MR. KHRUSHCHEV'S SECRET SPEECH (IP 557)

Created: 9/19/1957

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forcedfr'jtr3*l1i virtuallyarbines to plan all the details of iba vorld's second, largest eccac fron Mosoov. Aa tba ecaplexity and else of tha ccnaney increaaaa there Is an erer growing need toharper distinction, between, those decisions vhioh pertain to detail end those decisions which determine basic policy, end having drawn the distinction* to delegate power todecisions about detail far core widely than in Stalin'sare inrowing recognition among Soviet economic administrators that tha measures of ecocoaic activity need la that day to day operation of the econowy are too crude end bars bcccsB too nsaaaroua. Spring anat of atalla'a life there waa each jnatiffeatton for trying to sEaaura everything ia pbyaleal unite wbCa caoatantly erpandlng the craber of coBtplex end Qualitative sssasures at aecoatlc activity tar which tha plant Danoger cant bo responsible. Btalln'slp^str^tlcQi, like hla political edninlatratlisx, mmiSSfA the stick at the eae-nse of the carrot end pUood very narrow Halts upon the exercise of initiative at tha lever levels. She post-Stalin leadership haa been reasonably consistent ln otters/ting to encourage laltlatlTo, giro it aece room in which to work, and to push coercion Into the beckgroand vhile increasingancentives to workers, peasants, aod BtttaBBfc

t lihese cbsagae in attitudeethod* of oyexatloa at tha official level* there havo been see* faint stirrings among academic econeedete of tha need for *ora econoaio dtoojcracy in tbo distribution of the ecoaauia product enong varioae sociallscue alone enong theconaalsts hars centered sxoend the functions of tha various pricing system end tha conaeouences of pricing probleas. Official circles have given little or no hint of their attitude as yet but icportant problems of price policy arising fron the reorganisation of econcealo administration will necessitate an official reviev of priceayntcn* snd price policies la the near future.

Tha new scheme far rogioual adBlnlstratlon of tho economyemarkably bare skalston at this point. It Is Intended to eliminate

exceoolvo cpntrelliation, simplify operational procedures, and encourage initiative. But there aeeme to hare been very little thought of exactly bow tba new regional syaten is going to do theoo things.

exactly vbat cbangna In procedure will take place, what villwhat caahlned and einpllf led, end so on. It lato exwln* the principal problens areaa ofwhich asca to bo faolngB acoeony at threeplant nenager, tha now eeaiicdc council, end finally, thaorgans. Iho problss areas are eore" oooeon tolevels of adalnlstralion, but are partioulaxly acute foraaniefpara and the regional eccocadc councils. Tirot, thereprobloae of tha manure*fe^"

prinoipel enphnets ba placed upon antlnlstng the growth of output In teres of physical quantltloa, in Tslue teres, or on the growth of labor productivity, or cat reduction in produotion costs, or upon technological progress! Secondly, thererying need for acre realistic planning i how to Insure that the over-all plans are consistent vlth the resource*labor, neterlsls, capital eoulpnentactually availsbloT thirdly, eaasgarlal Initiative should be encouraged with aore flexible pricing polloles end rare liberal distribution of profits, finally, there is the general problem of extending the deeds ton. apjnapes authority at the lower echelons, but particularly in regard to the level of iarestorlas, wage polloles, and housing far plant

ibe objeotiv* of thla paper Is to outline acaei ajwdflc aolutlcam to these problsas at all three levsls of eooncentc ndntni straticn.

The Soviet plant lAnagCT la bedeviled by cueeroua criteria vhioh hla performance muat satisfy. Sow of tbeae criteria are very crude, some areplex, and ln practice all are often nutually Inooo-aioteat. apitalist manager whoae primary reepooaibiilty ia torofit, tha primary obligation of tba Soviet manager historically baa been to fulfill the plan for output in tone (or units) of his priority product (or {vodaota). As the economy baa grown ln also aad complexity other criteria havo increased, in importance* Ho Is also expected to fulfill his alas in terms of value of production, and If heonus froa higher anthoritias, to exceed the plan for gross value of production, (treat pressure Is exerted to reduce production coats, the extent to vhioh tbe manager succeeds in meeting tho target for cutting coats usually aetandatag succeea or failure of the profits plan which la turn dateradtnee how much, prof its vial ba retained by tho pleat for boaaaea and vuxkar emcnltiee* Aa labor haa beeoae scarce ln recent yeare the emphasis placed upon meeting tbe planned goals for labor productivity baa increased. Ssrgeta forftayrov-Pd Quality of product alaa hove been added te the army goals which tbe manager must attempt to reach.

ta addition to this welter of criteria, tha manager la often tba

victim of certain Institutional psaatteoa aad mantel habits of tha higher authorities. The manager constantlyhat tb* higher authorities bare revised hi* production plan upward with, loo*repertloaste increase la input a, or they have reduced his alloratlooji of material vtthout on eeuol roauction In hla outputnother practice is to reduce pleat Inventories of acarco materials below the rdntnia level to cope with ncraal supply coatinficociea. ToWitiaa in Koscow all this xapreaeata tha IrgltTrmta aad neaeeaary "aibilitatlcn of intaranl reservae". She aaxagur* viae it somewhat differently.

Ins varioua criteria Imposed upon tbe managers often are conflicting-It ie not nanaualroduct that is difficult to produce toover rata of profit than one that la eaaiar to produce, fa order to fulfill the plan* for cost redaction and profit the manager ia tempted

to overfulfHI tho plan for tho easier product although this usually means that output of the product which ia mora difficult to produce will fall abort of tba goal. In this case tha paonger will be rewarded for doing veil on the basis of tbo financial criteria but at the same time censured because tho final product mix (la physical units) diffored frcra ths plan. Another source of managerial unhapplneaa with tho present system is the vide discrepancies between tho labor Inputs and tho prices of various commodities. Many monagcra feel thatarxist economy the prlcoa of varioua products shouldloae correlation vith tho laborn tbe products.

umber of things which oould ba done to simplify tbe criteria, remove tbe worat conflicte, and make tha whole system of economic accounting promote mora afflctent use of resources. First, tbe overall performance of tba lndlvldunl plant should be evaluated primarily on the boatslngle criterion. Other laeaauros of plant output end efficiency should be collected primarily for informational purposes. Tho moat logical alngle criterion lo labor productivity defined as the ratio of labor inputs to the net product of the plant. All other criteria should be subordinated to this and tha plant accounting aye tea should be reformed ao that the aauagcra and officials of tho ccocaaio councils vill bo provided vlth tha appropriate data.

For planning and accounting purposes output goals for the plant underegime would not be statedas at presentin terms of gross value and In termsist of products In physical units, but rather solely in terms of nethe sun of wages, amortization and profits. Labor productivity voold be determined analogously to presentividing net product by the nnaber of man boure expended in produotion. do managere1 Job would be to nrrlmlre the growth of labor productivity. Orowth of labor productivity would be tha primary basis for planning, for Judging the performance of each plant, sad for paying bonuses to the assagai's, engineers, and technical personnel, and leading workers.

Corresponding change* la pricing policy will be neceaaary if prices are to reflect the aortally necessary amount of labor tine required to prodnxeeach product. Tha point of departure for setting the price of ana product relative to all others should bs tha veins of tha wages paid in producing it. lOrns the priceachine tool compered to the pricerunk flhTHld be determined primarily by tbe relative value of tho waga payments required to produce then-

Tha rste> of profit should reflect thaaoorotty. and banco tha snoust of labor time that can justifiablysllrveifWL to tha produotion of varioua products. Qadar th* present system the central planners often dnolda thatigher production priority than product b, and order tho plant manager toather than b. As often aa not, however, the profit rate ona lower than on product B- The nanagere find themselves In tho unenviable position of being told to modify their production programanner that threaten* their value of production end profit plana, and nance threatens their bonuses as well as housing and cultural amenities for the workers. And the prioofl of various productsoat unroll able measure of their relative scarcity. Many examples of this sort of thing appear In Soviet literature.

Apparently It Is quits ccaoon place for the Ministry of TTado to request that tho output ofe Increased in response to growing conouaer dirwinds without regard to the fact that the profit margin in the wholeasle price ofay be ranch lower than for

product Y- An example of tola oort of thing in heavy Industry on an induotry wide baaio is provided by the coal Industry during the last three years- It aeems that beginning. tba central planners discovered that they bad grossly underestimated coal requirements and Increased the produotlon plana accordingly. Resource allocations, however, were not Increased accordingly and the strain on the coal Industry to meet the production goals vas reflected in rising coats, snd hence In lowered profit rates because wholesale prloee were held at the aaaa level. 6 amen cool was in the extlaaely abort supply tha production of coal became unprofitable? aa*^aw>*Toe the petroleua industry was not only exceeding production, goals out va* evenurplus for export- But the profit margin continued quite high. Obviously the price of coal relative to the price of petroleum provided no reasonable guide to tba social value of tbe labor expended In the production of each- Furthermore, the managers ln the coal Industry could not be said to be working baaa efficiently than their brothsra In the petroleum Indnatry, considering what was being demanded of tho aool industry and tbe inadequate resources alio cubed to It.

Such anomalies would he eliminatedrice eyataai based, prlraxily upon, tba value of labor inputs into production with frequent afljaajtejejl in tha rata of profit to reflect tbe relative scarcity of varioua goods in the economy. This pricing policy would also eliminate the unjust burden and loae of material zewarda to the saaiagara and vrndosrs cenght In th* eejjBeze between changing priori ties without corresponding changes Inhich le so chmrmcterlstlo of tbe present eyatem.

Another desirable change would be toora realistic sdjuetment to the fact that the coat ofarticular product variaa widely among Individual plants. Whenalfora wholesale prloe tbenTvrr* currently use tha average costuaber of mora eificirnt planta vhoee coat* ore belov tha everoga coat of all planta prwrfnning tho product, tbla la unreeliatia #sl placea aa nnjnit burden upon the renagera who cmerate technologically baakaard. planta and who really cannot cut their coat* to tb* level of tha plants with new technology. Consequently, Industrial proflta almost tnvnricMy fall veil abort of tbo planreat deal of useless tension Is created. Simply shifting the basis for price setting to the average cost of all plants producing the product would eliminate the problem

In addition to those changes in pricing policy tho decision sadtlng authority of tho plant managers should be broadened In other respects if the managers oro to be given tho capability to really exercise their initiative. At present time aboutercent of the profite are taxed Into tbe state budget. At leeatercent of the profite ahould be retained by tho plant managers for financing plant expansion and for housing and other facilities for the vorkore. olicy would promote

the growth of labor productivity by increasing the effectlveneaa of

capital investment sad by stimulating the material aelf-interest of

tbe workers. Capital investment would be more effective because more

inveetmont would he channel led into tbe uoet efficient plants.

the individual plant manager usually Isetter

position then tbe central planners to Judgeiven amount of

capital invectment will yield the largest and most rapid return.

Tbe materiel self-interest of tba workers will be mined when they

know that half the profite will be divided between near machinery for

their plant end eaah bonuses, housing, clubs,tc for their aa*.

Labor productivity should grow rapidlyesult of auchincentives.

Another are* In crying need of reform le the matter of inventory policy. Historically, the central authorities by meena of various financial and administrative controls have kept plant inventories of key material* at extremely lowew day* supply at moat. esult even ulnar failure* in tha transport system or abort delay* la tha shipment of materials from other plant* produce work err/ppagne, which la tnra ceaao atoppagae at other plant*, letocs circle. Steal production, ta alowed by lank of ooka or iron era,

a

i iaw*ma*BatbOIJB/ in fulfilling aattaaaaataaa oblijiatlonel Meanwhile, the reelhe aafiJM plajuxrr* who will not trust the plantwith sufficienta creating near prcblemo by "exposing* some manager whoan day* aupply of rrteel oc hand: oovlcualy every aajor plant should ba permitted to0 toay supply of vital aaterlela, auch aaotala, timber, cement, aad the like.

Tbla lead* to tba final point (for tha purpoeee of this paper) oa needed change* in the etarua of tb* plant nrnagor, nsBOOy, bar ohcuid not be regfirdfld ultti-'BurpiMon aad aho^hav* aor* aafaguurd* -arbitrarynnthcrlty. Oust a* tha plant Encager should be truated with largera should he Induced Instead of coerced Into getting tbe moat production oat of hi* plant. Tbo often the higher authority .looks at the vnr^grrho la ki^ipg the "internal (production) re*erves' which mat be "exposed" by administrative inspection and surveillance, usually thereeau lea" are simply insurance agalaat failures ln the supply ayatem aggravated by iaedeuuate inventorloe. Or tbe manager may be not making the atatromt effort because of lack of adequate incentives, or the andleaa red tape and even suspicion involvedimple proposal to change the plan after It baa been approved. Or tbe meager may go to bed with production of Ma produete going nicely and wake up toelegram from Moscow ronoenolag that midgets now have the top priority end the production, of widgete should cease at ooce! Or worse yet, in addition to hla existing production obligations he la required to produce yet another product with no additional capital Investment, Just more materials likely to he delivered lateand possibly none more workers. Bo wonder tho ronagera like to keep "Internal reserves handy In tho form of come unused floorew unused or under-utilized machine tools, and naybe some extra workers.

otsZT"

In order to administer the broad range of eaononlc oatlvity In the regions snd to do It with Initiative, the economic- councils will require all of the decisionauthority of the former ministries and more. The task of the councils will be much ears complex than the ministries) insteadltad group af products they will have to cope with the production and distribution of almost everything producedodern economy. And if the efficiency possible through on-the-spot decisions ls to be realised/ tbe authority needed to Baku tbe decisions must be delegated to the councils, lha principal sreas la which the authority of the economic councils shf*'ld ba very brood are i allocation of material supplies, pricing policy, sad investment declelons.

Ihe new regional system of economic administration can hardly operate affectively until the central of material allocations la taken from Gosplan *pa delegated to tha regional SSesHfls lho regional ^TuncHs must have the right to decide what tho material input-output ratioshould be for ibe products of their region, and tha decision should be node on tbe basin of fte average inputs of arterial per unit ef output. The present system of setting tbs Input-output ratio* on tbe basis of the Boat efficient prcdacers la unrealistic and should be discarded. Given these decisions, the councils can then allocate the material supplies among the various producing units, snd man do It acre efficiently than eoemone sitting ia Moscow. Furthermore, the couaalla should make tha general deqlalans oh lnvwui*ary policies for the plants subcffdlnata to them aadeserve inventory ef fUelSf metals, ate* for unforeseen cunting'sctes. Baa role ef (Kaplan In huecov should be limited to ooordlnatlng material distribution and collecting Inforaation for long range notorial balances required for planning five to tea yeare in (he future. Currant operational decisions should ba left to the occoomlo councils. "*

The aeonomla councils ahonld have the authority to set wholesale prices for factories according to the principles aet forth to the aactloo (above) on tbe plant managers problems. Bat only should the councils set tha wholesale prices for the products produced In their region, they also should aet the retail prices of consumer goods produced and sold In the area. Indeed it Is in tbe field oflose relationship between the retail and wholesale price of consumer goods that tbe councils face one of their most Important tasks i to Introduce economic democracy Into the distribution of consumer goods. Dedpr the presentise In demandarticular consumer item is usually reflected first in the appearance of queues. Scootlmes that is all that happena for it requires en Independent administrative decision on tbe part

of the retail trade organ* to take co&nlinace of the fact that people are standing In line waiting to buy the item, and that consequently the producing organisations should be aakod to step up output. However, this requires another Independent decision by tho producing organs, tho Counoll of Ministers, and Qosplsn, because In all likelihood increase In consumer demand was not envisaged In the original plan, and changing the planigh level, coordinated, decision. She regional councils should dire at the retail trade organs to Increase tho orders automatically for any consumer item which appears In short supply, and tha producing plants to mexs the appropriate cnsngns In their production pjwriw lamedlately. To stimulate prompt reaction to the trade organs resosat for additional supplies, they should offer the producers aa appropriate bonus an the wholesale price until supply of the item haa inereaeod sufficiently to satisfy demand. The producing plant would aloeeams for the necessary Inputs. OatH there is an Buto-mtlc shift of resources to Increase production of rcnsisser items for which, demand in rising, and until the price of these resources refloat their mhSTired social voice, tho Bovlat txiaauaiar will not enjoy the fruits of ss&saste democracy. To give economic voting power to the aonauoor ruble should he one of tho first priority teaks of the regional econoatlo couBclls*

Just as the plants should retain half of the profits for Investment, housing, and bonuses, the economic oonrsrlls should retain the other half for *wi struct!en offnt* sadn the regions. Thefrom the, turnover tax would remain control! rod end would be nor* than sufficient (during peacetime) to pay for defense expenditures end certain long range lutesUaul projectse.g. the Siberian hydrc-olootrle projects'

otax* in the efficient operation

The most important thing tbe centralng orgoni. and the Council of Mlniatera in Hosoow can caatribute to tba success of tbm regional administration of Industryhange of attitude. Moscow must laarn to coordinate and assist rather then coerce. Hoacov east delegate to the regional ecanemic councils and to the plant managers the authority to stake decisions concerning the disposition cf economic resources. Hitherto the lower echelons bars borne meet of th* responsibility' for the production program veil* the central authorities disposed of Hon resourceB. Koacow eust ceas* to make unreasonable or production

beyond the capacity of the plants' on the specious grounds of "mobilising internalt was precisely thla kindlanning" on the pert of the center that led to the current revision of the Sixth five-Year Flan

and to the extreme shortage of fuels, metals, sad building aterlals

currently plaguing the Soviet economy.

Other broad changes In planning policies should be studied by the central planners* It sea been obvious for many years that tbe planners working oa investment projects needed some guide to th* choice of alternatives. Over theumber of Soviet economists haveeasoushl* solution In the formcoefficient ofate of return avertlm on tba initial Investmentuide to choosing investment elternatlv*. So far these proposals have all been rejected, principally on tbe basis of ill-founded ideological erguments that the coefflolenta were too similar to capitalist interest. At tbeime- It does appear that tha nee of "coefficient* of effectiveness" haa been tolerated in practice In many project planning organisations. Just as it ha* been ofrleumlly recognised since Stalin's death that technological obsolescence exists under Soviet socialism aa well as underay so It should be recognised that rational larestamnt planning is Impossibleniform guide ia the formate of return over/time to investment choices. Workingniform investment choice criteria far Industry, transport, and agriculture *hould be one of the most urgent tasks of the tBfifl Gosplan.

Consideration also should be given at the highest level to the problem of bringing consumer goods snd producer goods priceselationship that corresponds to their respective social values. In recentreet many Soviet economist* have admitted tbat tbe price* of oonwaagr

goods are well above their social valueprincipally because of the turnover tax which often accounts forl0 percent of the retail pricewhile the prices of producers goods are wall under their reel social value. It is clear that retail prices should be lowered while the wholesale

prices of producer goods should be Increased. But how much to lower the

one iind rolee tbo other le virtually Impossible to dmtormino under

prosenl Soviet pricing policies. The only vny the central outherltloa

can arriveeasonable approximation of the relative changos required

le too give the consumer ruble an economic vote aa suggested above.

If an increase In coosuaar dsrmnd Is allowed to automatically cull forth

u increase in output and If tbo increase in output of tho item is accompanied

by higher prlceo for the capital material and labor required to produce

It, then the central planners will beosition to noaaure the relative

social value of producer and consumer goods.

In general, the success of ths nov system on eccacoic administration depends upon two things. First tbe plant managers and eocnnarlc councils must be delegated broad decision making powers ecsmamosurato with their responsibilities. Secondly, economic democracy most be Introduced by giving consumer purchasingirect and Immediate vote in the allocation of economic resources.

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