THE COST-PROFIT-OUTPUT RELATIONSHIP
IN A SOVIET INDUSTRIAL FIRM
H. E. RONIMMOIS
University of British Columbia
"Unity in substance, underlying many varieties of form, is not easy to detect."
Alfred Marshall, Principles, I, 1, 4.
THE interrelationship of costs of production, profit, and output of a firm is
a central problem of modern economic analysis. This problem has been so
far conceived and investigated chiefly for a free market economy. The corresponding analysis of the equilibrium of a firm under the conditions of perfect
and imperfect competition represents the first stage of what is known under
the name of "the theory of value." This analysis is a joint contribution of
economists of many countries and a cornerstone of modern economics.1
The parallel problem in a nationalized industry subject to complete government control (the problem of the interrelationship between controlled costs
of production, controlled profit, and planned output) has so far escaped the
attention of analytical economists.2 This gap in analysis is due partly to the
fact that the dogmatic treatment of central planning in the hands of political
writers has induced some authors to believe that central planning and nationalization succeed in abolishing this important problem altogether. Outputs are
believed to be determined by targets and hence to be independent of profit
considerations.3 In addition, some economists have been led to believe that the
tools of modern economic theory in general, and the intellectual apparatus of
the theory of value in particular, are inappropriate* for dealing with what are
1
T h e main points of this analysis may be found in Joan Robinson, The Economics of
Imperfect Competition (London, 1933); Edward Chamberlin, The Theory of Monopolistic
Competition
(Cambridge, 1933); Erich Schneider, Die Theorie der Produktion
(Yena,
1934); and H. von Stackelberg, Marktform und Gleichgewicht
(Yena, 1934).
2
Writers on "competitive socialism" such as O. Lange, On the Economic Theory of
Socialism (Minneapolis, 1938), A. Lerner, The Economics of Control ( N e w York, 1944),
and others, have been concerned in their analysis with various aspects of incomplete control
rather than with the extreme case of complete control which underlies the present form
of Soviet industrial policy.
3
"An essential difference between Soviet economy and the capitalist economies of other
countries is that the maximization of profit by the individual firm or business man is no
longer the decisive factor in determining . . . output . . . and the direction and volume of
sales. What is determined elsewhere by the separate decisions of thousands of autonomous
entrepreneurs is determined in Soviet economy by a single co-ordinated complex of
decisions which constitutes the economic plan." Maurice Dobb, Soviet Planning and
Labour in Peace and War (London, 1942), 9. "Expropriation . . . has made possible the
ending of social dependence upon the profit-making motive as a stimulus to productive
effort." Harold Laski, Reflections on the Revolution of Our Time ( N e w York, 1943), 48.
4
"Looking to traditional economic teaching for some light on planning problems, Mr. Dobb
finds little to help him. Economic theory may be roughly divided into two parts—a static
. . . and a dynamic. . . . Neither is of much application to the questions at issue." Joan
Robinson, in Soviet Studies, I, 1949, 60. The distinguished author of The Economics of
Imperfect Competition appears to be misled by Mr. Dobb's presentation of the Soviet
planning which, she claims, exposes "the hollowness of theoretical economics." Ibid., 63.
Compare also J. R. Hicks' statement, "The State is a very incalculable economic unit, so
that the extent to which its activities can be allowed for in economic theory is somewhat
limited." Value and Capital (Oxford, 1939), 99-100.
173
Vol. XVIII, no. 2, May, 1952
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174
The Canadian Journal of Economics and Political Science
believed to be problems of administration rather than economic problems
proper.
In this article, which deals with production in a Soviet firm/' an attempt is
made to prove that both these limitations of economic analysis of production
in a nationalized and completely controlled firm have been accepted too
hastily. Central planning and nationalization do not remove the problem of
trie cost-profit-output relationship; and economic theory is entirely adequate
to explain the new form of this relationship. Let us inquire first into the
Soviet attempt to control the cost-profit-output relationship in an industrial
firm, and let us then describe the actual form of this relationship.
II
Soviet authorities attempt to control production in a firm by setting up
targets for all the main elements of exchange implied in this production, i.e. by
attempting to control supply, demand, prices, costs of production, and profit.6
Diagram 1 displays the chief targets set up for a Soviet firm. The output
of a firm is controlled by two value-targets.' One is fixed in terms of the
Y
De
rice
u
f)«,
AC11
AC11
kt
AC1
a.
AC0
r\
Output
DIAGRAM
1
1926-7 (i.e. constant) prices for the aggregate output of a firm. This target
fails to distinguish between finished and unfinished production. The other
target was introduced as recently as 1940, in an attempt to secure a better
5
It is hoped that a second article which extends economic analysis to Soviet industry
as a whole will be published soon. All references to Russian sources in these articles are
presented in English translation.
e
G. Sorokin, in The Socialist Planning of the Soviet National Economy (Moscow, 1946),
66, enumerates the following individual targets of a Five Year Plan: the gross output, the
market output, output of various articles in natural units, capital repairs, reinvestments
and new investments, full own price (planned costs of production), productivity of labour,
cost-reduction, profits, procurement of materials and fuel, the budget of revenue and
expenditure, the wage fund, and the aggregate number of workers. Apart from these targets
of the Five Year Plan, ministries fix a number of standard rates for technical consumption
of materials and fuel, stocks of materials, outputs per man, etc.
7
I n addition to these two targets, output of some important articles such as coal, crude oil,
iron, steel, and some others is also planned in natural units.
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A Soviet Industrial
Firm
175
proportion of finished articles in the firm's aggregate output. This target is
established in terms of current prices, and is referred to as a target of "market
output." For multi-product firms such targets are set by the ministry concerned for each of the articles which they produce (the so-called assortment
programmes). Demand for factors of production is controlled by setting up
technological standards for the industrial consumption of fuel and materials
per unit of output; by planning the aggregate wage fund and the average
number of workers; and by setting up targets for the productivity of labour.
The price of the market output is controlled by fixing the so-called transfer
price (otpusknaja tsena), marked P in the diagram, at which the firm sells
its produce to other firms. The same transfer prices are fixed for the entire
territory of the U.S.S.R. for articles whose costs of production do not vary
much from one firm to another and whose transport costs are an insignificant
proportion of aggregate costs. For other articles, transfer prices as well as
retail prices are fixed by regions (the zone prices). 8 Whether a transfer price
is a uniform or a zone price, it is for every firm a parametric quantity independent of output; the demand curve for the product of the firm is assumed,
therefore, to be a straight line parallel to the X-axis.
Profits of a firm are controlled by including in each transfer-price a profit
margin determined as a percentage of the planned costs of production of the
article concerned. These profit margins, called "planned profits," are shown
on the above diagram by R = P — AC11. The rates of planned profits, fixed
by the authorities for each article, range from a low percentage to 32 per cent
of the planned costs of production of the article. Since 1936 planned profits
have been established also for the products of heavy industry. Prior to this
date, only light industry was planned to work at a profit; heavy industry was
sometimes planned even at a loss so as to "cheapen" the raw materials of the
light industry, and consequently reduce the cost of the finished products.
Costs of production of an article are controlled in three main stages: to the
targets for costs of production proper are added the turnover tax and the
deductions from profits or the profit tax. These three elements of planned
costs are shown in the above diagram by the curves marked AC. The first
element of planned costs of each industrial article is the sum of two separate
cost targets. In the Soviet literature one of these targets is called "the factory's
own price," and the other "commercial costs." Their sum, known in Soviet
sources as the "industry's full own price," is the basic cost target in the Soviet
industrial planning. It is represented in our diagram by AC1. "The factory's
own price," marked AC on the above diagram, represents average planned
costs of production of a firm, and includes planned expenditure per unit of
output on such items as raw materials, fuel, power, wages, and sinking fund.
"Average" refers, however, neither to any particular firm, nor to all individual
firms of a particular industry, but to the group of firms regarded by authorities
as representative for the industry concerned. The "commercial costs," represented on the diagram by the discrepancy between the curves AC0 and AC1,
include average planned costs of transportation, economic administration, and
training of labour; in short, all costs which are not directly associated with
8
Sh. Y. Turetzki, The Industry's Costs of Production and the Problem of Price Determination (Moscow, 1940), 125 ff.
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176
The Canadian Journal of Economics and Political Science
production in factories. These costs are estimated by the Soviet writers to
amount to 5 or 6 per cent of the factory's own price.
In addition to "the industry's full own price," Soviet authorities set up also
two rates of taxes per unit of output. One of them, the main source of the
Soviet budgetary revenue, is known as the turnover tax. Rates of this tax (Rtt
on the diagram) are fixed as percentages of the transfer price, 9 and amount to
70 to 80 per cent of this price. The other tax, second in importance as a source
of the Soviet budgetary revenue, is called the deductions from profit. The rates
of this tax (Rf in the diagram) are fixed as percentages not of the transfer price,
but of the planned profits (R). Planned average costs per unit of output are
raised by these taxes from AC1 to ACn and finally to AC111.
The central economic problem implied in Soviet over-all planning procedure
is this: how does this targeting influence the nature of the actual cost-profitoutput relationship in Soviet firms? Soviet writers avoid this important question,
and direct all their attention instead to a less important side issue; to the
planned, not the actual, relationship between costs of production targets,
profit targets, and output targets. Soviet answers to this latter issue have been
given in the form of the "dogma of the plan,"' and in the formula of industrial
management known as "the Khozrachet system."10 All targets of the plan are
claimed by the Soviet dogma to be orders by the Soviet government and even
laws. 11 The relationship among planned costs, planned profits, and planned
output is claimed, accordingly, to be an administrative one. Managers are
expected to carry out all these orders, and the result is thought to be guaranteed by the peculiarly constructed "Khozrachet system"12 of management.
This system is modelled on an individual manager, who is required to keep
a separate balance sheet and to observe, at the same time, a set of compulsory
targets. The essence of the Khozrachet formula is that a manager must fulfil
all targets, and is even permitted to overfulfil some targets if he can do so,
but may not have any target unfulfilled, even if that might increase his
profits or contribute to overfulfilment of other targets. 13
The conclusion of most Soviet authorities is that the Khozrachet formula
does guarantee in actual production what it implies in Soviet dogma, that
the cost-profit-output relationship is really plan-determined, and that the
profit mechanism is actually absent,14 save possibly in exceptional cases of
overfulfilment of targets. This conclusion is reached by transferring a statement, which is valid for the sphere of planned interrelationships, to quite
9
Cf. National Income of the Soviet Union, ed. Prof. D . I. Chernomordik (Moscow and
Leningrad, 1939), 84 ff.
10
The name of this system constitutes an abbreviation from the Russian term for "economic accounting," khozaistvennyi
racket.
11
The conception of the plan-as-an-order was developed by the Stalinist fraction of the
Russian Bolshevist Party in contrast to the conception of the plan-as-a-prediction which
was put forward by a great number of Soviet economists who were subsequently removed
from responsible positions.
12
G. Kozlow, The Khozrachet System in the Socialist Society (Moscow, 1945).
18
It may be of some interest to point out that the logic of wartime control induced the
German Government to resort to a similar formula.
14
"The development of production in the Soviet Union is subject not to the principle
of . . . the guarantee of capital profit, but to the principle of planned management and a
systematic elevation of the material and cultural welfare of the workers." Problems of
Leninism (10th Russian ed., Moscow), 397.
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A Soviet Industrial Firm.
177
another sphere—that of actual costs, actual profits, and actual outputs—where
it is entirely erroneous. Such a mechanical procedure is clearly unwarranted.
It rests partly upon a dogmatically biased error of judgment of some writers,
and partly upon the deliberate desire of intellectuals to accommodate themselves to the Communist dogma. This procedure is responsible for the current
fairy-tale picture of Soviet economic life, in which official expectations are
systematically mistaken for facts.15
Ill
The basic question, "How does over-all planning influence the relationship
between actual costs, actual profits, and actual output?" accordingly has not
been answered by Soviet and Communist writers. This important problem is
closely associated with the phenomenon of deviations from targets. Even a
casual view of Soviet industrial production indicates that the neat pattern
of firms' targets does not reflect the actual production in a Soviet firm. The
presence of unpredicted developments in Soviet firms may be exemplified by
the following data. Demand targets and technological consumption standards
are frequently exceeded. A Soviet writer reports that in 1940 as many as
15,000,000 metres of cotton fabrics were not produced because the corresponding amount of cotton was squandered during the production process.16
Baykov points out that the average wage was in 1932 and 1937, 1,427 Rbl.
and 3,038 Rbl. respectively as compared with the wage targets of these years
of 994 Rbl. and 1,755 Rbl.17 Productivity of labour does not increase according
to plans.
The cost targets are ignored as a rule rather than as an exception. In the
Stalingrad tractor factory, costs of a caterpillar tractor exceeded target costs
by 4,000 Rbl. and those of the wheel tractors were twice as high as planned.
The cost reduction plans usually remain unfulfilled. The actual profit margins
deviate as a rule from planned profits, the difference being called "unplanned
profit or loss."
Outputs of individual articles usually diverge widely from planned outputs.
This happens especially in multiproduct firms such as those of the Soviet
textile industry, which leave their assortment plans unfulfilled. In the words of
a Soviet writer, Soviet managers "fraudulently disregard the sets of targets
fixed by Soviet authorities by producing more articles, the prices of which
have been fixed too high, and abstain from producing articles the prices
for which happened to be too low."18 This widespread deviation from target
outputs is concealed by the statistical formula, which computes percentages
for plan fulfilment not for individual articles, but for the output of a firm in
general.
15
The problem involved here is that of the chasm between the intellectual construction
and the actual life, between an Utopian ideal and a sombre reality. Whereas hundreds of
millions of Soviet citizens, and people dominated by the Soviet authorities, regard the
reality as the characteristic feature of Soviet economic life, Soviet writers and a few
intellectuals in the West treat the Soviet dogma of planning as if it were realized.
18
A. A. Yotkovsky, Production and Procurement in an Industrial Firm (Moscow, 1941),
33.
17
A. Baykov, The Development of the Soviet Economic System (New York, 1946), 344.
18
Sh. Y. Turetzki, The Industry's Costs of Production.
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178
The Canadian Journal of Economics and Political Science
In other words, in the allegedly controlled Soviet firms, deviations from
targets are frequent, and it is the task of an economist to attempt to indicate
the logic as well as the implications of all these unpredicted developments.
On the one hand the explanation of this problem is of considerable theoretical importance; on the other it gives an insight into the daily routine of
the Soviet economic administration and its struggle with the threatening chaos.
Soviet authorities appear to be losing ground in combating some of the unpredicted developments in their firms, and have been in fact forced to retreat
from some of their original positions. As we will see below, in the Soviet textile
industry, for example, the percentage formula for the turnover tax was abandoned in 1939,19 and this tax is now drawn into the budget in the form of the
so-called "budgetary difference."20
A considerable proportion of all unpredicted developments in a Soviet
firm results from the influence of other firms, and the decisions of planning
authorities, but these matters will be discussed in another article. Other unpredicted developments result from interactions within the firm. The main
elements of this process of interaction are unplanned costs of production,
unplanned profits, and unplanned outputs.
The general short-run view of the entire problem can be described, for a
single-product firm and under static conditions, with the assistance of diagram
2. The nature of the Soviet basic cost target AC1, the planned average costs
/NIC
/4
*
^y '*3
^ ~ * ™ _ _ — ••"
b.
AC™
-AC2
ACE
'AC,
AC*
Q
Q
4
Q
Q
3
Q
2
Q
1
0ut
Put
DIAGRAM 2
of production for a group of firms, makes it inevitable that the actual costs
incurred in any particular firm diverge from cost targets. AC1 and ACi may,
therefore, coincide for some outputs and in a very few firms only. In the
majority of firms, actual costs either exceed the cost target (as does curve 6)
19
K. N. Plotnikov, The Budget of the Socialist State (Moscow, 1948), 184-6.
"Budgetary difference" constitutes the difference between the price fixed for textile
articles, and the sum of the actual costs of production of these articles plus planned profits.
20
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A Soviet Industrial
Firm
179
for all relevant outputs, or fall short of it (as curve a) for the target output
or any part of it.
Since the turnover tax and the profit tax are both independent of output,
the deviation of the actual costs from the planned costs of production affects
profits. Planned profits, therefore, are realized in exceptional cases only, and
Soviet firms as a rule earn either positive or negative unplanned profits. Unplanned profits, measured by the deviation of the curve AC3 from the curve
AC111, are thus reflections of the deviations from basic cost targets; and it
remains now to follow the impact of such deviations in costs, through those
of profits, upon outputs. The explanation of this impact requires the use of the
MC curve, assumed to be derived from ACS; of some output targets (Qx, Q2,
Q.,, or Q4) on either side of the maximum profit output (OM); and a new
concept, to be used for measuring profit incentives in Soviet firms. This concept, to be denoted E(x) or simply E, is defined as the ratio of marginal
profits to price, and may be written a s £ ( x ) = 1 — MC/P where x and MC
denote output and marginal costs respectively, and P denotes the fixed price
of the product. 21 This concept constitutes a sort of "profit meter" being positive
for a range of outputs less than the profit maximizing output and negative
for all outputs which are greater. E changes its value with (1) the extent to
which output diverges from the profit maximizing output ( E for Q1 and Qt
exceeds that for Q2 and Q3 respectively), with (2) the steepness of the cost
curve (E changes more rapidly for steeply rising costs than for less steeply
rising costs), and with (3) the extent to which firms' costs deviate from the
cost target (E is higher for the firm with the cost curve a than for a firm
which works at planned costs).
The profit meter may be taken to measure, ceteris paribus, the incentives
for the Soviet managers to diverge from their output targets. That is so
because part of a firm's profit is paid as bonuses through the so-called director's
fund to the manager, who accordingly is personally interested in maximizing
the aggregate profit of his firm. Another part of a firm's profit constitutes the
source of additional working capital, and that also makes the manager professionally interested in maximizing the aggregate profit of his firm. For the
target outputs Q1 and Q2 which exceed the maximum profit output M the
profit meter shows a negative E and the manager feels an incentive to produce
less than planned. For target outputs Q, and Q4 which fall short of the
maximum profit output M, E is positive and the manager feels an incentive
to exceed the target. In both cases the incentive is stronger for targets
Qx and @4 which miss the ideal output by a wide margin and for firms with
steeply rising costs.
It seems, at first sight, that deviations from profit maximizing outputs might
cancel for a great number of firms, and thus the national output target be
21
Total profit R(x) may be expressed as R(x)=Px—C(x)
costs. It follows that
where C(x) represents total
dx
and hence
1 dR(x)
r,. ,
= E (x) = 1
P dx
'
MC
P
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180
The Canadian Journal of Economics and Political Science
fulfilled. However, this does not happen at the present stage of the Soviet
policy. The vigorous drive for increased output leads to the setting of targets
above profit maximizing outputs, and thus outputs tend to fall short of targets.
This important tendency in Soviet firms is brought about by managers who
ignore the rigid rules of the Khozrachet and turn it, illegally, into a variant
of the profit mechanism.
The above tendency occurs particularly in the multi-product firms. In such
firms the values of E for the separate products of a firm differ as a rule from
one another at the respective target outputs. This happens for a number of
reasons, but particularly because output targets of individual articles diverge
from the respective maximum profit outputs in very different proportions.
These differences in £ reflect differences in the profit incentives of managers.
Increasing the output of articles with larger positive E at target output at
the expense of products with smaller or with negative E tends to increase the
profits of the firm. Because the Soviet pricing policy is likely to favour some
articles more than others, there is no likelihood that the conflicting tendencies
toward underfulfilment and overfulfilment would neutralize one another,
even if the annual production were to increase at a less rapid rate than in
the last few years. Consequently, in multi-product firms, assortment plans are
likely to be ignored primarily on profit considerations. Articles with "high"
prices are likely to be "over-produced" and those with "low" prices "underproduced."
It remains to be shown that the Soviet managers actually do follow the
profit incentives registered by the respective profit meters. Soviet sources
provide ample information on this point. Soviet Finances, one of the leading
Soviet economic magazines, provides this example of the effect of profit upon
assortment plans in two firms which are described as "similar in all respects."2*
The firms "Lenskaya" and "The Xth Anniversary of the Red Army," both in
Pavlovsky Posad, Moscow Province, ended the year 1943 with the following
different results. Whereas the first firm exceeded its output target by 133.58
per cent, and reduced costs by over half a million roubles, its profit was 18
per cent below the target figure. The second firm, on the other hand, earned
322.8 per cent excess profits, though its output target remained unfulfilled by
17.8 per cent. The writer of the article, E. Liberman, explains this result by
the fact that the manager of the first firm went on producing high quality and
high cost cloth, prices of which were low relative to costs, whereas the manager
of the second firm produced low quality, high priced rags, to an amount 299
per cent in excess of the target, and left a proportion of high quality cloth
unproduced.
As we will see in a moment, the manager of the second firm is the typical
case in Soviet industry. The profit-seeking policies of such managers have
become a threat to the whole Soviet policy of planning, particularly in such
multi-product industries as the textile, shoe, and food industries, which provide
the Soviet state budget with a considerable proportion of its revenue from the
turnover tax. In all these industries, the rigid percentage rates of the turnover
tax caused actual profit rates to vary widely from one article to another,
and created ample incentives for managers to diverge from the prescribed
22
Soviet Finances, 1945, no. 12, 8 ff.
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A Soviet Industrial
Firm
181
sets of targets. 23 In 1939, Soviet authorities came to realize that the main
cause of wide differences in the profit rates of individual articles, and thus
of the unplanned losses of many firms, was the rigidity of the percentage
formula of the turnover tax. Hence, in the textile and food industries they
substituted the residual budgetary difference formula for the percentage
formula of the turnover tax. Whatever the other effects of this experiment, it
did not remove variations in rates of planned profit after tax, and thus did not
remove completely the incentives to diverge from assortment targets. To what
degree the illegal profit considerations of managers interfere with the production plans of the Gosplan may be gathered from the following pronouncement of a leading politician of a Soviet Republic: "The chief fault in the
work of industry as a whole was that a number of ministries, which successfully completed the 1947 Plan for gross production, failed to give the assortments demanded by the Plan."2i Consequently, the profit mechanism, though
allegedly abandoned, permeates the Soviet economy and forces Soviet authorities to realize that His Majesty Profit was not, after all, assassinated in 1917.
IV
These observations on the nature of the cost-profit-output relationship under
complete planning lead to several general conclusions. The attitude of the
Soviet authorities towards the cost-profit-output relationship under complete
planning has been that of dogmatic dreamers rather than of industrial experts.
It was believed that profit is a function of private ownership and that the
abolition of private ownership of the means of production would eliminate
profit. On the other hand, it was believed that complete control or central
planning is a function of public ownership and would be achieved automatically once industry was nationalized. In short, nationalization of industry
would substitute complete control for the profit mechanism. However, the
Soviet experiment has proved these beliefs to be unfounded.
First, profit appears to be not a function of private ownership, but a
category of exchange. It reappears in all forms of exchange however these may
be controlled. What changes the degree of control over exchange, is merely
the form of the profit mechanism. Second, complete control appears not to
be an inevitable function of public ownership, because nationalized industry
23
A recent Soviet source, K. N. Plotnikov, The Budget of the Socialist State, 184-5,
shows that in one particular textile mill, the Second Serpukhovskaya, profit rates of
individual articles varied during the first quarter of 1937 from —8.47 per cent to + 5 6 . 5 3
per cent as follows:
Individual articles
Rates of earned profit
Article I
-8.47%
Article II
-0.29%
Article III
+6.57%
Article IV
+37.10%
Article V
+56.53%
Professor Plotnikov points out further that in the Soviet linen industry profit rates actually
earned varied for individual articles from zero up to 46 per cent. In the Soviet woollencloth industry profit rates varied from 15 per cent to 50 per cent, and in the fur-coat
industry from 6 per cent to 94 per cent. Plotnikov admits that these widely diverging
profit rates caused some firms to work at a loss and induced managers to ignore both the
Khozrachet formula and the assortment targets of the firms concerned.
24
T. K. Lebedev, Secretary of the Central Committee of the Latvian Communist Party,
on the Plenary Meeting of this Committee held in January, 1948.
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182
The Canadian Journal of Economics and Political Science
may be subjected to widely differing degrees of control, from central planning on the one hand, to the system known as "competitive socialism" on the
other. In short, nationalization of industry in the Soviet Union did not substitute complete control for the profit mechanism, but changed the form of the
profit mechanism by subjecting it to some state control. Soviet writers exaggerate what are basically differences in the degree of control over profit
mechanism, into a difference in kind between a profit mechanism not subjected to planning, and a central planning which has retained no profit
mechanism.
Once the Soviet authorities realized that their hope of destroying the profit
mechanism through nationalization was vain, they set out to harness this
mechanism to planned production. They hope now that by establishing "right
prices" and "right profit rates" they can reinstate profit as an incentive to the
fulfilment of their plans and also as an incentive to maintaining the planned
proportions between all elements of production.
The formula developed for this purpose, the Khozrachel, has thus become
a one-way profit mechanism. Profit incentive is permitted to induce managers
to fulfil and even to overfulfil output targets, but is prevented from inducing
them to achieve this aim at the expense of having some output targets unfulfilled. This mechanism is supposed to work partly through the policy of
deriving additional working capital from net profits of the firm concerned
and, more recently, also through the so-called "director's fund" which is
derived from 2 per cent of planned profits and from 50-75 per cent of unplanned profits,*5 and a proportion of which is reserved for bonuses to
managers and their technical assistants for fulfilling and overfulfilling their
output targets. The personal interest of managers in profit was recently made
an integral part of the policy of production incentives in Soviet production.
"The Fourth FYP aims at stressing the importance of profit. We are concerned here not with the efficiency alone, nor with the amount of profit alone.
The question has been put in a much more general way. We are concerned
with raising the role of profit as an incentive of increased production."26
Soviet authorities, it seems, have adopted the slogan "he Roi est mort. Vive
le Roil"
Even the reduced hopes of the Soviet authorities in regard to profit appear
too high. Soviet authorities have set themselves an impossible task. There
can be no "right" targets in the sense that profit incentives (E) become zero
at these targets and thus induce managers to reach all targets and maintain
planned proportions. 27 Accordingly, there will always be incentives to deviate
from targets 28 and, in consequence, incentives to increase profit by producing
some articles at the expense of others. The temptation, therefore, will always
be present to disregard the one-way rule of the official profit mechanism,
^ T h e undifferentiated rate of 2 per cent for all firms was abolished in 1946, and
higher rates of 4 per cent were fixed for various heavy industries. The 2 per cent rate was
retained in the light industry only. This change shows that now also the Soviet heavy
industry, where profits used to be lower than elsewhere, is subjected to the profit-incentive.
J6
Professor N. Rovinskii in Soviet Finances, 1946, no. 12, 1 and 7.
27
This is so because uncertainty cannot be eliminated from the technical process of
production and hence, from cost formation.
28
"In any type of society uncertainty is likely to produce 'planlessness,'" Hicks, Value
and Capital, 139.
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A Soviet Industrial
Firm
183
and to turn the Khozrachet into a semblance of the traditional two-way profit
mechanism. The majority of the Soviet managers of today have yielded to
this temptation. The Khozrachet formula is ignored to such an extent as to
constitute the exception rather than the rule, and to induce one Soviet writer
to ask whether the Khozrachet system is a real system of management, or
merely an illusion!29 Apparently, the profit mechanism cannot be harnessed
by complete control of managers; and the ignoring of targets because of profit
considerations must be regarded as a constitutional feature of the Utopian
policy of complete control and central planning.
The full implications of this conclusion appear at the level of the industry
rather than the firm, and are not discussed in this article, but the above
observations suggest that the cost-profit-output relationship under Soviet conditions of control can be explained most readily by extending equilibrium
analysis, and the theory of value in general, to Soviet controlled production.
29
We refer to the article "Khozrachet—Real or Imaginary?" in Soviet
no. 12, 20.
Finances,
1945,
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available at https:/www.cambridge.org/core/terms. https://doi.org/10.1017/S0315489000008434