Advances and Debts

Nikolai Shmelev, Advances and Debts. 1987

In an interview with Nedelia (September 26-October 2, 1988) Nikolai Shmelev discussed why he wrote this landmark article published in Novyi Mir: “I thought to myself, why not beat the internal censor and pour out everything that has built up, everything that we have discussed among professionals? I would not have taken this step on my own accord; I was persuaded [by a friend]. I did not expect the storm that it caused.” No article did more to accelerate the debate about economic reforms than this spring 1987 essay. Shmelev presents a ruthless, straightforward analysis of what ails the Soviet economy, arguing that the problems go beyond military expenditures and foreign policy commitments. Rather, he sees the problems as being caused by a failure to provide incentives for workers and by the economy’s continued inability to observe the laws of supply and demand. Shmelev makes a number of innovative suggestions for improving the economy. Ahead of his colleagues he has advocated the creation of “free zones,” in which joint enterprises with foreign companies could operate without restrictions, and permission for Soviet enterprises to sell stock to obtain increased investment. In essence, Shmelev blames the centralized planning system for preventing economic, scientific, and technical progress.

Original Source: Novyi mir, No. 6 (1987)

The state of our economy does not satisfy anyone. It is too central, built-in, as they say. Its defects are certainly clear to everyone: the producer’s monopoly in general deficit conditions and the absence of incentives for an enterprise to make scientific-technological progress. But how can we get rid of these defects, and what is to be done, not in theory, but in practice? Anybody who would dare to assert that he knew a fully suitable prescription for life can be assured that today there are no such sages, either above or below. Now we and everyone else have many more questions than answers. And we still have much talking, arguing, proposing, and rejecting to do before we and the rest of the world discover the answers that are so necessary to us.

The basic reasons for the arteriosclerosis and restriction of the blood circulation of our country’s economy have already been revealed. A principle has been raised, “from a surplus-appropriation system to a tax-in-kind,” signifying that the administrative methods of controlling the economy should be exchanged for economic stimuli and levers not sponsored by the state. It is certainly possible to say that the road to common sense, at least in the ideological-theoretical sphere, has been opened. It is evident, however, that perestroika of such dimensions cannot be brought about at one stroke, however much we might want it to be. For too long, the command instead of the ruble has predominated in our economy, for so long that it seems we have already forgotten that there was-there truly was-a time when the predominant factor in our economy was the ruble and not the command, that is, common sense and not impractical, speculative, arbitrary rule.

I understand what kind of reproaches I am inviting, but the question is far too serious and vitally important for me to soften my language and resort to silence. If we do not acknowledge that the repudiation of Lenin’s NEP gravely complicated socialist construction in the USSR, we again, as in 1953 and 1965, condemn ourselves to halfway measures, and it is well known that a halfway policy is often worse than inertia. NEP, with its economic stimuli and levers, was replaced by an administrative system of rule. Such a system by its very nature was unable to concern itself with improving production quality, increasing the effectiveness of manufacturing, or achieving the highest result at the lowest expense. This system achieved the necessary quantities-in gross output-not in accord with the objective laws of economics, but in defiance of them. And because it was done in defiance of economic laws, it was done at the price of inconceivably high expenditures of material and, above all, human resources.

We must clearly understand that the cause of our difficulties lies not only, and not even very much, in the heavy burden of military expenditures and the very expensive scope of the country’s global responsibilities. Responsible expenditure of the remaining material and human resources would be fully sufficient to maintain a balanced economy oriented toward technical progress and to satisfy the traditionally modest social needs of our population. However, the persistent, protracted attempts to overcome the objective laws of economic life and to suppress the stimuli to work that have been formed over centuries in response to human nature have, in the final analysis, led to results diametrically opposed to what we intended. Today we have an economy in deficit, unbalanced in practically all aspects and unmanageable in many, and-if we are to be completely honest-we have an unyielding planned economy that still does not accept technological progress. Industry today rejects up to 80 percent of newly approved technical solutions and inventions! Our labor productivity rate is one of the lowest among industrialized countries, especially in agriculture and construction; during the years of stagnation the working masses displayed a nearly complete lack of interest in full-blooded, honest labor.

However, the results of the “administrative economy” that are most difficult to cure he in the economic sphere.

A purely administrative view of economic problems has deeply implanted itself in the system-an almost religious “belief in organization” and a reluctance and an inability to see that nothing sensible can be made through force, pressure, conscription, or urging on the economy. As both our own experience and world experience show, the main conditions for the viability and effectiveness of intricate social systems are an independent superstructure, self-regulation, and self-development. Attempts to subordinate the socioeconomic “Brownian movement” (with its inescapable, but consequently acceptable, expenses) to some central point of administration were largely abortive, and the farther we get away from this system the more evident this becomes.

Apathy and indifference, stealing, and disrespect for honest work have all become commonplace along with an aggressive envy for those who earn a lot, even if they earn it honestly. Indications of an almost physical degradation have appeared in a significant part of the nation because of drunkenness and idleness. And, finally, there is a skepticism toward aims and intentions that declare that a more reasonable organization of economic and social life is possible. According to the impartial observation of the academician Tatiana Zaslavskaia in the journal Kommunist (1986, no. 13), “frequent collisions with various forms of social injustice, along with the futility of attempts at individual struggles with its manifestations, became one of the principal reasons for the alienation of some workers from social goals and values.”

It would evidently be unrealistic to think that all of this could be overcome quickly-it will require years, and perhaps even generations. To construct a completely self-financing socialism will entail far more than simply eliminating separate, cumbersome bureaucratic structures. This does not mean, however, that one ought to sit with folded arms. Considering today’s internal and international realities, we cannot return to “administrative socialism.” But we don’t have any time for marching in place or for halfway policies.

What alarms us more than anything today is indecisiveness in the movement toward common sense. Slogans can’t change the world view of many leading cadres, those who possess only the skills of bare administration and the apparatchik craft. In the same way, no explanations can overcome the obvious distrust that people have for claims that leaders have taken matters seriously and carried through contemplated changes, or that after this half step forward there will not again be two steps backward. It is possible to convince only by deeds. In order to instill belief in the normalization of the economy, it is necessary to have immediate success and tangible indications, indications that are apparent to all, that life is improving. First of all, the market must be satiated as soon as possible. This is not simple, but with the proper resolve it is possible. It is possible, however, only by means of self-financing socialism, by developing the market itself.

We must call things by their true names: stupidity is stupidity, incompetence is incompetence, and active Stalinism is active Stalinism. Life demands that we be prepared to do anything to secure our food market within the next few years. Otherwise, all calculations of activating the human factor will be up in the air; people will not respond to them. Let us lose our ideological virginity which, incidentally, exists only in newspaper fairy-tale editorials. People are stealing and becoming rich by exploiting this virginity more than ever before, people who make a living not by creating anything and who neither want nor know how to create anything. Let only those people prosper who are willing and able to give society real products and services, things of real value. Only when we have solved the problem of providing our daily bread, and not before, will it be possible to think about preventing the largest profits of the most work-loving people and enterprising proprietors from resulting in the formation of threatening capital. For this there are simple, effective means: taxes and the corresponding powers of the revenue inspector (reasonable ones, of course, so as not to kill the goose that has just begun to lay golden eggs for the good of everyone).

Tax levers can and should provide reasonable control and, moreover, one means of satiating the consumer market, a means that does not require great capital investment: personal, family, and cooperative production in the sphere of services and small industry. Certainly, only today can we fully evaluate the significance of Lenin’s thoughts about the formation of civilized cooperatives, for this is all that we need for the triumph of socialism.

The expansion of the individual-cooperative sector in the cities will provide benefits beyond the physical satiation of the market. Our light industry, trade, and service sectors currently operate under inadmissibly favorable conditions that encourage inertia. No one competes with them, and import of consumer goods is still too small to stir them from their inertia. The appearance of a competitor such as the individual-cooperative sector could quickly change the conditions of the market. State industrial, trade, and domestic enterprises must either improve their work sharply or yield a substantial portion of their profits to other producers, resulting in the reduction of wages and expenditures on social needs, and even the curtailment of personnel to the extent of dissolving collectives of bad workers and closing enterprises.

Today’s system of material incentives for conscientious work acts weakly, and not just because it is a thoroughly bad one. Wages and bonuses don’t work either, as there is nothing for a person to buy with the money he receives. To revitalize the consumer sector of the national economy, to satiate the market and to give choices to the masses of buyers, means to make it possible for wages to finally work at full strength, so that our citizens could actually wish to be paid well for honest, scrupulous labor.

The material preconditions for development of the individual-cooperative sector undoubtedly exist in this country. In the cities there are enough empty accommodations. In the stocks of state enterprises is any amount-up to a billion rubles’ worth!-of unnecessary or obsolete equipment; raw and other types of materials are stored, just in case. Although it would be called a gamble, by offering this equipment and material for open sale it might be possible to meet the initial basic requirements of small individual and cooperative enterprises. Of course, with such a turn of events, violence, theft, and corruption might be escaped only if two conditions are met: First, free wholesale trade of the means of production, raw and other materials, must be allowed. Second, the individual cooperative sector must be fully equal (as both buyer and seller) to the state enterprises and organizations in legal and economic conditions.

A decisive general introduction of the well-known “Shchekino formula” could also produce a very quick effect.

‘An initiative by the Shchekino chemical plant managers to significantly reduce the number of employees without reducing output by utilizing additional wage payments as an incentive.

If one judges by the past, by the ruinous ministerial experience, this formula permits the number of workers to be reduced by 25 to 30 percent over two and one half years, without great investment. This is especially important today, when the productive capacity of many branches is under-loaded by 20 to 40 percent, when the majority of machines are used during only one shift, and when working hands are acutely insufficient for the construction of the country. Exaggerations have been presented so forcefully that there are apprehensions that a general dissemination of the “Shchekino formula” will give rise to unemployment.

First of all, natural unemployment among people who are seeking work or changing their place of work exists even today; at any given moment it is scarcely less than 2 percent of the work force, and if one counts vagrants who are not registered anywhere, unemployment undoubtedly approaches 3 percent. It is one thing to discuss the problem while pretending that we have no unemployment at all, but it is an entirely different matter to realize calmly that there is some sort of unemployment and that it is not possible not to have unemployment. Second, there are millions of unoccupied positions, and new work places are opening constantly. We could quickly reduce the scale of temporary unemployment to a minimum. Naturally, this will require considerable additional state efforts to retrain the displaced work force, to convert it to other professions in other regions, to stimulate an organized migration, etc. Third, we shall not close our eyes to the economic damage caused by our parasitic certitude about guaranteed work. Today it seems clear to all that, for the most part, we owe agitation, drunkenness, and shoddy workmanship to excessively full employment. We must consider, fearlessly and in a businesslike manner, what can be gained by us from a comparatively small reserve army of labor which would, of course, not be left entirely to the mercy of fate by the state. This is a discussion about replacing administrative coercion with economic coercion. The real danger of losing work, of turning to temporary means or being obliged to work where one is sent, isn’t bad medicine at all for laziness, drunkenness, and irresponsibility. Many experts believe that it would be cheaper to pay temporarily unemployed workers an allowance sufficient for a few months than it is to keep in the factory a mass of loafers who don’t fear anything, loafers by whom any profitable enterprise, any attempts to raise the quality and effectiveness of general labor, can (and will) be crushed.

“Socialism,” emphasizes the well-known Soviet economist Stanislav Shatalin, “has yet to create a mechanism that does not simply provide full employment for the population (this is a passing stage of extensive development of our economy), but employment that is socially and economically effective, rational, full of significance. The principles of socialism are not principles of philanthropy that automatically guarantee every worker a position that he is not capable of fulfilling” (Kommunist, 1986, no. 14).

A definite review of all our policies of economic assistance to socialist and developing states has become urgent. In the final analysis we are talking about billions. Too many objectives which are being carried out with our participation are not being used practically by us or our partners. Specific examples are the construction of the gigantic GES–the means being devoured are huge, but the return is expected no sooner than the next millennium-and wasteful metallurgical plants; a general example is the emphasis on heavy industry in places where attention is needed most by small and medium-sized enterprises for the production of mass demand products.

We have dared to begin the creation of enterprises with foreign participants on our territory. It would have been worth it, possibly, to think also about creating “free economic zones.” This business is very difficult politically as well as economically. To attract significant amounts of foreign capital is hard. It is even harder to reach the point at which joint enterprises easily get along under our conditions, the point at which foreigners willingly place in our industry the profits received from us (reinvestment). If we were to achieve apparent success here, we could not only accelerate the satiation of our domestic market, but also noticeably strengthen the country’s export position. Interesting propositions are already being made to us today. However, we are keenly aware of the provisions of the new law, specifically the 45 percent tax it stipulates on profits from foreign partnerships, which is considered unattractive abroad. It seems that the usual little-justified economic stereotypes are playing a role here, and it is inescapably necessary to change them.

For all the importance of the question of the initial satiation of our domestic market, we must at the same time realize that this is only the sharpest, most urgent part of all the problems of cost accounting, of self-financing socialism.

The most difficult problem we have today in the organization of a fully self-financed economic structure is the equalization of basic price proportions in the domestic economy. The arbitrary price decisions accumulated since the end of the 1920s are indeed a frightening legacy. If we do not eliminate this legacy, we will never have objective reference points for an indisputable evaluation of the expenditures and results of production independent of arbitrary human rule. Consequently, we will never have genuine non-state financing. In theoretical discussions today, various plans to reform the price system are being put forth. Most of these plans, however, contain one common and, judging by our experience, extraordinarily dangerous defect: the supposition that prices will again be designed in offices, speculatively, in isolation from life and from the real processes in both ours and the world’s economy.

Roughly equal price proportions function today, not only in capitalist countries, but also in many socialist ones. They have taken shape under the objective influence of general tendencies in the development of productive forces. Of course national differences in price levels and proportions exist, but as a rule the basic correlation remains. For the quick, safe normalization of our economic structure, a gradual equalization is necessary, first of the wholesale, and then of the retail price proportions, in balance with what is taking place in the rest of the world. We now have sharply declining prices for fuel, minerals, and agricultural raw materials and increasing prices for mechanically engineered products. We have unjustifiably sharply declining prices for food and public utilities and unjustifiably increasing prices for all industrial consumer goods. Soviet prices should correspond with world prices as closely as possible. The next question is: Who will be in charge of price formation, the State Committee on Prices, the Industrial Ministry, or the enterprise/producer itself? First, it is necessary to make the initial step and equalize the proportions.

The equalization of prices is an exceptionally delicate matter, particularly because it calls for a noticeable rise in prices for food products and public utilities. It is necessary to be prepared for anything by persistent, methodical, and-most important-honest and open preparatory work.

Today the Soviet consumer receives more than $50 billion per year from the treasury in the form of subsidies of unprofitable prices for basic food products and services. And why should he not receive the same money in the form of an increase in his basic wages and, possibly, also in his savings bank deposit? In the final analysis, why underpay for meat and at the same time overpay for fabric and shoes; why not buy both at real prices? Of course, in order for people to get used to this, the stereotypes they have formed must be broken, but to break them will be difficult. Only honest, understandable attempts to normalize our economy can convince the average consumer to change his habits. It is necessary to begin talking with the people, essentially as it was done in Hungary, where extensive explanations in 1976 paved the way for the smooth introduction of new prices. And we shouldn’t forget the sad experience of Poland, where in that same year of 1976 they tried to change the prices in one fell swoop and then were forced to rescind the changes.

There is still another prejudice: rejection of the joint stock structure. Why is it prohibited to attract the free means of our citizens and enterprises for the purpose of creating new manufacturing facilities and expanding the old? This position defies all sensible explanations. It is simply blindness or open unwillingness to implement what for the time being lies dormant but can be of very useful service to the whole country. Our famous economists Pavel Bunich and Vladimir Moskalenko correctly state the point: Today’s lack of invested means “can be filled, specifically by having suitable enterprises sell their bonds to enterprises that have free resources.” Only one thing needs to be added-to sell to private individuals as well. Or is it better for the state if these means lie dormant?

Source: Isaac Tarasulo, ed., Gorbachev and Glasnost: Viewpoints from the Soviet Press (Wilmington: SR Books, 1989), pp. 77-86.

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