the producer’s aspiration not for a visible reduction in outlays but the ultimate savings which the national economy will receive from production should be assumed as a basis of economic activity. If an increase in the capacity of aircraft engines requires additional outlays by the producer amounting to, let us say, 3 million rubles, but the state as a whole will receive greater savings through the air force, then it is perfectly obvious that it is unwise to reduce outlays for production instead of increasing them. These additional outlays, of course, should be compensated.

Of course, under capitalism, too, much has been achieved in the struggle to improve the quality of output, and it would be stupid to deny this. However, the capitalist’s drive to improve the quality of output is derived from the laws of competition and is a forced necessity for him, while with us such a drive represents an organic need of both the producer and consumer.

It is obvious that an increase in outlays is a loss for the producer, a decrease in profit, and it should be compensated for by raising the selling price. But here the producer has the first word! He should be concerned with constantly improving the quality of output; he should risk additional outlays and recoup them. What is the enterprise collective guided by in such cases? By a drive for higher profitability from the national economic standpoint, if we are to translate its general political, moral motives into the language of economics.

Evidently the higher form of profitability should also be concretely manifested in purposeful capital investments in the branches with the greatest long-range prospects, which will increase the efficiency of the national economy as a whole and, consequently, increase profits. The higher form of profitability should be reflected in all the relations of enterprises with one another: client and contractor, transport and clientele, industry and trade, etc.

To base every order, every proposed price, every design of a new machine not only on the profitability of the given enterprise but on optimality for the entire national economy is the demand being made on economic science and economic practice today. In order to cope with such a task, enterprises must have the corresponding information and methods of calculating efficiency. But this is a separate topic.

From all the aforesaid, it does not follow that the higher form of profitability can be juxtaposed to current profitability. On the contrary, the profitability of the national economy as a whole is the result of the profitable everyday work of each enterprise. The real problem is that the profit of a metallurgical plant should not result in lower reliability of machines and the profits of transport should not result in losses to the clientele. Is it necessary to formulate the higher form of profitability? We believe so. We must compare current profitability with that which actually could have resulted with optimal efficiency of management. It is one thing to strive to improve management “in general” or abstractly and another thing to have a perfectly concrete conception of the extent of losses in accumulations to society as the result of various defects in the organization of social production. Why should the Central Statistical Administration, let us say, not indicate in its analysis of the annual results of the work of branches of the national economy that the total accumulations would have been so many millions more, given such and such actions by organs of material and technical supply, industry, transport, construction, trade, and agriculture?

Modern mathematical techniques and electronic computers permit us to pose and to solve such a problem. Need we emphasize its significance?

The Regulating Role of the Law of Value

We shall discuss one other problem resulting from the conversion of profit into one of the main indices of economic efficiency. We refer to the argument that with an approach such as this we accept the regulating role of the law of value under socialism, and in the opinion of a number of economists such an admission is a mortal sin and is not subject to further investigation and discussion. Indeed, in a majority of polemical articles, the positions of the parties are approximately as follows. The proponents of profits are reproached for accepting the regulating role of the law of value under socialism. But the latter reject such an accusation in every way and prove that there is no direct connection between acceptance of the role of profit and the regulating role of the law of value under socialism. But let us try to approach the matter in a different way.

Lenin’s instructions that the material and technical prerequisites for the transition to socialism are created during the epoch of imperialism are well known. In large amalgamations and banks, Lenin saw the skeleton of the economic organism under socialism, essentially a ready mechanism; all that remains to be done, wrote Lenin, is to eliminate the purely capitalistic features in this mechanism, features caused by private ownership of the means of production and by the conversion of labor power into a commodity.

The law of value is not the offspring of the capitalist form of production; it was in operation for thousands of years before capitalism. Hence it is not the law of value but the forms of its action, its manifestation, that are specifically capitalistic in nature.

The essence of the matter is that under capitalism, regulation of production by the law of value is carried on spontaneously and is accompanied by tremendous losses in productive forces, the ruination of many producers, crises, and wars. So the trouble is not the “regulating role of the law of value” in general, but the uncontrolled nature of this regulation, its economic, social, and political consequences under capitalism and the private ownership of the means of production. The very existence of capitalism is a misfortune for humanity.

However, it is perfectly obvious that in a socialist society with socialization of the means of production and the operation of the law of planned, balanced development of the national economy, the law of value cannot operate spontaneously and, in fact, it does not, if one ignores isolated phenomena caused by imperfect planning and management of production. Given the determining operation of the basic economic law of socialism, the law of planned, balanced development, the law of value expresses the most efficient ways and means of developing socialist production and of attaining the greatest result with the smallest outlays. Hence, in order to aid the implementation of the economic reform, Soviet economists should not deny the regulating role of the law of value in its proper sphere but should learn how to utilize it thoroughly for the benefit of communist construction.

Of course, a certain amount of time was required in order to understand the mechanism of the development of the socialist economy. Even today we are still far from having completely solved this problem. Many views of the law of value which now seem to us naive were, probably, historically inevitable. With the advantage of hindsight, we should not reproach people today for such views. But that is all the more reason not to cling to them, to turn one’s back on the demands of life.

Let us try to analyze what, essentially, are the differences in using and not using the law of value in regulating the economy under socialism. The opponents of regulating the development of the national economy by means of the law of value draw the following picture. The operation of the law of planned, balanced development is manifested in the fact that consumer enterprises put in orders indicating everything that they will need in the course of, let us say, five years, and everything that they themselves can produce. On this basis, the planning organs work out a production program, allocate funds, and … that is all. The miscalculations which take place are explained by the poor work of certain planners, the small number of electronic computers, and similar partial reasons. But they regard the use of the law of value as a conflict between the interests of consumer and producer in the socialist market, a revelation of optimal relations only through direct connections, a drive to produce only the most profitable goods, etc. In short, the law of value appears as something spontaneous which breaks the “well-composed,” well-ordered, usual system of administrative methods of control. But everything is upside down in this picture.

What should planning organs be guided by when studying the requests of production branches for new capital investments? Why in the current five-year period are the rates of extraction for petroleum and gas two and three times higher than for coal? Why is the production of chemical fibers being more than doubled while the production of cotton cloth is growing more slowly ? Why has railroad transport replaced steam engines with electric engines and diesels? Let us pose the question in a more general form: what is the principle of improving the structure of social production? It has been given a perfectly definite formulation in the Program of the CPSU:

to obtain the greatest results with the smallest outlays. But what is the mechanism for realizing this demand? The comparison of investments and results, the time periods of recoupment and, on this basis, the distribution of capital investments. Obviously this is a manifestation of the regulating role of the law of value; it is being implemented through the targets of the plan, it is anticipated, since the economy develops according to plan. Divest the planning organs of the demand for optimal efficiency and the mechanism of its influence, the working out of plans, will turn into dreary arithmetic: all branches will grow from year to year at approximately equal rates and the structure of production will not change or improve.

Let us illustrate with two examples of using the law of value in economic practice and let us see what result is obtained. For many years, state purchases of beets amounted to 45 million to 50 million tons, but in 1964, 76 million tons were procured. The reason? An increase in procurement prices by 18% and the implementation of a series of other incentive measures. Was our national economy ruined by these additional outlays? No, it obtained great additional accumulations. Another example: for a long time factory warehouses were stuffed with calcinated soda, but the shops did not take it since outlays for selling it exceeded the trade markup. As soon as the mark-up was increased, the soda was sold out.

As for direct connections, contractual prices, and the elimination of a number of directive indices, all this was necessitated, first, by the very nature of the socialist mode of production based on democratic centralism and, second, by the fact that production relationships between enterprises under socialism are carried on in the form of commodity- monetary relations and cannot be carried on otherwise. The experience of recent decades has convincingly shown that it is impossible to attain real centralization of economic planning without freeing planning organs from regulating each of the millions of relationships among economic organizations and building these relationships on the basis of economic accountability. The more planning strives to be ‘concrete,” scrupulous, encompassing all details, the more difficult it is to maintain genuine planned development of the national economy as a whole. One must not forget that there are over a million enterprises and economic organizations in our country.

Thus there are no grounds to deny the definite regulating role of the law of value under socialism. And indeed, what kind of law would it be if it did not regulate the sphere of its operation?

It is important only to understand this regulating role scientifically, that is, to see it as it is in reality under socialism. The law of value does not operate alone but interdependently with the other economic laws of socialism, above all, the basic economic law and the law of planned, balanced development. These laws define the aim of the socialist mode of production and the ways to attain it (and hence the nature of the operation of the law of value). But the law of value defines the economic mechanism and the economic levers proper to the socialist mode of production, which make it possible to attain the aim in optimal time periods and with optimal expenditures of social labor.

Profit and Prices

The practical conversion of profit into one of the leading economic indices brings the problem of improving price formation to the forefront. As a matter of fact, under the previous prices, profit could not characterize the efficiency of economic management because in very many cases profit was not a monetary expression either of production outlays or of the result obtained. Experience shows that as long as there was no pressing need to improve prices, discussions about price formation dragged on for years without leading to anything. However, as soon as sales and profit – indices describing real economic relations – replaced gross output as an index, then the impossibility of keeping the existing prices immediately became clear. Hence we consider the following formulation to be correct: precisely because prices were defective, and in order to make them better, it was necessary to introduce the index of profit as one of the most important indices.

Of extreme importance is the circumstance that the prices existing until recently understated the amount of monetary accumulations actually obtained in the national economy and thereby substantially hindered the planned control of the economy and the analysis of the processes taking place therein. The surplus product created by miners, mining workers, timber procurement establishments, and many other enterprises was not reflected (or was far from fully reflected) in the total profits of the said enterprises. But is it not clear that a true expression of social product, including monetary accumulations representing the overwhelming part of the surplus product, is extremely important for reflecting the processes taking place in the national economy?

Hence the problem of “profit and prices” does not only consist in the need to put prices in good order to convert profit into an objective index of the work of each individual enterprise. It is no less important to have prices as the basis on which we can determine in detail how the surplus product is formed, used, and consumed in the national economy as a whole.

As is well known, Marx pointed out the possibility of “losses” of the surplus value in price. He wrote: “In any event, even if that part of surplus value which is not reflected in the price of a commodity is lost for price formation, the total average profit plus rent in its normal form can never be more than the total surplus value, although it can be less than the latter” (K. Marx and F. Engels, Sochineniia, Vol. 25, Part II, p. 400).

The use of prices that do not fully express the surplus product created hinders the correct distribution of the national income for accumulation and consumption; it has a negative influence on the formation of income to the state budget and on the financial position of many enterprises. The ongoing reform of wholesale prices is intended to eliminate all of these and other defects.

In connection with price formation, it is sometimes also argued that the application of profit as a basic index will allegedly weaken the centralized planning of the national economy: in the race for profitability the product mix will be violated, proportions of the distribution of capital investments will change, etc. Those who argue in this way forget the simple fact that profit is obtained only as a result of the sale of output, that is, after society (the consumer) has acknowledged the necessity of the manufactured output, accepted, and paid for it. Profit is not an accounting or statistically constructed index. The profit obtained shows that all economic relationships connected with the manufacture of a given product have been concluded successfully and the needs of society have actually been satisfied. So then how can one speak of any violation of the plan? If the product produced has been obtained and paid for, then obviously it is needed. And if it was not in the planned product mix, so much the worse for that product mix.

If, when distributing capital investments, the efficiency of their use and the period of their recoupment are taken into account, then who would object to this? It is another matter that, in determining the price for a specific commodity, it is expedient to plan to include in this price a profit of a size that will not encourage the manufacture of certain products to the detriment of others. This is a purely practical matter, a very important one, but, in our opinion, having no essential bearing on the question under discussion. It is possible to have a greater profit in a cheap commodity and a smaller profit in an expensive one (technically this is easily achieved by means of rates of turnover tax) and thereby discourage the desire to produce only expensive commodities.

From what we have said, it does not follow that the index of enterprise cost of production can be relegated to the archives. Not at all! The struggle to reduce enterprise cost of production in combination with improving the quality of output remains the major task of each enterprise collective. However, the output produced has two aspects: it is the result of labor for the supplier and an object of labor (consumption) for the buyer. Their interests diverge greatly. The mine is concerned with recouping production outlays, while the metallurgical plant is interested, above all, in the percentage of metal contained in the ore. Meanwhile outlays to obtain a

ton of ore are in no way dependent on the quantity of metal contained in the ore. The index of enterprise cost of production of a ton of ore, vitally important to the mine, in no way enters into the economic interests of the metallurgical plant: it is primarily concerned with the price of a unit of minerals. Therefore, the importance of the index of profitability should increase sharply, particularly in relationships among enterprises, to supplement the index of a decrease in enterprise cost of production.

Profit and Bonuses

The main virtue of profit as an index is its objectivity. As a matter of fact, gross output was used as the most important index for many decades. But now it has been abolished – and the enterprises continue to work, and even better than before, because the index of gross output as a measurement of economic efficiency was an inadequate, more or less artificial index. At the same time, the “abolition” of the index of profit is unimaginable, so long as commodity-monetary relations exist. And profit is not only an index. Profit is the source of expanded reproduction not only at the given enterprise, but in society as a whole, even including the material incentives to successful work.

In touching upon the latter subject, we should like to pay attention to a certain complication in forming bonus funds at enterprises which are being converted to the new conditions. The size of incentive funds depends: a) on the rates of growth in the volume of output sales (or profit) and the level of profitability planned by the enterprises; b) on the degree to which the plan is fulfilled according to these indices. Two plants performing equal work can obtain the most different funds under such a system of incentives. Scales and percentages are awkward and difficult to understand. In particular, in many cases the enterprise has no more incentive than before to utilize all its reserves in drawing up a plan. It seems to us more correct to introduce (if only as an experiment) a direct and simple distribution of profit (that part of it which is earmarked for bonuses), regardless of whether profit has been according to plan or above plan and by how much it increased over the preceding year.

Let us suppose that on the basis of calculated data for a number of years and with regard for the real possibilities, it is established that 10% of profit is spent on material incentives in the machine building industry, 4% in the petroleum extracting industry, etc. And let us suppose that 30,000 rubles of profit have been allocated for material incentives at some enterprise for the first quarter of 1967. Let us say that this sum comprises 10% of the paid-out wage fund. The simplest and fairest thing will be to distribute this profit in the same proportion: 10 kopecks per ruble added to the wages of every person working at the enterprise, the director as well as the janitor. There is no wage leveling here, since the wages are different, and there is justice here, since the percentage of allocations is equal. Of course, the possibility is not hereby excluded that individual workers may be deprived of bonuses fully or partially or, on the contrary, may receive additional reward, if this is called for by some special circumstances. As is well known, the clarity and obviousness of the incentive system is of great importance. The enterprise collective itself will find ways and means of raising the level of profitability and total profits. At the same time, the incentive to raise qualifications will also increase. And if, in rewarding, one also takes account of the length of uninterrupted service at the enterprise, labor turnover will decrease.

Some More Practical Problems

The need to more than double total profits in the course of five years brings up many problems which can scarcely be enumerated in a single article. We shall only dwell on a few.

The struggle to fulfill the profit goals of the Five-Year Plan undoubtedly includes the full liquidation of planned losses for individual products and enterprises. There are hardly any “theoreticians” now who would argue the advantages of planned losses. The difficulties arising in enterprises operating at a loss are so well known that it is not worth dwelling upon them. It is important to emphasize something else. In the absolutely overwhelming majority of cases, in all branches of industry (except, perhaps, extractive industry), planned losses are artificial; they arise as a result of an economically unjustified distribution of the production program among enterprises. Now, when industry is being managed by the branch principle, a distribution of output by which no products will be manufactured at a planned loss must be demanded as an independent task. The productive capacities of our industry are such that this task can be fulfilled in a comparatively short time by means of specialization of enterprises and concentration of products that were manufactured at a planned loss because they were scattered.

Among purely financial problems, one should probably devote some thought to stimulating enterprises which are fulfilling and overfulfilling their quotas in payments of turnover tax. A somewhat incongruous picture is seen. Upon obtaining profit, the enterprise forms a bonus fund out of it. In cases where profitability exceeds the normal, healthy level due to a sharp decrease in production costs, part of profit is then subtracted in the form of turnover tax, which, of course, is correct. As is well known, in the national economy as a whole, total turnover tax is approximately equal to total profit. The same relationship can be seen at many enterprises, and at some of them the turnover tax considerably exceeds profit. In such cases, the enterprise receives no incentive of any kind, although economically turnover tax and profit are a monetary expression of the value of the surplus product to an equal degree. Practically speaking, the result is that, having improved their work and achieved a growth in profitability above a certain level (and thereby establishment of rates of turnover tax for the given output), the enterprise collective loses material incentives. It would be useful to establish some form of incentive. This is to the advantage of both the state and the enterprises.

If one is to speak of general economic tasks, it is indisputable that the basic way to double profitability is the uninterrupted improvement of the equipment and the technology of production. It seems to us that the major task of economic organs should be to promote the rapid introduction of new equipment and those discoveries, inventions, and improvements whose efficiency is indubitable. It is no secret that many scientific institutes and laboratories make rapid progress in the field of science and then lose many years in implementing the results of their labor in mass production, setting prices, etc. It seems to us that the ministries, and especially the financial organs, can to a considerable extent assume this whole organizational and economic side of implementing new technology. The result will be an immeasurably greater growth in profitability and in revenues for the government budget.

It is perfectly obvious that the task of more than doubling profitability requires raising the level of economic work at enterprises and in branches of the national economy, expanding the preparation of economic cadres, and putting them on an equal footing in all respects with engineers, designers, and other leading workers in production.

Thus, it is important to approach in a new way the role and meaning of profit under socialism and to ensure a steady rise in labor productivity, the observance of the efficiency regime, and the growth of profitability of socialist production.

Source: Murray Yanowitch, ed., Contemporary Soviet Economics; a collection of readings from Soviet sources (White Plains: International Arts and Sciences Press, 1969), Vol. I, 74-84.

 

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