Soviet Central Planning(1)

Heinz Köhler

The Planning Mechanism

Ignoring finer details, the planning procedure can be described as follows. During the first half of the year during which a plan is worked out (the planning year), the Central Planning Board (Gosplan) collects information on the state of the economy, showing accomplishments as well as any bottlenecks hindering further expansion. Subsequently, the Presidium of the Party's Central Committee and the Council of Ministers study this information and determine the major objectives that are to be sought during the following year (the plan year). These might be cast in very general terms, such as "increase the share of resources devoted to investment by 10%" or "cease expanding the coal industry, and rapidly enlarge chemicals production with emphasis on plastics." These Party directives are then used by Gosplan during the summer to work out a preliminary balance of the economy, specifying key output targets in physical terms as well as major inputs required for such outputs. Here we meet the core of the plan, the system of material balances, showing for thousands of specified commodities (18,000 in 1963) the intended sources of supply and places of delivery. A typical material balance, greatly abbreviated here, might look like Table 1.

Putting all material balances together and considering all goods produced would give us a table with innumerable gaps and inconsistencies. At this point in the planning process, all entries are tentative.

The data just derived are called control figures and are passed down the administrative hierarchy during the early fall, for instance, to the various production ministries or regional planning centers. The Ministry of Electric Power might be told to produce 544.44 billion kwh in 1966, the Foreign Trade Ministry to import 12.16, and the steel industry to expect delivery of 240, for example.

As a next step, each ministry or regional agency in turn will split up the aggregate into subtotals. The Ministry of Electric Power might, for instance, allocate the production of 544.44 billion kwh among the Soviet Republics or other geographical units.

These in turn will add detail to the plan, passing it down to smaller geographic administrations and finally to the individual plants. Power plant X in the Ukraine will now have before it the control figures for 1966, telling it to produce 0.7 billion kwh, while expecting to receive x units of labor, y units of oil, z units of new equipment, etc.

Table 1. Material Balance, 1966, Electric Power (Billion kwh)


Sources Uses


Production 544.44 Industry

Imports 12.16 (a) Electric Power 54.44

Inventory Decrease --- (b) Steel 240.00

(c) Milk 50.00

Households 150.00

Inventory Increase ---

Government 50.00

Export 12.16

______ ______

Total sources 556.60 556.60


At this point the process is reversed. Plant officials will suggest changes in the control figures, arguing possibly that the inputs provided could not possibly produce the output required and requesting an increase in input allocations. The draft plan is now passed back up the hierarchy until it reaches Gosplan again. At each level, the planning agency has to reconcile conflicting demands between the higher authority insisting on producing so much with so little and the lower ones arguing for producing less with so much more. At each level, an attempt is made to "tighten" the plan by shifting allocations among firms or regions and insisting that they do the job. If absolutely impossible, the imbalance is passed back up onto the higher authority. Eventually, Gosplan will have to resolve all remaining conflict between sources and uses. Either targets have to be cut or more inputs must be made available.

The final balance being struck, the government approves the plan and turns it into law.

Now it is passed down the hierarchy of ministries, regional councils, etc. once more. At each step the plan law is again detailed until it reaches each individual firm. Firms are then required to enter with each other into legally binding contracts about the details of delivery to each other.

In addition to this physical core of the plan, concerned with high priority items, the production of goods and services considered less important is also planned, but in less detail and in monetary terms. Hence we have to consider prices. This is also necessary for another reason, namely, the fact that the execution of the physical plan itself is, among other ways, being supervised with the help of money flows, as observed by the State Bank.

The Role of Prices and Money

The Soviet government establishes essentially three types of prices and, once established, an attempt is made to keep them stable for as long a period as possible. The first type of prices is wholesale prices for industry. These are prices at which goods are sold from one firm to another. They are set to equal "planned, weighted-average, adjusted branch cost plus profit." It is here that for the first time we meet the real influence of Marxian ideology, for "cost" is interpreted in the Marxian sense, including only raw materials, depreciation, and labor, but excluding rent and interest.

Industrial Wholesale Prices

Taking raw material, depreciation, and wage costs for all firms in a particular branch of industry, say tractor production, price setters would exclude from consideration abnormally high average costs of some plants as not "socially necessary." The remaining "adjusted" cost data are then weighted by the output levels of the various plants to find the adjusted branch average. Finally, this is changed (probably downwards) to a planned figure, taking into account expected cost declines due to technical progress, while a small percentage of such figures is added as profit, giving the price sought. Such profit is set for accounting purposes and ideologically defended as the workers' production "for society at large." It is obvious from what we have said that such industrial wholesale prices do in no way, except by sheer accident, reflect relative scarcities. This is so for a variety of reasons: the exclusion of rent and interest, the use of average rather than marginal costs, and the use of planned rather than actual costs.

Agricultural Prices

The second major type of price is agricultural procurement prices at which the production of farms has to be sold. These prices are set with the major objective of fixing the terms of trade of the peasants so as to allow them to receive no more consumer goods than desired by the state. Given the prices of inputs collective farms have to buy (mostly at industrial wholesale prices) and the quantities they are supposed to buy according to plan (fertilizer, equipment, etc.), the price setters can estimate the revenue needed by the farms to cover their costs. If it were desired that collective farmers receive no money income whatsoever, since no industrial consumer goods are available for them, the projective cost figure would be divided by the planned output, establishing a delivery price per ton of product. If the output plan were fulfilled, the revenues would exactly cover costs, leaving no money income to the farmers. On the other hand, if it is desired that they have a negative (or positive) money income, because, let us say, farmers hold large idle money balances accumulated in the past (or there are industrial consumer goods available for them), the procurement price can accordingly be lower (or higher). Clearly, as in the case of industrial wholesale prices, prices so established would only by accident reflect relative scarcities of agricultural products. State farms, that is, those nationally owned, usually sell their products at the prices set for collectives, but workers in such farms have regular wage income, like those in industry.

Retail Prices and the Labor Market

A third major type of price is retail prices used by state retail stores (owned by the nation as a whole) and consumer cooperatives (owned, like the collective farms, by groups of individuals jointly). These prices differ in level and structure from industrial wholesale and agricultural procurement prices because of the imposition of a large and differentiated turnover tax on the latter two, providing a major source of revenue for the government. These prices are set with a view to clearing the aggregate market for each consumer good.

We have already seen how farmers may or may not have money income to demand goods offered in retail stores. Industrial workers are also paid in money for their work, though their income, as for laborers on state farms, is contractual and not residual like that of collective farmers. Workers have free occupational choice, and wages are differentiated by the state to get just the number of workers for each occupation that is required by the plan. This obviously minimizes the misery that would ensue if everyone were arbitrarily assigned to a job. If 200,000 miners are needed for the plan, that number will be procured, but, for example, by changing the wage up or down until that number is voluntarily forthcoming. Forced labor has shrunk to negligible proportions, but there are a few other qualifications to the above statement. The long-run supply of labor for various occupations is directed carefully by the state in controlling the number of people entering various types of training, and graduates are assigned to their first jobs. After a few years, however, they are free to do as they please, although the housing shortage seriously limits geographic mobility. Income earned by workers, as well as by farmers, can be freely spent; that is, there is free consumer choice. However, there is no consumer sovereignty. This means that the plan determines what kinds and quantities of consumer goods are produced, and each consumer decides which of these he wants. If any surplus or shortage for any one good should develop, production is not changed, as would happen if consumers were sovereign.

We can now return to the price-setting process. Planners make an estimate of consumer money income (wages, pensions, farm income) and deduct an estimate for other uses (taxes, saving). The result will be some figure such as 50 billion rubles. Planners also have (for instance, material-balance) data on planned availabilities of consumer goods (from production, imports, inventories minus exports, etc.). These will consist of items such as 5 million tons of ham, 100,000 TV sets, 15 billion pounds of bread, 5 million rubles worth of kitchen utensils, etc. From these two types of information a set of prices is then derived so that the value of ham, plus the value of TV sets, plus the value of bread, plus the value of kitchen utensils, etc. equals 50 billion rubles. Then it is at least possible that consumers spend exactly what they had intended, while buying exactly what had been provided. On the other hand, many things can and usually do go wrong. There are obviously an infinite number of price sets fulfilling the above condition. If quantity demanded was at the set price different from the estimate (and such estimate is a wild guess, since there is practically no demand research), shortages and surpluses will occur. If the price of ham was set at 1 ruble per pound, demand may well be for 1 or 15 million tons, causing a surplus or shortage (and in the Soviet system, no change in production or price). Furthermore, output plans may not be (and for consumer goods usually are not) fulfilled. Hence shortages may occur, even if by accident the "correct" price set was picked, leaving undesired money balances in the hands of consumers.

Again, such prices obviously have no connection with relative scarcities. Identical prices for two goods will typically not indicate the use of identical quantities of resources in their production.

As a "safety valve" for things that might go wrong under the above conditions, the Soviets also allow one pure remnant of private enterprise, the kolkhoz market. In thousands of different locations, peasants are designated trading areas and allowed to sell freely agricultural produce grown on their private (about 1 acre per household) plots. Households can thus dispose of any excess money they might have and are unable to spend in retail stores. Prices in this market vary with supply and demand. The transactions, furthermore, serve the twofold purpose of providing extra, or even the only, money income to peasants and of allowing urban consumers to find an outlet for theirs. In both cases, this is an important element for incentives to work.

In summary, we can state that prices are essentially grafted onto the physical plan and manipulated to accomplish what has already been determined in that plan. That plan is usually expanded in monetary terms to include nonpriority goods, assigning to firms output and input targets in money, such as "produce 10,000 rubles worth of kitchen utensils, using 5,000 rubles worth of metal, 3,000 rubles worth of labor, etc."

State Bank Control

As a result of using money in the economy, it is possible to let the State Bank control the execution of the plan. Except for wage payments to households and their purchases of goods, the use of cash is severely restricted. Typically, an industrial or agricultural enterprise must deliver its output to other firms according to contractual obligations incurred as part of the detailed specification of the plan. Payment is not made by check, but by the acceptance method. The seller will send an order to pay to his State Bank office, which will deliver it to the buyer. Upon acceptance by the latter, the account of the buyer is reduced, and the seller's increased. In this way the State Bank can in theory check upon the purpose, timing, and size of every single transaction and prevent it unless it corresponds exactly to the predetermined plan. (Obviously, for the purpose of controlling real transactions via their counterpart money flows, any price set would do as well as any other. Hence the observed irrationality of prices is here irrelevant.) In fact, the State Bank has at its disposal stern sanctions, ranging from the expropriation of a firm's deposits to a full-scale Party investigation into enterprise affairs. Yet the burdens of surveying details of economic activity on the scale ideally required are enormous. Banks frequently only engage in "formalistic" controls, using sanctions sparingly and failing in their role of detailed overseer of the entire economy.

Incentives and Their Effects

Such detailed control missing, a number of things, having survived all administrative changes, go continuously wrong and have caused headaches for the central planners for many decades. The fact that a plan exists, no matter how feasible, internally consistent, and desirable it is, does not mean it will be carried out. Ultimately this depends on the incentives for work felt by millions of workers, peasants, and managers. We have already seen above that workers, whether in industry or on state farms, are essentially motivated by the same kind of rewards and punishments as in a capitalist economy. They receive wages and salaries with which they can buy goods in state stores or on the kolkhoz market. Their pay differs with the type of occupation they hold (training required, unpleasantness of work, importance attached to it by the planners) as well as the degree to which they exert themselves on the job (piece rates). Personal effort typically leads to promotion, lack of it to demotion or loss of job. In general, real incomes have risen steadily and substantially since the Second World War. All these things combined, there have been no particular problems with making people work. The case of peasants on collective farms is a different matter. [T]heir incentives have been typically wanting, though much less so for work on their private plots! This, as well as the low priority given to investment in agriculture, must undoubtedly have contributed to the continued undesirable performance of agriculture in the Soviet Union. Agricultural output has grown substantially, but less so than hoped for by the planners.

The case of managers of industrial firms deserves some further study. Fundamentally, they, too, are motivated to do their best by the same kind of incentives as the managers of a modern capitalistic corporation, namely, salary and promotion. Yet the environment they work in is in many ways incredibly different. As we have seen, the Soviet industrial enterprise is given by some higher planning authority a plan, covering its operations for a certain period. This plan specifies a minimum output to be produced in value terms (and for priority goods in physical terms as well). It specifies input targets for materials, equipment, and labor in value and possibly physical terms. And it specifies a host of other goals, ranging from profits, quality, and labor productivity to winning socialist competitions and keeping the plants clean. A manager, as a steward for the state, is to do all these things and, upon performing well, will be rewarded with high pay as well as certain other things money alone may not be able to buy, such as a home, a car, and vacations at the Black Sea. On the other hand, failure to perform may bring not only loss of his job, but also prosecution for criminal negligence and (under Stalin) possibly a bullet in the neck.

To be more specific, while the basic salary may influence people to choose one occupation rather than another, it is a system of bonuses that determines what kind of decisions are made in the day-to-day operations of any one job. These decisions, as we shall see, are frequently made contrary to the interests of the state, although the bonus system is set up to encourage decisions desired by the central planners. Bonuses are received by management for fulfilling or overfulfilling the plan targets. It is quite possible to receive up to 50% of the basic salary for plan fulfillment alone and up to 4% more for each percentage point of overfulfillment. Hence the difference between 99 and 100% plan fulfillment may mean up to 50% difference in the incomes of the managing group, and a manager overfulfilling the plan by 5% may receive up to 70% above his basic money income! No wonder the system elicits high managerial effort.

The planning authority, however, in order to make the system work and judge managers, will have to provide the key to what is meant by plan fulfillment. This is a tricky problem, for it is possible to overfulfill three and underfulfill nine out of twelve different targets! The traditional response has been to give priority to the fulfillment of the output target in physical or, if not available, in value terms. This should not surprise us, since we have seen how central is the concern with physical planning of inputs and outputs.

We have now at hand everything needed to explain the behavior of managers. More than anything else affecting their bonus, output plan fulfillment will receive their undivided attention. This will begin with the elaboration of the plan itself. The lower the plan target, the easier it can be fulfilled. Hence the urge is strong to hide the true capabilities of the plant. But as we know, nothing is more vital to the central planner than to be informed of the capability of the economy as accurately as possible. Soviet planners are aware of this and have introduced the practice of "flushing out reserves" by arbitrarily increasing all production targets annually, even if they know of no capacity increase having occurred. This will, indeed, flush out some hidden capacities, but it will also make it impossible for other firms to fulfill an unfeasible plan, eliminating bonuses and incentives alike and possibly bringing criminal prosecution upon the innocent.

While excessively ambitious plans may raise the efforts of some managers to increase output (and also may raise their ulcer rate), they will also tempt managers to over-order and hoard raw materials or labor. This is another way of stacking the deck beforehand. By claiming that more material and labor are needed than is in fact the case, possibly more will be received. They can be used to overfulfill or they may "just be kept around" for insurance against future needs when materials might not arrive in time in right quantity and quality. Frequently personal influence (blat) is used with the higher authorities to have input allocations raised. As a result, all kinds of inputs may be available in all kinds of places but be unused, which is clearly not in the interests of the state. Many firms, especially those liable to insufficient deliveries of inputs since they produce low priority output, employ special kinds of supply expediters or "pushers" (tolkachi) who push, legally or otherwise, for the interests of the firm at higher places and who arrange for informal exchange of hoarded materials among firms. Hence hoards may be lower than one may think at first. However, the fact that materials probably go into low priority channels still shows this activity to be against the state's interests. Again, the state tries to counteract this activity by frequently moving managers from one job to another. This is to disrupt the "family relation," the system of mutual support of the controllers and the controlled, at the bottom of the planning hierarchy.

The over-ordering of capital equipment follows similar lines of reasoning on the part of managers. This is reinforced by the fact that fixed capital is provided as a grant. No interest payment being necessary, and no depreciation being incurred, if the equipment is not used, managers try to get as much as they can by whatever means. Possibly output can be increased, possibly unwanted equipment can be traded. In any case, there is nothing to lose and everything to gain. Even a steel mill can use a cabbage-planting machine!

The high mobility of managers, which is to counteract the above, provides them with an extremely short-range view. Hence they are unanimously opposed to technical innovations. Replacing present equipment with new capital is entirely different from getting more of the old. It is risky business, and risk is not rewarded. It will upset the apple cart by interrupting continuous production, and production is rewarded. To make things worse, at the very moment when a technical innovation is introduced, causing the need to eliminate production bugs, to retrain the labor force, etc., the output target is typically raised to account for the superior productivity of the new equipment or production method. At best this will mean no bonus, hence no wonder that managers drag their feet before introducing novelties! Nothing short of a direct order will do. Managers prefer to repair old equipment no matter what the cost, since their bonus depends on uninterrupted output. As a result, the introduction of new technology is seriously hampered. Planners have been quite at a loss to do anything about this reticence. Giving a special bonus for innovating will have no effect if it is small, and if it is large, the output goal will be ignored entirely.

Another serious problem for Gosplan lies in managers' response to the way in which the output target is stated, leading to the production of low quality output and incorrect assortments. To maximize output, managers are tempted to reduce quality. If the task is to produce tons of metal, greater impurity may not be visible, just as fewer stitches on a garment or fewer screws or thinner parts on a machine would not affect the number of garments or machines counted as output, freeing some inputs to raise output. At the expense of quality, this is hardly desirable. Again, if the choice is between 500 machines with or 550 machines without spare parts, we do not have to guess about the manager's choice, if his income depends on the number of machines produced. As a result, the Soviet Union has been plagued by persistent shortages of spare parts and complaints about low-quality output.

A related problem is the disregard of industrial and private consumers' demand. If small nails are needed, but the output plan is stated in tons, only huge nails will get produced. If the output plan is stated in numbers, only the tiniest ones will be made, and no large ones at all. This is the same if output targets are more general and stated in value terms, such as 50 million rubles worth of kitchen utensils. Only knives may be made, if that can most easily fulfill the plan, no matter what the demand for pots, pans, and can openers. If one were to specify the physical quantity and quality of each item produced, we would be back at the impractical case of overcentralization of bureaucracy.

In summary, we may say that Soviet managers, while following the plan as far as possible, do engage in a variety of practices contrary to the interests of the state when it becomes apparent that they cannot otherwise fulfill the plan. Being subject to a multitude of controls (the superior planning agency, the State Bank, the Central Statistical Administration, the Ministry of Finance, the Party, the Ministry of State Security), managers react in these ways rather than risk open falsification of fulfillment reports. But even in this way they continually place themselves in a potentially dangerous situation, since they do violate the laws. As one scholar put it, operating under tremendous pressure to perform, they are like a neurotic whose problems express themselves in psychosomatic illness. If one of these is cured, another one just as surely springs up. Somewhere, the pressure has to escape.