Where the price-mechanism is efficient and rational, the managers of industry have a compass to help guide them in their activities. In capitalist based on private property the prices of materials, machinery, labour power and the finished products are elements determined by the play of market forces, to which the Manager has to adapt his enterprise. In Russia all these are centrally, determined factors, which can also be changed by this sane bureaucracy. The result is that the factory director spends quite a large portion of his time and energy on influencing the decision of the higher authorities; this being so, there is a persistent need to keep a tight hold over the manager, lest he influence these decisions too much.
However, if the prices decided by the central authorities were rational, i.e., clearly reflected the cost of production of different elements, there would be less place for bureaucratic pull on the part of the managers, and consequently less need to control the managers.
On the other hand, if there is no rational relation between prices, but the tie-in between the prices of different goods is faulty, the management of the factory is forced to revert to quite arbitrary decisions in his operations. A complex industrial economy, like that of Russia, needs a very exact price mechanism to help guide it. Without this, which acts as an automatic warning, its place is taken by the arbitrary warning of the higher bureaucrats.
The defectiveness of the price mechanism in Russia is shown quite clearly by the spasmodic rise and fall of prices and the absence of harmonious relations between them. Dr. Jasny has illustrated this very clearly. One of the examples he gives is this:
“The development of the prices of timber and lumber during the Plan era was fantastically inconsistent. After a small decline in 1927-28, the lumber prices were raised by more than 100 per cent, effective April 1st, 1936, They remained unchanged, thereafter, for almost 13 years in spite of inflation, the extreme shortage of timber, and the cutting of forests far in excess of what was economically reasonable. The lumber prices were raised almost 3-fold, effective January 1st, 1949, to become about 7 times as high as in 1926-7.
“Round timber, large quantities of which are used directly in construction in the USSR, declined in price 14.7 per cent from 1926-27 to 1927-28 and then was raised only moderately in 1936. Timber prices were raised slightly again in 1910, but even after this they still were only moderately above prices of 1926-27. Then, to make up for all such arrears, timber prices wore boosted in one stroke more than 4.5-fold in 1949. Roughly the timber prices were close to 50 per cent of those of lumber (sawn timber) in 1926-27; in 1936 they became little more than 20 per cent of the latter; the percentage was raised to about 30 in 1944 and exceeded 40 in 1949.
“The prices of railway ties, a simple timber product, showed yet another course: doubled in 1936 and again more than doubled in 1943. Again they were more than doubled in 1949, with the result that the prices effective January lot, 1949, were almost 10-fold their 1927 level.” 
In another book Jasny gives further examples of the lack of tie-in between the prices of a competing goods or between the prices of raw materials and finished products:
“In 1933,” he writes, “the price of kerosene for technical purposes, f.o.b. destination, was raised about 10-fold, to a level about 45-fold that of good Donbass boiler coal, f.o.b. mine. In 1949, the one kerosene cost not quite six times as much as coal. There is no justification – there cannot even be any explanation – for such shifting ground. The varying rates between kerosene and coal prices are an extreme case, but the number of unjustified large shifts in price and rate relationships is almost infinite. In 1949, important types of rolled steel cost about 5-6 times as much as coal; in the second half of 1950 the relation was only about three to one.” 
“It was a great blunder to raise machinery prices 30-35 per cent in one year (1949) and then to eliminate the entire increase and more the next year (1950); or to raise railway freight rates on short distances much less than on long distances (rate revision of 1959) and to do exactly the opposite in the next revision (1949).” 
Again, according to A. Zverev, the Soviet Minister of Finance, during the years 1950-1955, the wholesale prices of capital goods were changed five tines. There is no logical reason at all for this change to have taken place. By the end of 1955 the wholesale price index of capital goods was 39.6 per cent below the 1949 level. Compared with the 1948 level 1955 prices for heavy industry products in general were 8-10 per cent lower, for the machine-building industry – 40 per cent lower, but for raw materials and fuels – 20-24 per cent higher. 
The price mechanism works so ineffectively that the following astonishing discrepancy could appear: while according to official prices, wages made up 10.9 per cent of total cost in heavy engineering, according to the calculations made by a Soviet economist, Kronrod of the real costs, the percentage was 39,2.  10.3 or 39.2!
Kronrod argues that no consistent principle is applied in price-fixing. Sometimes “average-progressive cost” – i.e., the average cost at the more efficient factories – is taken as a basis, and a standard rate of profit of 3-5 per cent is added. In other cases, the price is fixed simply by adding a standard rate of profit to planned costs, As a result, of course, the prices paid for similar goods often differ considerably and there is no coherence and harmony between prices of different goods. 
Without a rational price system, no real economic rationality is possible. The bureaucratic fiat is therefore a necessity and this is one of the main causes for the multiplication of controls.
While it is quite obvious that the faultiness of the price-mechanism is an impediment to the rational running of the economy, there are strong, conservative vested interests on the part of the ruling class of state capitalism which seek to preserve it.
First of all, it is possible to gain great propaganda advantage from the inflation of prices: in the distorted prices-mirror, actual economic achievements, which are very considerable, look many times more inspiring.
Secondly, the real distribution of the social product between consumption on the one hand, and capital accumulation and armaments on the other, is shown to the advantage of the fernier and the disadvantage of the latter. Thus, “in 1949, for example, the prices of consumers’ goods were more than 25-fold those of 1926-27. Prices of producers’ goods, however, were little more than 3-fold this level, and even after a big boost in 1949 were still only 6.0-6.5 times as high as in 1926-27. Armaments, which belong among producers’ goods in Soviet terminology, were in 1948 relatively cheaper even than civilian producers’ goods.”  The military budget, in consequence, appears small. Thus, for instance, in 1940, on the eve of the Nazi invasion, the defence budget was only very slightly more than that devoted to social and cultural welfare (56.1 and 40.9 milliard roubles respectively), and in 1949, when the “cold war” was already raging fiercely, it was less,79.2 as against 116.0 milliard. This is indeed bewildering.
The main explanation for this strange phenomenon lies in the extreme cheapness – artificially induced – of armaments. As a result of heavy turnover taxes on means of consumption and huge subsidies to heavy industries, especially armaments, the price relationships between the products of heavy industry and those of the rest of the economy is drastically distorted. The coal and steel that go into the production of the machine tools which produce the armaments, the coal and steel that go directly into the production of armaments themselves, the transport of all these elements, etc., are heavily subsidised. Thus the prices of armaments are cumulatively reduced by the subsidy system. Insofar as turnover taxes make up about two-thirds of the prices of consumer goods, and as subsidies, directly and indirectly probably reduce the price of armaments to about one-third of the actual cost of their production, one should, to obtain a true picture, multiply their price by nine, and compare this figure with that of the total price of consumer goods (including social and cultural services.) Unless this is done, the picture remains quite out of touch with reality. For instance, the Plan for 1941 stipulated that the total price of the products of all defence industries would be 40,300 million roubles, while that of the textile industry, at 46,000 million roubles, would be higher. 
Thirdly, the distorted price pattern covers up some of the privileges of the ruling class, by making the luxuries of the rich relatively much cheaper than the necessities of the poor. This will be clearly perceived from a few figures of the turnover tax rate:
73-74 per cent
Salt in bulk,
70-80 per cent
67-71 per cent
40 per cent
25 per cent
2 per cent 
Since the turnover tax is not added to the selling price but is included in it in advance, a turnover tax of, say, 50 per cent actually increases the price of the commodity by 100 per cent; a turnover tax of 75 per cent raises the price by 300 per cent and a 90 per cent tax results in a tenfold increase in the actual price. This must be borne in mind when examining the above figures. As a result:
“In mid-1948, the equivalent of the car ‘Moskvich’ (costing 9,000 roubles) was 310 pounds of butter (costing 62-66 roubles a pound), while in the United States a somewhat better car was worth about as much as 1,750 pounds of butter.” 
The distortion in the price mechanism is an expression of the tensions existing and the struggles going on between different sections of the bureaucracy, where every shift in the relation of forces leads to shifts in the relative prices of the goods which the different sections command. (Similarly under monopoly capitalism, prices are diverted from the costs of production under the pressure of monopolistic agglomerations of capital).
Lastly, where the state owns industry and where this is under one-man management, the whole state has to be headed by an omnipotent leader, whose fiat must lead to arbitrariness, including inter alia an arbitrariness in price fixing.
State ownership with workers’ power would demand for its rational operation an honest calculation of the social costs of production. State capitalism is torn by inherent irrationalities.
Lacking a price-criterion for the success of a factory, the higher authorities place all their emphasis on the physical volume of output. D. Granick, a student of industrial management in USSR wrote:
“As early as 1936, the Government tried to reduce somewhat this stress on quantity. The Council of Commissars and the Central Executive Committee of the USSR, issued a joint proclamation establishing new criterion as the main, one to be used for evaluating the success of each industrial firm. This new criterion was the output of those finished and marketable products which properly met the plan’s quality and assortment requirements. It was intended to take priority over the former criterion of ‘value of product’ – which included unfinished goods and entirely ignored assortment and quality. The shift in criteria was ordered as of October 1, 1936, for all industrial firms. But the new index never caught on... As late as 1944, premiums given to engineering and managerial personnel were based solely upon the index of production-quantity, and net at all on quality, cost, or assortment standards.” 
The situation has not changed since then. If the manager of a large mine doubles his salary by fulfilling his production plan, and earns an additional 10 per cent for each 1 per cent overfulfillment , (corresponding figures for a chemical plant are 175 and 8 per cent) he will undoubtedly emphasise quantity output regardless of the great wastage this might cause.
Bulganin, explaining why Russian agricultural machinery weighs more than similar machinery produced elsewhere (for instance, the diesel tractor Belarus weighs three tons, whereas the similar British Fordson-Major 1951 model weighs only two tons) said:
“The present method of planning and assessing output solely by weight does not stimulate metallurgical workers to produce new, economical relied sections. The consumer-ministries, and the building ministries in particular, likewise display no interest in getting rational rolled sections, because the manufacture and assembly of steel structures are planned and paid for also by the ton, that is, the greater the weight of the metal the heavier the structure, and therefore the more ‘profitable’ for them.” 
For the same reason, it is not in the interests of factory managers to produce small items needed by other factories, which is a factor compelling the latter, willy-nilly, to become more and more self-sufficient: this is one of the secrets of departmentalism, so bitterly complained of by Khrushchev.
The emphasis on volume of output also encourages the manager to give priority to quantity to the neglect of quality. As a result shoddy goods are common. Thus, of the output of the Stalingrad Tractor Plant of DT-54 tractors in the first nine months of 1956, 28 per cent were rejected by the buying organisations as defective. “Losses from faulty output in the plants of Gorky in the first nine months of 1956 amounted to 44,000,000 roubles, which is twice as much as the city’s enterprises saved in the same period by lowering costs of production.” 
For the same reason maintenance is neglected. As delay in maintenance does not necessarily affect production considerably or immediately, any factory manager finding himself in a tight spot will postpone such work. It is true that one of the consequences of delay in repairs is that equipment is worn out more quickly and in the end more maintenance work is required than would otherwise have been the case, a state of affairs suggested by a report that around 1950 over 12 per cent of all industrial equipment underwent capital overhaul annually, about 12 per cent underwent medium-scale repairs, and 100 per cent minor repairs.  But as all major equipment is replaced by Ministry of State budget grants, the manager does not consider this a cost to his firm. (By the way, the fact that the turnover of managers in one and the same job is quite frequent – see below – means that there is a tendency to neglect repairs even more. Why should a manager be worried about the wear and tear of equipment the consequences of which not he, but his heirs, will have to face?)
In setting production plans for their enterprises “glavki take as their point of departure primarily the level of production already achieved. (Stroitel’naia gazeta, July 27, 1955, p.2) ... here is an example. The Kornevskii Silicate Brick Plant succeeded in 1954 in shortening the autoclave baking cycle to 9.8 hours, while the industry average was 12.4 hours. In 1955 they set its plan at 9.7 hours, Having run into trouble getting enough raw materials, the enterprise failed to fulfil its plan in the first quarter and fell among the lagging enterprises, even though it was producing more per unit of equipment than other silicate plants which had fulfilled their plans.” 
Hence, to protect himself from pressure from above, the factory manager tends to press for smaller annual tasks, and underestimates the productive capacity of the plant. As the head of the Planning Sector of one firm expressed it: “Why should I go in for charity and advise (the higher bodies) ... of the productive possibilities of the plant?” 
As plan targets are distributed between factories mainly on the basis of results that have already been achieved, factories which are working badly quite often will get low plan targets, while a greater burden will be placed on the more efficient plants. As underfulfilment of the plan is punishable while fulfilment and overfulfilment carry premiums for the manager, it is quite natural for him to conceal the productive capacity of the factory.
This particularly affects technical advance. If a factory proposes technical improvements, the cost reduction anticipated does not go to the factory, but is included henceforth in the target, and the manager is penalised if he does not achieve the target. Hence, the method of reward for plan fulfilment often turns into a method of rewarding technical stagnation.  “The facts reveal,” said Kapitonov, Secretary of the Moscow Oblast Party Committee, “that many managers of enterprises, striving at any price to fulfil the plan, are clinging firmly to obsolete equipment.”  The tendency of the manager to economic conservatism makes it even more necessary for tight control over him.
While the central authorities incline to impose as high a target of production as possible on the individual factory manager, they are also predisposed to estimate his requirements for supplies of materials and equipment as low as possible. The manager, however, does not accept the orders from above without a fight, or otherwise without cheating the authorities in order to get a larger amount of supplies out of them than he really needs, and so be on the safe side.
As the materials and other supplies needed by a factory depend on the production planned for it, it seems logical that a factory’s supply plan should follow the drawing up of the production plan. But in actual fact, annual production plans are drawn up as late as November in the previous year, so that time is too short to draw up a supply plan to fit the production plan. In practice, therefore, factories have to send in their supply plans before their production plans are decided. These go in during the preceding July and August for the annual plan and six weeks to three months before the first day of each quarter.  At best the manager has only a draft production figure to go by and quite often he has to rely on simple guesswork. Consequently,
“In order to be sure of having sufficient materials, firms have often requested larger supplies than needed and even presented falsely reduced statistical data as to inventory. The procurement organisations usually have had only scanty information on which to base their evaluation of these requests, and thus they have to cut down orders indiscriminately or by a set percentage. Naturally, this formalistic approach has encouraged firms to submit still more exaggerated orders the next time.” 
This tendency to inflate supply needs is strengthened by the fact that supply plans are rarely changed, even when changes are made during the year in the production plans. A few examples of frequent changes in production plans unaccompanied by changes in supply plans were given by Izvestia:
“The production plan ... for the Baku Worker Plant of the Azerbaidzhan Ministry of Oil Industry was changed 15 times in 1954. The list of products to be produced by the Grozny Red Hammer Plant of the Oil Machinery glavk was raised 13 times, its monthly and quarterly plans were changed 10 times.” 
Fear of not having the necessary materials and equipment for the fulfilment of the production plan leads the manager to adopt two expedients: one, to inflate the request for supplies and keep inflated reserves; the other, to be more independent of other production by producing everything down to the bolts and screws. Both these two expedients make the general national scarcity even worse.
The tendency to keep inflated reserves is strengthened by the lack of price criterion for economic success. As J.S. Berliner, a student of Soviet industrial management, said:
“There are no strong cost deterrents, such as interest charge, to the holding of idle materials and equipment. ‘Today the only interest of an enterprise it selling unnecessary equipment,’ writes the eminent economist A. Arakelian, ‘consists of the fact that the transfer of unnecessary resources frees a certain amount of floor space.’  Nor is a depreciation charge made on stored or dissembled equipment.” 
With the faultiness of the price mechanism, which causes the relative values of such indices as quantity, quality, assortment of goods, costs of production, etc., to be inexpressible in terms of a common denominator, the factory manager would have to operate quite blindly and hope that his judgment was not challenged by his superiors, if it were not for the guidance he gets from “campaigns” and “priorities,” which stress one or more factors that are most important at a particular time.
The need for priority schedules is the result not only of the faulty price mechanism, but largely also of the scarce supplies and high production-targets.
However, priority schedules are not a very clear guide for managerial staff to act on. As Granick so well put it:
“... relative emphases cannot be expressed quantitatively. The director cannot readily decide if it is worth while to use a little more fuel per product unit than was planned in order to increase production slightly. If a lot more fuel was needed for only a little more production, or a little fuel for a big increase, the decision would be easy. But it is the borderline case which cannot be decided on ‘rational’ and ‘economic’ rounds because there is no common denominator in terms of which to express both the fuel and the product. It is for this reason that a commissariat senior engineer could write in 1939 that his commissariat had no technical-economic criteria for determining whether one technological process for manufacturing a given item was bettor than some other. If 150 engineers are set to work to develop a manufacturing process, he wrote, 150 different variants will be received, and each will be hotly defended as the best by its originator.” 
However defective priority awareness may be as a guide to production, it is obvious that without it, the state capitalist economy of Russia, which suffers from irrational price mechanism and “planning” methods would have faced even greater difficulties. As Berliner put it:
“If managers did not discriminate among competing consumers on the basis of priority, it would be a matter of indifference to them whether to produce the products designated for a military consumer or for a civilian consumer first; their own plans require only that both products be fulfilled in the course of the month. The marketing department would be indifferent to the choice of shipping out first the order of a steel mill or of a bakery shop. If it became clear that the total plan could not be fulfilled, management would be indifferent between underfulfilment of the high-priority production or the low-priority. If, however, managers are aware of relative priority and discriminate among consumers on this basis, then the decisions are made in closer conformity to the desire of the state. Priority awareness thus serves as a sort of rudimentary ‘rule’ according to which managers can decide among competing demands for the resources which they produce.” 
Another question is how effectively the central authorities manage to communicate their scale of preferences to the managers.
“For a ... guide to priority, management looks for a variety of hints. Products listed specifically in the enterprise (or ministry) plan but lumped into the ‘other output’ category of the ministry (or national) plan are less important than those listed specifically in both levels of the plan. Larger plants are thought to be more important than smaller plants, and plants in prominent industrial districts carry more prestige than plants in smaller districts ...
“It is extremely important for the manager to scrutinise the press carefully for new ‘campaigns’, for these are a sure indication of a change in priority ... He must keep his sights steadily focused upon Party and government pronouncements for cues as to what has become more important and what less. This is the meaning of the Party’s insistence that managers be ‘politically’ educated and alert; and for a manager to be accused of a ‘narrow economic approach’ to his job is a serious charge.
“But in many cases the determination of relative priority is an art, one for which the successful manager must develop a ‘feel’. Russians talk much of ‘reading between the lines’, a vital talent for the manager.” 
The lack of objective, quantitatively determined guides in production plans, supply plans, etc., of the individual enterprises, leads to a great amount of arbitrariness in production decisions and concomitantly with it, to the extreme importance of the personal factor in plan determination. As Berliner states, on the basis of discussions with many former Soviet managerial staff now abroad:
“... output plan depends in large measure upon what the enterprise has been able to bargain out of ‘Moscow’, the supply of materials hinges upon how much can be haggled out of the functionary in the State Economic Committee, the financial plan is based upon currying the favor of some minor official in the Ministry of Finance, and so forth. The cultivation of good relations is a prime principle of plant management.” 
Planning by negotiation, however, is irrational and wasteful.
One result of arbitrariness is the short tenure of office of managers in one factory.
“Studies in 1934 and 1936 showed that only 3 to 8 per cent of directors had hold the sane post for over five years, 16 to 20 per cent for three to five years, and another 40 to 55 per cent for one to three years. Twenty-five per cent to 35 per cent had held down their jobs for less than one year.” 
As each industrial unit has its own peculiarities which take tine for the director to master, this mobility is in itself a major source of inefficiency. (We have already referred to the tendency of the manager to neglect repairs and to “milk” his factory, caused by this same mobility).
Again, “chief engineers... had roughly the same distribution of time of service at the same post as had directors. Department superintendents (these latter for 1936 only) also had the same pattern of rates of turnover, and glavki chiefs loaned only slightly toward greater length of service.”  Bulganin remarked: “The executives of many enterprises are changed too often. In the coal industry, for example, about 40 per cent of the heads and chief engineers of mines, and some 50 per cent of the sector managers, change every year.” 
Arbitrariness in the general management of the economy aggravates the lack of rationality in the prices fixed by the Ministries and glavki, and the lack of tie-in between production and supply plans of enterprises.
One by-product of mismanagement, irrationality and arbitrariness is the rise of middlemen who make a living by finding out which plants have surpluses and which deficits, and arranging barter agreements between them, in the process violating the prices fixed by the authorities. Planovoe Khoziaistvo reported a case in which a heavy machinery factory promised a building organisation, in exchange for 2.5 million bricks, not only the official price of the bricks, but also the following extras: 800 tons of coal, 250 tons of timber, 11 tons of kerosene and various amounts of a number of other commodities.  All this is illegal, but nevertheless very widespread: the bureaucratic government that prohibits this, is, after all, the cause of its appearance.
Hence the appearance of the tolkach – the supply expeditor – who, quite illegally, takes an enormous commission for acquiring materials, machines, etc. Hence also the great importance of blat, or personal influence, for acquiring this equipment to which the factory manager is not entitled. Russian publications give ample testimony that it is a major phenomenon there.
Another necessary by-product of irrationality and arbitrariness, which serves to aggravate both, is the multiplication of contradictory control systems to which we referred above.
Under capitalism based upon private ownership of the means of production, the capitalist uses for his financial compass the automatism of the market, with its blind determination of the prices of factors of production as well as of the commodity produced. He must operate an accurate accounting system. His punishment for miscalculation is a financial loss; for a grave mistake, bankruptcy. Under a statified economy, where most of the prices are determined administratively, and there the income of the plant manager has no direct correlation to the real economic situation of his plant, accurate accounting becomes even more vitally necessary, as the manager of a plant can conceal the defects of the enterprise for a long time should it become necessary; he is not subject to the market law alone. Without accurate accountancy any distortion in one enterprise can be assimilated as an element in the calculations of other enterprises, and so on cumulatively. The Kremlin can punish the manager who fails, but the failure comes to light only after the damage is done. Again, the administrative and extremely harsh nature of the impending punishment (demotion, imprisonment, etc.) merely gives an added urgency and encouragement to the dissembling manager, and provides greeter incentive for such managers to plot with other officials of the administration. Further, the same ruthless quality of retribution engenders high degree of circumspection, not to say timidity, in any manager faced with the need to take a risk or to make a decision. Hence a marked tendency throughout the managerial side of Russian industry to “pass the buck” and to increase, ad nauseam, the number of unproductive officials. Yet again, such managers are sharply conscious of the implacably administrative nature of the sanctions hanging over them, and, therefore, of the great extent to which their own fate depends upon arbitrary decisions derived automatically from a current general policy which can be and is frequently superseded overnight by one of an entirely different character.
A clear link can be detected here between irrationality and the role of terror and “purges”. One of the paradoxes of the Stalinist regime is that even the socially privileged bureaucrats are not at one with it. Of course they are glad to know that the Kremlin protects them. But alas, too often the MVD, besides arresting workers and peasants, also lays its hand on the exalted bureaucrat himself! Thus it was estimated that in 1938-40 some 24 per cent of the technical specialists were imprisoned or physically eliminated. 
While we have seen what the forces in the economic system are that load to a multiplication of control systems, it has not yet been shown what factors make it possible for managers to engage in hoarding materials, hiding the productive capacity of the enterprise, and generally evading many of the regulations. Besides the purely technical factor that where regulations are contradictory or without clear tie-in, it is impossible for the manager to keep all regulations, there are other forces which induce control officials to refrain from carrying out fully too control functions with which they are charged.
Thus, for instance, the chief accountant is gradually drawn into complicity with the factory manager, whose activities he is supposed to control.
“What draws him gradually into collusion with production management is a combination of his personal dependence upon plan fulfilment for his income and his career, and the need to live in some sort of harmony with the people with whom he has daily work and social contact ...
“The chief accountant knows that the director takes as many or more chances than he, and that he will make every effort to cover up for both of them. The chief of the quality-control department knows that the director is experienced, and perhaps important in party circles, and none of the customers are likely to risk an engagement with him over quality for fear of losing their source of supply. The mechanical engineer may grumble a bit about overworking the machines, but the director is highly valued in Moscow and a word from him will silence the grumbles. As far as legal prosecution goes, all are aware that in order to got anywhere one must take chances and nothing succeeds like success. Regular plan fulfilment closes many an investigating eye.” 
The Party Secretary is also induced to enter the “family circle”, as his power and prestige are dependent on the success of the factory. If this is facilitated by the invasion of regulations, he turns a blind eye. However, his very dependence on the performance of the enterprise makes him a source of pressure on the management. As one informant told Berliner:
“Before the plan is confirmed, the Party Secretary aids the director in trying to get as low a plan as possible. Once the plan is decided upon, the Party Secretary now brings pressure to bear on tee director in order to get the plan fulfilled.” 
The Ministry of State Control is not part of the web of mutual involvement. Its agents do not have a motive for covering up any misdeeds in the enterprises, but on the contrary their own performance is judged by their superiors according to their success in exposing law evasions. However, this Ministry is unable to keep a constant check on all the particulars of a firm’s operations. It seems it also lacks trained and experienced technical specialists. The Ministry of State Control of the Karelo-Finnish Republic, for instance, did not employ one timber expert, even though timber is the main industry of the Republic. An agent of the Ministry, describing his impotence during an investigation of a dairy enterprise, an industry of which he knew nothing, said: “They twisted me around their fingers.” 
The multiplicity and different degrees of efficiency of the control systems lead in themselves to increasing arbitrariness and wastage, and thus lead to these same conditions that make strict and multitudinous controls necessary.
Unable to rely on the self-activity of the people, denying all working class democracy, the Kremlin has to rely on bureaucrats to control other bureaucrats. The hydra of bureaucratic anarchy and its concomitant, bureaucratic control, grows on the soil of workers’ alienation from the means of production and exploitation of the labourer.
The usual picture of Russian industry is that of a well-organised, streamlined and harmoniously working system. The above description of the working of this system tears this idyllic picture to pieces. What are the basic causes for anarchy and wastage in Russian industry?
We have seen that high targets of output together with low supplies – like the two arms of a nutcracker – press upon the managers to cheat, cover up production potentialities, inflate equipment and supply needs, play safe, and in general act conservatively. This leads to wastage, and hence to lack of supplies and increasing pressures from above on the manager, who once more has to cheat, and once more in a vicious circle.
High targets and low supp1ies lead to increasing departmentalism. This leads to misuse of productive resources and wastage. Hence the increasing inclination to departmentalism. Again a vicious circle.
High targets and low supplies make necessary priority awareness on the part of the managers. But this priority system and “campaign” methods lacking a clear quantitative gauge, lead to wastage and hence to an increasing need to refer to priority schedules. Again a vicious circle.
All these requirements necessitate a multiplicity of control systems which are in themselves wasteful and in their lack of systematisation and harmony make for even further wastage. Hence the need for more control, for paper pyramids and a plethora of bureaucrats. Again a vicious circle.
What has been said about the vicious circle resulting from the conflict between over-ambitious planned targets and low supply basis, applies, mutatis mutandis, to the effect of the poor price mechanism. Thus, for instance, the poor price-mechanism leads to departmentalism, priority campaigns and a plethora of controls. And these lead to increasing faultiness of the price mechanism. Again a vicious circle.
To break these vicious circles, there are three main Gordian knots to be cut: 1) lower output targets, 2) improved supplies, and 3) establishment of a rational price mechanism.
The great impediments on the path of lowering output targets are the world competition for power, the tremendous military expenditure, and the practically limitless demand of China for capital.
The great impediments on the path of establishing a rational price mechanism are, as we have seen, first of all the need of the rulers to cover up exploitation with the help of a distorting mirror; the need to exaggerate economic achievements; the vested interests of different sections of the bureaucracy and their relative weight in the economy and in politics; the stability and arbitrariness of the top strata expressed in a sea of instability, changing, groupings, personal pressures, in which the rest of the bureaucrats flounder, with the concurrent criss-cross of control chains and economic disharmonies.
Of All the deficiencies, disharmonies and bottlenecks in industry, Khruschev’s reforms try to face up to one, and one only: the increasing departmentalism, with its nefarious outgrowths.
Let us first describe the changes brought about in the organisation of industry on July 1, 1957. They consist of the following measures: The bulk of industrial and construction enterprises have been transferred from the control of various control ministries to newly-created Regional Economic Councils or Sovnarkhozy, each controlling a separate economic region
The USSR has been divided into 105 such regions, of which 70 are in the Russian republic (RSFSR) and 11 in the Ukraine. The sovnarkhoz is to act as the planning and operational boss for the bulk of industrial and construction enterprises situated in the economic region. 25 industrial Ministries have been abolished (10 All Union and 15 Union-Republic), thus eliminating the majority of industrial Ministries both in Moscow and in the Republic capitals. The exceptions involve mainly the control of defence industries: aviation, defence, radio, medium machine building [b], shipbuilding, electric power stations. However, the industrial and construction enterprises of the retained Ministries, just as those of the abolished Ministries, are to be transferred to the management of the Economic Councils, which will directly administer these enterprises. Thus the place of the industrial Ministry – which is functional – will be taken by Economic Councils which are territorial. Instead of 40 All-Union Ministries, there will be 105 territorial industrial units. As some of the former ministries were quite small and a number of the territorial industrial units will be quite big, the economic-administrative units created will often be larger than the former Ministries. Khrushchev stated on this subject:
“Let us for instance take the Moscow City Economic Area, The machine-building and metallurgical enterprises situated in Moscow alone produce more than the enterprises controlled by four machine-building Ministries – the Ministry of the Machine-tools and Instruments Industry, the Ministry of General Machine-building, the Ministry of Apparatus-building and Means of Automation and the Ministry of Heavy Machine-building. It is proposed to place under the management of Moscow City National Economic Council 600 of the largest industrial enterprises of various branches which in 1956 produced goods to the value of over R.55,000,000,000. It is proposed to place under the management of the National Economic Council of Moscow oblast 593 industrial enterprises which produce R.43,000,000,000 worth of goods. This, too, is equal to the output of several Ministries.” 
The size of the new economic regions, compared with the former Ministries, disposes of the suggestion that Khrushchev’s reform is directed at decentralising the management of industry. Pravda made this quite clear:
“The new forms of administration will enable centralised state control of the economy to be strengthened even more ... Gosplan of the USSR is to follow a single, centralised policy in the development of the most important branches of the economy ... The new forms of industrial administration, with a considerable increase in the role of the Gosplan of the USSR, a centralised system of accounting, statistics, finance, and technological leadership, will have a beneficial influence on the further growth of socialist industry.” 
Again, Khrushchev, in his speech to the Supreme Soviet introducing the reform, quoted approvingly the following statement made over an American radio: “A superficial :observer will probably say – Look, this is decentralisation. But if one is to study the question more closely one can arrive only at one conclusion. The whole thing is nothing else than bringing centralism closer to the spot – this is not a lesser but a greater decree of centralisation.” He remarked: “One cannot but give its due to the shrewdness of the author of this statement.” 
Of course the mere reorganisation of industry on territorial lines will eliminate or mitigate some of the deficiencies met with in the past. It will be easier to ensure the cooperation of enterprises in the same locality, with a consequent saving of transport costs, local resources will be utilized better.
It is possible, however, that the advantages will be counterbalanced, perhaps outweighed, by newly arising disadvantages.
The first grave danger that the reorganised management may well face is that of trends towards territorial autarchy – to replace former departmentalism.
Already in his introduction to the plan, Khrushchev pointed to this danger, saying:
“During the discussion of the Theses it was noted that in the now structure of management, if local organs were :rooted extensive powers, tendencies toward autarchy might arise with a desire to build a closed economy inside an Area or a Republic. Such fears are not baseless, and they should not be forgotten. Local tendencies may show themselves in attempts to develop their own raw material bases, derived from local natural deposits, the exploitation of which might be of less advantage than the exploitation of those in other regions; in a desire to organise within the region the production of various types of equipment and auxiliary materials which it would be more profit able to produce in specialised plants in another region, and in other deviations from economically expedient methods of the management of the economy. Some local workers may try, contrary to the interests of industrial development on a national scale, to use for the satisfaction of the local requirements of an oblast, krai or Republic more resources than the State can allocate for these purposes.”
To meet this threat, Khrushchev proposed the following:
“The unmasking of such harmful local tendencies which move contrary to national interests and the struggle against them must always remain before the eyes of Party, Soviet, economic and trade union organs. In the struggle against these and similar manifestations it will be necessary, in addition to methods of political leadership; to make full use of such powerful levers in the hands of the State as unified national economic planning, centralised finances and all-national statistics. The Gosplan will have to make a careful study of the economic expediency of the capital investment programmes planned by Areas and to stop any attempts to use State resources contrary to State interests in order to create a closed economy in individual areas.” 
Why such proposed numbers should be non-effective in overcoming territorial autarchy when the same measures were in overcoming departmental autarchy, Khrushchev did not tell us.
And if Moscow’s intervention is necessary to overcome autarchy and conflicts between economic regions, the difficulties met with will be harder to counter than the former inter-departmental conflicts. Whereas previously a journey from one Moscow Ministry to another might resolve a conflict, now distance will hamper and slow up arbitration by Moscow.
Most factories of any size require the delivery of raw materials and equipment from many parts of the USSR, and if each sovnarkhoz inclines to autarchy, the mismanagement resulting can be quite serious. The new set-up, by giving autonomy to the different sovnarkhozy in carrying out their own plans will inevitably incline them to give priority to their own regions. Autarchy thus becomes inherent in the system, for, as deliveries to other regions become uncertain, each sovnarkhoz will try to produce as much as possible of the products it needs.
Reports in the Soviet press bear this out. Thus, for instance, the chairman of the Belorussian sovnarkhoz complained in an article in Pravda:
“There are instances when officials bother only about enterprises subordinate to them, and do not think of the difficulties which their irregularities cause for enterprises in other regions. It is necessary to speak about this frankly, so that these defects do not grow worse... we have met clear instances of tendencies towards autarchy, The Dzerzhinski factory of the Dnepropetrovsk region supplies rolled wire to the Rezhitsa nail-making works. In July the Dzorzhinski factory underfulfilled its plan by 15 per cent but sent to Rozhitsa only 300 tons of rolled wire instead of 1,020 tons. When this outrageous fact was investigated, the managers of the Dzurzhinski factory declared that they had orders from the Dnepropetrovsk sovnarkhoz to give priority to enterprises in their own region and to supply them in full.” 
In a similar case cited by the chairman, suppliers from Nikopol arbitrarily cut deliveries of pipes to Minsk by 41 per cent, while only 7 per cent cut was made in similar deliveries to Kharkov (which is in the same republic as the supplying factory).  On July 25, 1957, Pravda devoted its editorial to the subject of such defaults in deliveries from one region to another.
A few months later it was reported that as many as 46 sovnarkhozy failed to fulfil their delivery schedules to the sovnarkhozy of Eastern Siberia ; the Leningrad sovnnarkhoz could not obtain many spare parts which it could not manufacture itself; the Kharkov sovnarkhoz refused to maintain production ties with other sovnarkhozy in 1958; the Moscow city-sovnarkhoz did not fulfil its plan for deliveries to the Gorky sovnarkhoz; the Dnepropetrovsk and Stalino sovnarkhozes refused to supply other sovnarkhozy; and the Armenian sovnarkhoz received an insufficient quantity of rolled metal from other sovnarkhozy, but in turn did not fulfil its obligations towards other economic regions. 
This reluctance to assist other regions has sometimes reached ridiculous extremes. A Pravda article entitled Altercation on the Banks of the Ik stated that after the creation of the Bashkir and Tatar sovnarkhozy a new building materials combine situated on their common boundary began to experience serious operational difficulties. The Bashkir sovnarkhoz, which had the raw materials required by the combine, categorically refused to supply the factory because it came under the jurisdiction of the Tatar sovnarkhoz. Eventually, the dispute was referred to Gosplan, but in the meantime the combine ceased operating. 
Kamalov, First Secretary of the Uzbek Party Central Committee said:
“The most complicated question in the new conditions is... supply. Let us say straight out: the search for new organisational forms of ... supply has dragged. Furthermore, obviously unhealthy phenomena can be observed in this sphere.” 
The new set-up may cut across specialisation and thus hamper scientific and technical advance. In fact diverse groups of Soviet scientists and technicians have openly expressed their doubts about Khrushchev’s plans. I.P. Bardin, a major Soviet metallurgist and vice-president of the Academy of Sciences of the USSR sharply criticised the present measures in a speech at the session of the Supreme Soviet of the USSR that adopted Khrushchev’s proposals:
“It must be borne in mind that this branch of industry (metallurgy) is being consolidated everywhere, not dismembered on a regional principle. In the USA the various metallurgical corporations or companies are not set up on the regional principle. United States Steel has plants in the East, South and West of the country, as has Bethlehem Steel. This is proof that things can be done properly with such a branch arrangement.” 
Bardin stated emphatically that in his view the Ministries should be preserved. Kapitsa, the famous atom energy specialist, argued in similar vein.
“In the USA, England, and other capitalist countries industries grow to such an extent that large firms and combines were able to solve scientific and technological problems by the organisation of their laboratories and institutes. Our Ministries are in essence even larger industrial combines, hence, they are also able to create their research institutes (and) designing bureaus... Clearly, the bigger the ministry, the bigger the technical problems being worked out ... by it may be. We must not close our eyes to the fact that this advantage will be lost to a great degree with regionalised industry.” 
The structure of the different sovnarkhozy themselves are uncoordinated, and related enterprises producing the same type of goods may be under different branch administrations in the various sovnarkhozy, or even in one and the same sovnarkhoz. Thus, according to the former Minister of the Food-processing Industry of the USSR, V.P. Zotov, two Leningrad vitamin-producing factories are included in the administration of the food industry, while another factory of the same kind is in the administration of the chemical and pharmaceutical industry. A similar factory in Moscow oblast is to be included in the administration for local industry. A number of other Moscow vitamin-producing works are included in the administration of the oil and fats industry, and in Mari ASSR in the administration of local industry.  Thus any possibility of specialisation is lost, and specialised enterprises in the sovnarkhozy will often be controlled by people who know nothing about that particular branch.
The new structure will possibly not even cut the size of the bureaucracy. Each of the 105 sovnarkhozy will comprise from six to twenty glavki, not counting operational sections, trusts and combines. All told, the 105 sovnarkhozy will comprise approximately a thousand glavki.
Besides these administrative centres of industry, there will be some others, namely, 8 All-Union industrial Ministries (mainly of military significance) and a number of Republican Ministries. Thus instead of 150 Ministries (All-Union, Union-Republic and Republican) which were of the same type, there are 105 sovnarkhozy with a thousand branch administrations, which will probably carry as big a bureaucracy with as heavy a weight of red tape. 
To add to the complexity, the administrative rungs above the different plants is not the same in every case. Thus some sovnarkhozy have the following system: sovnarkhoz, glavk, combine, trust, plant; others have only trusts administering a number of plants. 
The new system has not eliminated the plethora of paper work. Previously the annual production plan of the Ministry of Coal Industry covered 5 pages; now it takes up a whole volume. One of this Ministry’s output plans previously consisted of 20 production indices; now there are 240. 
As forecast by the scientists and technicians quoted above, the new set-up already shows signs of proving detrimental to the research and designing organisations. Whereas previously a research or designing institute served a whole branch of industry, now it will serve in the main only the industry in the region administered by the sovnarkhoz. Thus we are informed that when Remmashtrest, a trust engaged in the modernisation of machine tools, was transferred from the Ministry of Machine-Tool Building and Tool-Making Industry to the Moscow city sovnarkhoz, hardly any function was left it.  A worse fate befell the Tsentroenergotsvetmet designing organisation which served the non-ferrous metal industry, but now, on transference to the Moscow city sovnarkhoz found itself without sufficient employment and was abolished.  The Simferopol Specialist Designing Office, which previously served all the factories engaged in tae production of canning machinery, has been working at 15 per. cent of capacity since it was transferred to the jurisdiction of the Kherson sovnarkhoz. 
Without a rational price-mechanism, without increasing supplies and cutting production targets, without putting an end to the arbitrary intervention of the Kremlin, and without chopping the hydra of control systems, there can be no rational management of regional economy. As Gatovski, the editor of Voprosy Ekonomimi, wrote:
“It is necessary to find objective criteria for regional specialisation...so as to avoid the danger of substituting territorial for departmental barriers (to efficiency).” 
Khrushchev’s reform of the management of industry is only a palliative. It does not reach to the roots of bureaucratic mismanagement inherent in state capitalism. However, even these belated and half-hearted reforms bear witness to the fact that state capitalism is becoming an increasing impediment to the productive forces of society. If by the term “planned economy” we understand an economy in which all component elements are adjusted and regulated into a single rhythm, in which frictions are at a minimum, and, above all, in which foresight prevails in the making of economic decisions – then the Russian economy is anything but planned. Instead of a real plan, strict methods of government dictation are evolved for filling the gaps made in the economy by the decisions and activities of this very government. Therefore, instead of speaking about a Soviet planned economy, it would be much more exact to speak of a bureaucratically directed economy. Actually the totalitarian, bureaucratic political dictatorship helps to overcome the results of bad planning, which at the same time has its origin in this self-same bureaucratic set-up.
One should, however, avoid the mistake of assuming that the mismanagement corroding Russia’s national economy precludes very substantial, nay, stupendous, achievements. Actually, between the bureaucratic mismanagement and the great upward sweep of Russia’s industry, there is a tight, dialectical unity. Only the backwardness of the productive forces of the country, the great drive towards their rapid expansion (together with a whole series of factors connected with this) and, above all, the subordination of consumption to capital accumulation, can explain the rise of bureaucratic state capitalism.
The efforts and self-sacrifice of the people have raised Russia, despite bureaucratic mismanagement and waste, to the position of a great industrial power, from being, in terms of industrial output, fourth in Europe and fifth in the world to being first in Europe and second in the world. She has stepped out of her sleepy backwardness to become a modern, powerful, industrially advanced country. The bureaucracy has thus earned as much tribute as Marx and Engels paid to the bourgeoisie:
It has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts and Gothic cathedrals ... The bourgeoisie ... draws all ... nations into civilisation ... It has created enormous cities ... and has thus rescued a considerable part of the population from the idiocy of rural life. The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together.” 
The price paid for these achievements has of course been human misery on a scale impossible to estimate.
From a socialist standpoint, however, the decisive criterion is not the growth of production per se, but the social relations accompanying the tremendous development of the productive forces. Is it or is it not accompanied by an improvement in the economic position of the workers, by an increase in their political power, by a strengthening of democracy, a reduction of economic and social inequality and a decline of state coercion? Is the industrial development planned, and if so, planned by whom, and in whose interests? These are the basic socialist criteria for economic advance.
Marx visualised that the development of the productive forces and capitalism would drive humanity towards a crisis out of which there were only two ways: the one, a socialist reorganisation of society, the other, a decline into barbarism. The threat of barbarism takes the form, before our very eyes, of hitching the productive forces of humanity, of industry and science, to the chariot of war and destruction. The place of Magnitogorsk and Oak Ridge in man’s history will be decided not by their tremendous material achievements, but by the social and political relations underlying them.
Above all, state capitalism is becoming an economic impediment to the development of the most important productive force – the workers themselves – which only a harmonious socialist society can liberate. This fundamental cause of conflict in Russian state capitalism will be the theme of the next article in this series.
b. In an interview granted to the managing editor of the New York Times, Khrushchev confirmed, after a fashion, that this Ministry is also in charge of atomic energy development.
60. N. Jasny, Soviet Prices of Producers’ Goods, Stanford 1952, pp.83-4.
61. N. Jasny, The Soviet Price System, Stanford 1951, pp.9-10.
62. Ibid., p.10.
63. A. Zverev, “The Budget of the USSR for 1956,” Planovoe Khoziaistvo, 1956, No.1.
64. Ia. Kronrod, Foundations of Economic Accounting (Russian), Moscow 1956, p.186.
65. Ibid., pp.161-4.
66. Jasny, The Soviet Economy during the Plan Era, Stanford 1951, p.9.
67. These figures are taken from State Plan of Development of the National Economy of USSR for 1941, January 17, 1941 (Russian). No date or place of publication given. Photographic copy by the Universal Press for the American Council of Learned Societies, New York, 1950, p.11.
68. N. Jasny, The Soviet Price System, op. cit., pp.164-5.
69. Ibid., pp.44-5.
70. Granick, op. cit., pp.153-4.
71. A. Vikanteev, Essays on Soviet Economic Development in the Fourth Five-Year Plan (Russian), Moscow 1952, p.175.
72. Bulganin, op. cit., p.21.
73. Pravda, December 7, 1956.
74. A. Arakelian, Utilization of Fixed Industrial Capital in USSR (Russian), Moscow 1950, p.81.
75. J.S. Berliner, Factory and Manager in the USSR, Cambridge (Mass.).
76. Za Industrializatsiu, May 8, 1934, quoted in Granick, op. cit.
77. E. Lieberman, in Voprosy Ekonomiki, 1955, No, 6.
78. Pravda, August 2, 1955.
79. R.W. Davies, The Reappraisal of Industry, Soviet Studies, Vol. VII, No.3.
80. Granick, op. cit., pp.144-5.
81. Izvestia, August 23, 1955.
82. A. Arakelian, Business Accounting and the Struggle for Improved Utilization of Fixed Capital, Voprosy Ekonomiki, 1951, No.5, p.30.
83. Berliner, op. cit., pp.105-6.
84. Granick, op. cit., pp.156-7..
85. Berliner, op. cit., pp.201..
86. Ibid., pp.201-2..
87. Ibid., pp.224-5..
88. Granick, op. cit., p.47.
89. Ibid., p.48.
90. Bulganin, op. cit.
91. Planovoe Khoziaistvo, 1946, No.3, pp.38-9.
92. N. De Witt, Soviet Professional Manpower, Washington, 1955 , p.231.
93. Berliner, op. cit., pp.242-4.
94. Ibid., p.267.
95. Izvestia, March 18, 1956.
96. Pravda, May 8, 1957.
97. Pravda, May 17, 1957.
98. Pravda, May 8, 1957.
100. Pravda, September 2, 1957.
101. Pravda, July 25, 1957.
102. Pravda, January 25, 1958.
103. Promyshlenno-Ekonomicheskaya Gazeta, February 5, 1953 quoted by A. Fedorov, The Sovnarkhozes – A Preliminary Survey, Bulletin, Institute for the Study of the USSR, March 1958.
105. Pravda, January 18, 1958.
106. Izvestia, May 11, 1957.
107. Pravda, May 4, 1957.
108. Pravda, May 10, 1957.
109. J. Kholonegerov, The Dilemma of Economic Planning, Bulletin, July 1957.
110. Promyshlenno-Ekonomicheskaya Gazeta, January 5, 1958.
111. Pravda, February 6, 1958.
112. Promyshlenno-Ekonomicheskaya Gazeta, December 22, 1957.
113. Ibid., February 2, 1958.
114. Ibid., February 26, 1958.
115. Kommunist, 1957, No.9.
116. Marx and Engels, Communist Manifesto, in K. Marx, Selected Works, London 1942, Vol.I, pp.208-10.
Last updated on 6.3.2005