On Improving Industrial Management

Aleksei Kosygin, On Improving Industrial Management, Perfecting Planning, and Enhancing Economic Incentives in Industrial Production. September 28, 1965

This decree captures the Kosygin-era attempt to make Soviet industry more “responsive” without abandoning planning. Issued in the mid-1960s reform drive, it called for enterprises to be judged less by gross output and more by profitability, sales, and product quality, while granting managers greater discretion over investment, wages, and bonuses. The document also sought to simplify ministries’ micromanagement and strengthen economic levers, especially pricing and incentives, to push factories toward efficiency. Its careful balance between market-like mechanisms and centralized control shows both the ambition of the reforms and the constraints that soon limited their impact.

Original Source: Izvestiia, 28 September 1965.

Comrades! The Presidium of the Central Committee is introducing for discussion at this Plenary Meeting proposals for improving the planned guidance and organization of industrial management. This is a most important problem, the solution of which is imperatively demanded by the practice of communist construction in our country.

The October Plenary Meeting of the CC of the CPSU has instituted a new approach to the essential problems of the national economy, based on a deep analysis and all-round account of the objective laws of economic development. The party, drawing on the historic experience of socialist construction in our country and the experience gained by the entire world socialist community, is penetrating ever deeper into the essence of economic relations in our society, in order correctly to utilize its economic laws and tremendous creative opportunities.

The Soviet Union is on the threshold of a new five-year plan. We have to make a big stride forward along the road of economic construction and a rise in living standards. The CC Presidium and the Council of Ministers are of the opinion that a series of measures have to be implemented to improve planning and economic management and to enhance economic incentives in production, in order to cope with the new tasks in developing industry - the basis of the entire national economy - and to set up conditions that will facilitate the acceleration of technical and economic progress.

The correct solution of these problems will be of tremendous political and practical significance. It will be no exaggeration to say that the successful completion of the program for building the material and technical basis of communism, the further improvement of the people's well-being, and the strengthening of the defense capacity of our country will largely depend on how they are resolved.

The problems concerned with improving planned industrial management have been discussed on a broad scale in the course of a number of years by party and economic activists, the scientific community, and our press. Many useful proposals have been made.

The main measures which are being presented for this Plenary Meeting of the CPSU CC have been thoroughly discussed by managers, party workers, economists and other workers of many enterprises in Moscow, Leningrad, Volgograd, Minsk and other cities, by scientists and experts from planning and economic organizations. The proposals were also considered by the councils of ministers of the union republics, the State Planning Committee of the USSR, the Presidium of the Academy of Sciences, ministries, state committees, and departments. The essential theses of the draft have met with universal approval.

...

Improvement of Planning and Greater Economic Stimulation of Industrial Production

What are the main directions in which it is proposed to improve the forms of economic planning and the methods of economic management at each enterprise?

First, a number of measures are envisaged to raise the scientific standards of state planning of the economy.

The rates of growth of production and of the national income and the basic proportions envisaged in the national economic plans must be optimum, i.e., they must guarantee the best, the most effective utilization of existing opportunities in conformity with the objective economic laws of socialism. In conditions of the present-day scientific-technological revolution, the task of planning is to provide for a rapid rate of industrial application of the latest achievements of science and technology. Plans must be compiled on the basis of the future prospects of scientific -technological development. It is necessary to augment the importance of long-term plans, and to work out a system of scientifically substantiated planning norms.

This will enable us to avoid voluntarism in planning and to create the conditions for raising the effectiveness of social production.

Second, a complete system of measures is being proposed in order to expand the economic independence and initiative of enterprises and associations, and to enhance the importance of the enterprise as the main economic unit in our economy. In conditions of the growing concentration of production and the increase in relationships between enterprises, the existing framework of economic independence has become cramped for modern socialist enterprises and tends to restrict their ability to raise labor productivity and production efficiency. Expansion of the economic independence of enterprises and the growth of the political consciousness and activity of the working class will open up the possibility for collectives to participate on a broader scale, under the leadership of the party organizations, in the management of production.

To this end it is necessary to abolish excessive regulation of the economic activity of enterprises, to provide them with the necessary means for developing production, and to establish firm legislative guarantees for the expanding rights of the enterprises.

Third, it is proposed to strengthen and develop the system of cost accounting, to intensify the economic stimulation of production with the help of such means as price, profit, bonuses, and credit. It is necessary to increase the interest of the enterprise in the growth of its production, in increasing its income, and in the optimum utilization of its tremendous wealth - the fixed assets assigned to the enterprise.

It is planned to greatly increase the interest of workers and employees in improving the overall results of the work of their enterprises, and thus to strengthen the economic foundation for expanding the activity and initiative of the masses in economic construction, and for ensuring their greater participation in the management of production.

The proposed measures are aimed at the consistent application of the Leninist principle of providing material incentives for the working people, so as to find new reserves within the enterprises themselves and to create new sources for raising the wages of workers and employees.

On the Improvement of Industrial Planning and the Expansion of the Economic Independence of Enterprises

In order to expand the economic independence of enterprises, it is proposed to reduce the number of indices that are assigned from above. At the same time, those indices that are retained in the plan should be aimed at raising production efficiency.

Experience indicates that the index of volume of gross output does not stimulate the enterprise to produce goods which are really needed by the national economy and the public, and in many cases the index tends to limit any improvement in the assortment of goods and their quality. Not infrequently our enterprises produce low-quality goods which the consumer does not want and which therefore remain unsold.

Instead of using the index of gross output, it is proposed that the plans for enterprises should incorporate assignments for the volume of goods actually sold. Enterprises will then have to pay greater attention to the quality of goods they produce in order to be able to fulfill their assignment for marketed produce. An enterprise that produces low-quality articles will experience difficulties in disposing of its goods and, consequently, will not be able to fulfill its plan. Under the existing system of evaluating the activities of an enterprise on the basis of gross output, such an enterprise would have been considered as having fulfilled its plan.

But it is not sufficient to appraise the work done by an enterprise only on the basis of the volume of goods sold. The national economy requires definite items of production in order to satisfy social needs. For this reason, assignments for the more vital goods must be retained in the system of planned indices.

When economic ties between enterprises are well organized and the contract system is well developed, it will be possible to reduce steadily the assortment of goods assigned by the state plan, and to substitute for it a group, consolidated list.

The target for goods sold is aimed at establishing closer ties between production and consumption. In order to orientate the enterprise toward raising efficiency, it is best to use the profit index, the index of profitability. The size of profits characterizes, to a considerable extent, the contribution made by an enterprise to the country's net income, which is used for the expansion of production and the improvement of the people's well-being.

It goes without saying that profit assignments do not lessen the importance of reducing production costs but, quite to the contrary, increase it. One of the most important tasks of economic managers is to lower production costs. The production costs index should command special attention in the technical, production and financial plan of the enterprise.

The state is interested in constantly increasing accumulations not only by means of lowering the cost of production of each unit of output, but also by increasing the quantity of goods produced, by expanding and renovating the assortment, and by raising the quality of articles.

Profit reflects all these aspects of the production activity of an enterprise more fully than the cost of production. What is important in this case is to take into account not only the amount and increment of profit, but also the level of profitability, i.e., the amount of profit per ruble of fixed assets.

Substantial changes are also envisaged in the planning of work at the enterprise.

At present the enterprises receive four labor indices from above - the productivity of labor, number of personnel, level of average wages, and the size of the wage fund. From now on it is proposed to hand down only one of the above-listed indices - the wage fund. This, of course, does not mean that the other indices have lost their significance. The indices of growth of labor productivity, of the number of personnel, and of average wages remain, as before, necessary elements in the national economic plan and the production plan of the enterprise itself. But is it really necessary to assign all these targets to an enterprise from above? We have discovered from experience that such a system of planning fetters the initiative of the enterprises in the search for ways of increasing labor productivity.

There have been proposals that the wage fund of an enterprise also not be assigned from above. But to discard the planning of the wage fund would be premature. The necessary balance between the quantity of consumer goods manufactured and the population's purchasing power must be guaranteed in the national economy. And the population's purchasing power is determined in large measure by the wage fund.

In the future, when we are able to considerably expand the production of consumer goods and accumulate the necessary reserves of these goods, it will be possible to abolish the system of assigning the wage fund to the enterprise. It is planned to do this, first of all, in the branches producing consumer goods.

Thus, an enterprise will have the following indices established from above:

the volume of goods to be sold;
the main assortment of goods;
the wage fund;
the sum of profits and the profitability;
payments into the budget and allocations from the budget.

Besides those indices, they will also have assignments with respect to: the volume of centralized capital investments and commissioning of production capacities and fixed assets; the main targets for introducing new technology; the indices for supplying materials and equipment.

All other indices of economic activity will be planned by the enterprise independently, without endorsement from a higher organization. This will free the enterprises from excessive tutelage and will permit them to adopt the most economical decisions in the light of actual conditions of production.

While expanding the economic independence of the enterprises, the state will continue to conduct a unified policy in the spheres of technical progress, capital investment, labor remuneration, prices and financing, and will see to it that accounting and reporting are conducted according to a unified system.

One of the main tasks facing the planning and economic organizations is to improve the quality of goods in conformity with the demands of consumers and modern technical standards.

The plans must provide the most important indices relating to technical standards and the quality of goods, and all the financial, manpower and material resources necessary to attain them.

It is necessary to raise the role of state standards as an effective means of raising the quality of output. The standards must be raised constantly in the light of the latest achievements of science and technology. A system of state certification of the quality of goods should be introduced.

The normal economic activity of an enterprise is frequently upset by the fact that the plans assigned to it from above are not substantiated by the necessary technical and economic calculations, and that different sections of the plan are not dovetailed. Up to now sufficient concern was not given to working out the technical and economic norms that are necessary in planning and in economic management. Approved plans are frequently changed, which disrupts the work of an enterprise and lowers production efficiency. One of the main tasks in improving the planning system is to work out stable plans for enterprises on the basis of scientifically substantiated norms and technical-economic calculations which take into account the peculiarities of different branches of industry and groups of enterprises.

Enhancement of scientific standards of planning presents economists with the job of analyzing modern processes of the technical and economic development of the country, and of defining the trends and prospects that are emerging. Special attention should be given to increasing the economic effectiveness of new equipment, to changes in the patterns of production and consumption, and to study of economic relationships, the complex development of regional economies and the territorial division of labor throughout the country.

Under present conditions, when enhancement of the technical standards of production and its efficiency has been moved to the forefront as the most important task, the planned management of the economic activity of enterprises cannot be restricted to annual plans. Due importance has not been ascribed to long-term plans. Many enterprises did not compile them at all, and those that did usually failed to correlate them with the plans for the development of the national economy. Another major drawback of the existing system of long-term planning is that the assignments included in long-term plans and, in particular, the target figures for the Seven-Year Plan were not broken down into annual figures.

Such a state of affairs leads to a situation wherein enterprises do not know in advance what prospects are in store for their own work and thus cannot organize their production in advance, nor establish regular ties with suppliers and consumers.

It is proposed to establish the five-year plan as the basic form of planning, including the distribution of the more important assignments by years, so that the enterprises may implement their production and economic activities on the basis of the plan.

Not enough attention has been Paid recently in national economic plans to measures directed at increasing production efficiency in individual branches of industry; this is a violation of the branch principle of management in industry. In industrial management and in national economic planning, the task is to increase the significance of each branch of industrial production, and to guarantee the correct combination of planning by branches and planning by republics and economic regions.

In this connection we must mention the tasks facing the USSR State Planning Committee. The State Planning Committee must concentrate on securing correct proportions and interrelationships within the national economy, on raising efficiency in social production, on searching for means for an accelerated growth of the national income and for raising the people's well-being'. Of special importance, in this respect, will be a more profound and thorough elaboration of national economic balances, in particular, of the national income and its utilization, of the manpower supply and its utilization both in the country as a whole and in separate areas, of money incomes and expenditures of the population, of financial resources, and also of the more important material balances.

On Enhancing Economic Incentives for Enterprises and Strengthening Cost Accounting

Improvement of the forms and methods of planning will make it possible to tackle the problem of strengthening and developing cost accounting in a new way. V. I. Lenin pointed out that each enterprise must function on a profitable basis, i.e., it should completely cover its expenditures from its income and should make a profit.

The enterprises operating on the cost-accounting system and their managers must bear full responsibility for the economic results of the work they do. Lenin's ideas on cost accounting must become firmly entrenched in our economic practice. In the consistent implementation and further development of the idea of cost accounting we see the way to the solution of many of the current tasks of communist construction at the present stage.

What must be done in order to strengthen and develop cost accounting in the new conditions?

First, conditions must be created that will enable the enterprises independently to solve their problems of improving production, and that will give them an interest in utilizing to the utmost the fixed assets assigned to them for increasing output and the amount of profit they receive. It is necessary to leave to the enterprises more of their profits so that they will be able to develop production, improve their techniques, materially encourage their workers, and improve the working and living conditions of their workers and employees. The profits to be left to the enterprise should be in direct proportion to the effectiveness with which it utilizes the fixed assets assigned to it, the increase in volume of the goods it sells, the improvement in the quality of its goods, and the increase in profitability. At the same time, financial grants made by the state to enterprises for capital investment must be restricted and the use of credits must be expanded.

Second, it is necessary to strengthen the cost-accounting system in inter- enterprise relations, to ensure that enterprises adhere strictly to obligations with respect to commodity deliveries, and to increase their material responsibility for discharging their obligations.

Third, on the basis of the cost-accounting system, it is necessary to provide material incentives for the entire collective, and for every shop and section of the enterprise, to make them interested not only in fulfilling their own individual assignments but also in improving the overall results of the enterprise's work. In doing this, incentives must be so constructed that enterprises will be interested in working out and fulfilling higher plan assignments, and in utilizing their internal resources in the best possible way.

In short, it is necessary to orient all the activities of the enterprise toward seeking means of improving the economy of production, of increasing its own income and thereby increasing the overall national income.

Under the existing system, capital investments are almost exclusively allocated according to the central plan and, in large part, are devoted to the construction of new enterprises. In many cases operating enterprises do not have the necessary means at their disposal and thus cannot replace obsolete equipment quickly enough. This retards. the growth of labor productivity, improvement of the quality of the goods produced, and enhancement of the profitability of production.

It is proposed that every enterprise establish a production development fund, which would be formed from deductions from its profits. Such funds will also be supplemented by part of the depreciation allowances, which are intended for the complete replacement of fixed assets. At present, this part of the depreciation allowances is used wholly for centralized financing of capital construction, and enterprises cannot make use of these means.

When these measures are implemented, the size of the production development fund - which the enterprises will be free to use for technical improvements in production - will comprise a much larger sum than is now the case. This can be seen from the following data.

In 1964, expenditures from the enterprise fund for the introduction of new techniques and the development of production totaled - in industry - 120,000,000 rubles, and 600,000,000 rubles of bank credits were spent for the same purpose; the total figure was therefore 720,000,000 rubles. Under the new conditions the development fund will equal approximately 4 billion rubles in 1967, including 2.7 billion rubles from the depreciation allowances.

The strengthening of the cost-accounting system and the economic stimulation of production depend on the basis upon which the state grants means to the enterprise, and on the way in which enterprises transfer part of their income to the state budget.

The financing of capital investment is currently handled by free grants from the state budget. Enterprise managers show little concern as to the cost of the reconstruction of the enterprise or how effective the additional capital investment will be, because their enterprises are not obliged to refund the sums granted them. Hence we need a system that will induce our economic managers to take more care to use funds for construction in the most effective manner, to build new installations and shops with a minimum of capital investment, to put them into operation in good time, and to utilize their designed capacities more quickly.

One way of tackling this problem is to switch from the free allocation of means for capital construction to long-term crediting of the enterprises. It is suggested that the credit system will, first of all, be introduced for capital investments in operating enterprises. As for new construction, it appears that it might be expedient to employ long-term crediting for those construction sites where expenditures can be recouped in a comparatively short period of time.

Of great importance in making production more efficient is the correct and economical use of the circulating assets allocated to an enterprise. At present, any deficiency in these assets is refunded to the enterprise from the state budget. We cannot, therefore, speak of a genuine cost-accounting system if the enterprise does not, in essence, bear any economic responsibility for the utilization of the circulating assets allocated to it. It is proposed to abolish the practice of providing free supplements to the circulating assets of enterprises from the state budget and instead, where necessary, to grant them credits for this purpose. Such a system will encourage enterprises to use the assets allocated to them more thriftily.

A change in the system by which the enterprises make payments to the state budget from their incomes is also envisaged.

At present the size of the deductions made from the profits of the enterprises in favor of the state budget does not depend on the value of the production assets assigned to them. That is one of the reasons why enterprises attempt to obtain more money from the state for capital investments and for supplementing their circulating assets, without taking the necessary measures for their rational use. It sometimes happens that an enterprise purchases equipment for which it has no need, merely in order to have spent the means allocated to it.

As has already been said, the effectiveness of the use of production assets has recently declined in a number of branches of industry. It is most important, therefore, to interest enterprises in increasing their output and raising not only the sum total of their profits, but also the size of these profits per ruble of the production assets assigned to them. To do that it is necessary to introduce deductions in favor of the state budget from the profits of enterprises in proportion to the value of the fixed and circulating assets allocated to them, with these deductions being considered as payments for production assets.

The norms for payments for fixed assets and circulating assets will be established for a prolonged period of time - several years - so that a normally functioning enterprise will have profits left, after making its payments, for setting up incentive funds and for covering its planned expenses. Those enterprises which make better use of their fixed assets and circulating assets will retain more profits for setting up incentive funds, which will provide the necessary material encouragement for the best possible use of the nation's money allocated to the enterprise.

New machines, newly installed equipment, and shops and enterprises just put into operation cannot always produce their maximum effect immediately, and enterprises might experience certain financial difficulties in this connection. Therefore, it is proposed that payments for assets be made only after the end of the planned period envisaged for the full utilization of capacities.

It should be stressed that these payments are not proposed as additional contributions to the state budget over and above the payments which the enterprises are making now; the idea is to divert a considerable portion of the payments to the state budget through a new channel. In the future, payments for assets will become the most important part of the state's income, and the importance of other payments, including the turnover tax, will be correspondingly reduced.

It is also planned to introduce cost accounting on a broader scale into inter- enterprise relations. At present, the economic responsibility of an enterprise in its dealings with other enterprises is most inadequate. The contract has not as yet acquired the role it deserves in relations between enterprises.

It is proposed to increase the material responsibility of the enterprise or organization in cases of non-fulfillment of contract obligations for deliveries of goods so that, as a rule, the guilty party will make good any losses incurred. The responsibility of rail, water, road, and other transport organizations for delays in moving goods from enterprises and retarding their delivery to the customer is also being enhanced. It is also necessary that design organizations should be responsible for errors they make in projects, technical drawings and designs, where these errors lead to material losses and additional expenditures during the building of a project or while production is being mastered.

Introduction of the index of goods sold makes the position of the producing enterprises and the formation of their assets dependent on payments by customers. It goes without saying that every enterprise must itself bear full responsibility for making payments and for clearing accounts with suppliers on time. Cost-accounting relationships between enterprises demand that payment discipline be tightened. Simultaneously, the role of state credit in economic turnover must be intensified with the aim of guaranteeing uninterrupted clearance of accounts between suppliers and their customers.

On Measures to Increase the Material Interest of Personnel in improving the Work of Enterprises

At present, the incentives provided for production collectives and for individual workers to make them interested in improving the overall results of their enterprise's work are quite inadequate. Enterprises possess very limited opportunities for raising the remuneration of workers and employees from the sources of income created by the enterprise itself.

About 50 percent of the industrial enterprises do not possess funds created from their own profits, and in those cases where enterprises do possess them, these funds are very small and the sums paid out from them for encouraging workers are insignificant. Nearly every kind of bonus and other reward is paid out not from profits but from the wage fund. The achievements of the enterprise in increasing profits and the profitability of production do not have any direct effect on the earnings of the staff of the enterprise.

It is necessary to change this system in order to give the personnel a greater material interest. It is necessary to introduce a system under which the enterprise's opportunities for increasing the remuneration of its workers and employees would be determined, above all, by the growth of production, improved quality, increased profits, and greater profitability of production. The basic wages and salaries of workers and employees will continue to be raised by central impetus as before. At the same time, the enterprises must have at their disposal - in addition to the wage fund - their own source for rewarding personnel for individual achievements and high overall results of enterprise operations.

This source must be a part of the profit obtained by the enterprise. Out of this profit the enterprise will not only pay bonuses to its workers and employees for high work indices in the course of the year, but also a lump sum at the end of the year. In doing this the length of uninterrupted service of the individual at the enterprise will be taken into account, which will have a positive influence on the stabilization of staffs.

Under the existing system of material incentives, the enterprises are not interested in providing for the utmost utilization of their internal resources in their plans, since the entire appraisal of the enterprise's work and the system of material incentives for the personnel are mainly based on reward for over-fulfillment of the plan. Such a system encourages enterprises to strive for lower plan assignments in terms of volume of production, growth in labor productivity, and reduction of costs of production, and for higher assignments in terms of the wage fund, the number of workers, capital investments and material funds, so that it will be easier for them to over-fulfill the plan. This makes it more difficult to compile correct plans. How is this system to be changed?

A fund for the material stimulation of the personnel will be set up at each enterprise from the profits obtained by the enterprise. Allocations made to the material incentive fund should be made according to stable norms, established for a number of years and in such a manner as to ensure that the volume of the material incentive funds is dependent on an increase in the volume of goods sold or in profit and on the level of profitability envisaged by the plan. The sums for stimulating over-fulfillment of the plan will be relatively less than the sums paid for achievement of the planned indices. This will induce enterprises to disclose reserves in sufficient time and to agree to higher plan assignments.

The material incentive fund will also increase, depending on the share of new goods and on additional income derived by the enterprise from increases in the prices of its goods because of their higher quality. The enterprises will be interested in mastering the production of new goods as quickly as possible and in improving their quality.

Because the pattern of production, the cost of production, and the ratio between profit and wages are not the same in different branches, a differentiation is suggested in the norms for allocations to the incentive funds according to the branch of industry and, perhaps, according to separate groups of enterprises, with due account of the size of the wage funds.

A fund for financing social and cultural undertakings and housing construction must also be set up at enterprises. The means from this fund will go for new housing (over and above the central resources allocated for this purpose), for the building and upkeep of children's institutions, Young Pioneer camps, rest homes, sanatoriums, and for other socio-cultural needs.

Consequently, the better an enterprise functions, the more opportunities it will have not only for raising wages but also for improving the living conditions of its workers and for effectuating cultural and health- protection measures.

The proposed changes in the methods of planning and economic stimulation are not based on theoretical conclusions alone, but also on the results of practical experience that we have already obtained.

In 1964 and 1965, new methods of planning and economic stimulation were introduced in a number of enterprises of the garment, footwear and textile industries. The work of those enterprises was evaluated on the basis of the fulfillment of the plans for goods sold and profits.

A new system of bonus payments to managers, engineers, technicians and office workers was recently introduced at enterprises in a number of industrial branches. The system is aimed at raising the workers' interest in the growth of production and the quality of output. The first results available to us confirm the correctness of the road chosen. I would like to dwell in greater detail on one practical experiment involving the use of the new system. I shall speak about enterprises in the field of motor transport.

There are major shortcomings in the work of motor transport enterprises. About half of all runs are performed by empty trucks. The plans, of course, envisage annual assignments to reduce empty runs, to diminish maintenance costs, to increase loads carried by machines, etc. In practice, however, they yield little in the way of results. The motor transport organizations cite a host of arguments to prove the impossibility of fulfilling the plan quotas assigned to them.

Five months ago the Council of Ministers of the USSR charged the Labor and Wages Committee, together with the Moscow and Leningrad City Executive Committees, to introduce the new system of planning and economic stimulation in some motor transport organizations. The system was introduced in three Moscow and two Leningrad organizations. They were major organizations with different specialties - servicing construction, the trade network, industry, and inter-urban transport.

The economic independence of those organizations was expanded: they had a reduced number of plan indices assigned from above; they were granted major rights as regards the use of above-plan profits and savings in the wage fund for the material stimulation of their workers, for improvement of socio-cultural conditions, and for developing their production facilities.

The Presidium of the Council of Ministers of the USSR recently examined the first results of their work and heard the reports of the directors of two of the Moscow organizations. The first results of their work have shown that the introduction of the new system of planning and material stimulation yields a considerable effect. Having obtained major rights and opportunities, the collectives found ways to improve their work and to carry more cargo, above all by reducing empty runs. They expanded the circle of enterprises and organizations which they were servicing, considerably increased the quality of the services they provided, interested their clients in cutting down the time required for loading and unloading operations, improved the organization of repairs and maintenance, sold superfluous trucks and equipment, and discontinued the employment of superfluous personnel.

The new system of planning and economic stimulation increased the workers' interest in the results of their work. In the course of four months of work under the new conditions(May-August, 1965), empty runs were reduced by 15 percent, and the freight turnover rose by 34 percent as a result. Labor productivity went up by 31 percent and profits more than doubled, making it possible to raise the employees' wages. The profit for the five organizations over and above the planned level totaled 969,000 rubles in four months. As before, they transferred 40 percent of profits to the state budget, and the balance - over 550,000 rubles - was used for improving production and accumulating reserves, as well as for socio-cultural requirements and bonuses for personnel.

Of course, one can hardly expect the work of all motor transport organizations to improve immediately in exactly the same way.

Nevertheless, the results of the experiment speak for themselves. We cannot fail to see in them a new element that will yield important effects in other branches of the national economy, too.

The transition to new forms and methods of economic stimulation of industrial production demands the improvement of the system of price formation. Prices must increasingly reflect socially necessary outlays of labor, and they must cover production and turnover outlays and secure a profit for each normally functioning enterprise.

The existing neglect of economic methods in planning and managing the national economy, and the weakening of the system of cost accounting, are to a great extent connected with the considerable shortcomings in the system of price formation. If prices are not substantiated, then economic calculations lose their dependability, and this, in turn, encourages the adoption of subjective decisions.

Now, when wholesale prices are determined for industrial goods, it is becoming absolutely necessary to substantiate scientifically the level of profitability determined for the branches of industry. Normally functioning enterprises must obtain profits from the sale of their produce at wholesale prices; they must gain the opportunity to set up incentive funds and to dispose of the necessary means for expanding their activities, for paying for their fixed assets, and for making other contributions to the state budget.

Price must also play a major role in solving the problems connected with raising the quality of goods, with improving the length of service and reliability of goods. Thus, when prices are determined for new and improved articles, they must reflect the additional expenditures made by the manufacturers and the economic effect which the customers will get from using better goods. In such a situation, manufacturers will be more interested in improving their produce and it will be economically advantageous for consumers to employ such goods.

In the course of preparing for this Plenary Meeting, the Presidium of the CPSU Central Committee and the Council of Ministers of the USSR decided to set up a State Committee for Prices under the USSR State Planning Committee. This committee is entrusted with working out and presenting, by January 1, 1966, proposals relating to basic trends in the elaboration of wholesale prices for industrial goods, basing its decisions on the need to bring prices as close as possible to levels of socially necessary outlays of labor. These prices must guarantee the implementation of the planned measures for the improvement of planning and the economic stimulation of the enterprises.

Improvement of the system of price formation and of the methods of determining wholesale prices will help in improving the economic indices of the work of industry, in finding additional reserves, and in securing a systematic and constant reduction of the cost of industrial production. There can be no question but that retail prices can be revised only along the lines of reducing them.

Experience shows that the task of establishing wholesale price levels for all goods, and of preparing new price lists for all branches of industry, takes considerable time. It seems clear that it will be possible to introduce the new prices in 1967-1968.

At the same time, the State Planning Committee, the Ministry of Finance and the Committee for Prices will have to introduce - for those branches of industry where the transition to new forms of economic stimulation will take place at an earlier date - the necessary amendments in operating prices in order to eliminate unjustified differences in profitability.

Such are the basic features of the main proposals for improving planning and the stimulation of industrial production. The proposed system of planning and stimulation is also applicable, in its main features, to construction, railroad transport, and certain other branches of the national economy. But it must not be extended to those branches mechanically, without taking into account their specific economic features and the tasks facing them. Work in this direction will be carried out gradually ...

Source: Murray Yanowitch, ed., Contemporary Soviet Economics; a collection of readings from Soviet sources (White Plains: International Arts and Sciences Press, 1969), Vol. I, 105-121.