There was no model or theory at the time of the collapse of the Russian Empire for how a socialist economy should function. The economies that claimed to be socialist, such as the Soviet Union, evolved a system that worked (sort of) but in a very flawed manner. It was called the Stalin model because it evolved during his period of total control of the Soviet Union and therefore its features must have had his approval. Contrary to being a progressive system it was a feudal system of the same sort that a feudal lord would use to manage his self-sufficient estate.

The performance of a stalinist enterprise was evaluated on the basis of a set of success indicators. These were quanities such as the number of items produced, the quantity of labor used, the quantity of raw materials used, etc. The central authorities established minimum levels for such things as volume of production and maximum levels for such things as labor and raw materials utilized. These minimum levels were called quotas. The factory manager was paid a bonus based upon the factory satisfying the quotas and this bonus constituted about 40 percent of the factory manager's income. Thus the factory manager had a strong incentive to see that the quotas were met.

Initially there were 32 success indicators and their quota requirements. It proved typical that the quotas for the success indicators could not all be satisfied at once. Later the number of success indicators was reduced to eight to simplify operation and management.

The most important success indicator was the attainment or surpassing of the output of the main products as they are specified in the plan for the enterprise. When possible this output was expressed in physical units such as number, weight or length. Only as a last resort was this output expressed in the value of output.

The factory manager focused on the attainment and surpassing of the output target. Not exceeding costs may be another success indicator but reducing costs below the target level did not affect the factory manager's bonus, instead it would give the enterprise a greater share of the profit of the enterprise, if there was any. Clearly this was of the same order of significance for the factory manager as 40 percent of his income. Therefore the production quota was generally the over-riding concern of the factory manager.

The work force and wage fund of the enterprise were not subject to adjustment by the factory manager to adapt to current conditions. Instead these were set by a higher authority. The factory managers, of course, tried to inveigle from the higher authorities as large of a work force and wage fund as possible. Likewise the capital investment budget came from an interest-free and nonrepayable grant from higher authorities. But once these are established they are the responsibility of the higher authority. The logic of the system is that the higher authorities gave the enterprise the labor and material resources and it is up to the enterprise manager to get as much production from those resources as possible. The end result is a system in which there is a single-minded focus on production quotas with little regard for quality and cost.

One of the most serious flaws of the system was that the tallying up of production for fulfillment of the production quota made no provision for excluding shoddy or defective production. Even completely useless production got counted and ended up being stored in warehouses. Soviet newspapers reported on such things as sunglasses so dark that even the bright sun could not be seen through them. Another notable case was of rain coats that were made with a rubber coating but in which the rubber was improperly vulcanized so that it was sticky. Such coats when folded up could never be unfolded. There was also the case of women's high heeled shoes in which the heels were attached to the wrong ends of the soles. A more useless product could not be imagined. But probabably the most outrageous malfunction of the system was of a factory that fabricated metal products. It had a quota for scrap metal for recycling. The factory was operating more efficiently than expected so it was not generating as much scrap as expected. Since the factory was not meeting its scrap metal quota the higher authorities were going to fine it. So the factor personnel did what to them was rational. They took perfectly good zinc metal sheets and converted them into scrap to fulfill their scrap metal quota.

For other examples of how the system operated irrationally in the prison labor system see the Economics of the Gulag.

However, not all of the flawed production ended being stored in warehouses. Because of the general shortages of the socialist economies, unless the product was absolutely useless it would be used or get incorporated into other products. This led to a deterioration of quality along the chain of production.

The management system was designed by the central authorities. Here is the thinking that went into the system.

The Organizational Management Theory
for the Stalin Model

The theoreticians of the model articulated three principles of organization and management for socialist enterprises:

• A degree of autonomy in management and accounting for the enterprise (the khozraschet principle)
• One person having power and responsibility for management of an enterprise (a principle which Lenin emphasized)
• Multiple external controls and supervision
  • Supervision by authorities within the official organizational hierarchy
  • Supervision by banks. Enterprise working capital must be held as deposits in the National Bank. Payments between enterprises were supposed to be only in the form of bank transfers.
  • Oversight by tax authorities in the course of their collection of taxes on turnover (revenue), profit and wage fund.
  • Supervision by the Finance Ministry inspectors who investigate whether an enterprise is complying with the financial plan of the enterprise.
  • The Ministry of State Control executes an annual supervision plan for the enterprise to observe the financial, economic and accounting functioning of the enterprise.
  • The Communist Party cells within the enterprise have supervisional authority.

The latter principles indicate that the authorities thought that more supervision would correct the flaws. There were planning committee authorities Gosplans at each level of administration; national, republic (provincial), regional and local. These committees were subject to double subordination, which means that the planning committee was subject to the authority of a governmental council at the same administrative level (national, provincial, regional and local). Additionally the planning committee was subject to the authority of the planning committee immediately above it in the planning hierarchy. And to make things even more complicated administratively, there were dual hierarchies of the official government organizations and a parallel Communist Party organization.

The reaction of the enterprise managers to this web of control was to strive for self-sufficiency and keep secret from the supervisorial authority as much as possible. This meant that the enterprises hoarded material and equipment. It also meant that enterprises strove to attain their quotas and exceed them a bit but not by too much in fear that their quota would be raised.

The end result was a system which wasted resources and had no incentive or reason to operate efficiently. For material on why the system finally collapsed see Soviet Collapse.

Source:
• J. Marczewski, Crisis in Socialist Planning

---

HOME PAGE OF applet-magic HOME PAGE OF Thayer Watkins