Profit, Risk and Incentives under Socialist Economic Planning By the same author The Economics and Politics of East-West Trade The Economics of Socialism Socialist Economic Development and Reforms Profit, Risk and Incentives under Socialist Economic Planning J. WILCZYNSKI Palgrave Macmillan © J. Wilczynski 1973 Softcover reprint of the hardcover 1st edition 1973 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. First published I973 by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies in New York Toronto Dublin Melbourne Johannesburg and Madras SBN 333 13418 4 ISBN 978-1-349-01444-6 ISBN 978-1-349-01442-2 (eBook) DOI 10.1007/978-1-349-01442-2 Contents Preface Vll I Historical Background I A. Dogmatic Communist Views on Profit I B. Orthodox Indicators of Enterprise Performance 3 c. Discussions in Favour of the Adoption of Profit 9 D. Profit before the Economic Reforms of the 196os 14 E. Profit, Risk and Incentives under the New Economic 17 System 2 Profit as a Criterion of Enterprise Performance 20 A. Merits of Profit 20 B. The Profit Mass 23 c. The Rentability Rate 26 D. The Profit Rate 29 E. Gross Income 33 F. Abnormal and Anti-Social Profits 36 G. Limitations of Profit under Socialism 44 so Risk and the Socialist Economic System 3 so A. Risk under Socialism and under Capitalism B. The Centralized Directive Model and Risk 57 c. Economic Reforms and Risk 63 D. Technological Risk 66 E. Protection against Risk 70 F. Confines of Permissible Risk 77 4 Prices and Profits 8I A. The Question of Efficiency Prices 81 B. Producer and Retail Prices 8s c. Differential Rent 88 D. The Differentiation of Profit Mark-ups 95 E. Decentralization and Flexibility 99 F. Deficiencies of Socialist Prices 103 Vl CONTENTS 5 The Growth and Distribution of Profits 110 A. The Growth of Profits 110 B. The Division of Gross Profits between the State and Enterprises 114 c. Profits as a Source of Budget Revenue 117 D. The Internal Allocation of Enterprise Profits 122 6 Material Incentives to Labour 126 A. The Case for Material Incentives under Socialism 126 B. The Formation of Incentive Funds 130 c. The Distribution of Incentives 136 D. Risk and Incentive Payments 141 E. Incentives and Consumption 148 F. The Criticism of Material Incentives 153 7 Investment 157 A. Financial Instruments and Profit 157 B. The Financing of Innovations, and Risk 162 c. The Self-Financing of Enterprises 166 D. Limits to the Role of Profits and Incentives 169 8 Internal Trade 174 A. Profits, Trade Margins, Turnover Taxes and Incentives 174 B. The Problem of Stocks 181 c. Trade Risk 184 D. From Sellers' to Buyers' Markets 189 External Trade 9 193 A. Prices and External Markets 193 B. Foreign Trade Profitability 196 c. Risk in Foreign Trade 202 D. Incentives in Foreign Trade 208 10 Conclusions and Appraisal 212 A. The New System and Economic Progress 212 B. Peculiarities of Socialist Economic Levers 215 c. Socialist-Capitalist Paradoxes 218 D. Profit, Incentives and Full Communism 221 Index 227 Preface THE official adoption of profit as a criterion of enterprise perform ance and a basis for incentives to labour in the European Socialist countries- Bulgaria, Czechoslovakia, the German DR, Hungary, Poland, Romania, the USSR and Yugoslavia - has caused a good deal of understandable sensation throughout the rest of the world. Many excited observers in the West have taken it as an admission of the failure of Socialist economic planning, whilst the irate ideologues from Tirana to Peking quickly dubbed it a betrayal of Marxism and the world communist movement, all trying to make a good story or political capital out of it. Apart from the ideological significance, the importance of the Socialist adoption of profit consists in the fact that it has also brought in train other economic reforms. The reforms which are most complementary to profit and incentives to labour include varying degrees of the rationalization of prices, interest rates, taxes and exchange rates, the decentralization of planning and manage ment, the introduction of capital charges on fixed and circulating capital held by enterprises and some reactivation of the market mechanism in general. The extent of these reforms has differed from one country to another - on the whole they have been advanced furthest in Yugoslavia, followed by Hungary, Czechoslovakia and Bulgaria, and least in the German DR, Poland, the USSR and Romania. Nevertheless, even in the latter countries far-reaching departures from the old Stalinist model of centralized command economy are unmistakable. It is now widely agreed in the Socialist countries that in the higher stages of economic development directives must be largely replaced by incentives and disincentives, and at the same time enterprises must be allowed considerable independence and en couraged to exercise their initiative. Socialist leaders have also viii PREFACE come to realize, although not admitting it openly, that a rigid adherence to Marxian ideas inhibits economic progress. The driving force behind these reforms has been the determina tion to advance rapidly to higher levels of efficiency by reducing waste and by accelerating technological progress. The objective is to maintain high rates of economic growth, to step up improve ments in living standards and to demonstrate that Socialism is a superior social as well as economic system. Contrary to the asser tions made by critics in capitalist countries and in China alike at the time of the reforms, the Socialist adoption of profit and the strengthening of other quasi-capitalist devices have not led to a return to capitalism in any of the eight Socialist countries. Nor has the ultimate Marxian ideal of 'full communism' been aban doned as the ultimate goal. It is not generally realized that the nature and role of profit and other economic levers in a modern Socialist economy are vastly different from those normally identi fied with capitalism. Profit, risk and incentives are considered in this book together, because they are obviously closely related under modern Socialism. Although these categories existed under the old system, their role was either non-existent or otherwise small, and certainly there was hardly any correspondence amongst them. The adoption of profit on the one hand, and the extension of the independence of enter prises together with other forms of decentralization, the drive to accelerate technological progress and the strengthening of the role of the market on the other, have all brought the problem of risk to the fore. Incentives to labour are based on enterprise profit, and they are designed to induce the management and workers to maximize profits. Various forms of protection have been developed against risk to promote innovations. At the same time, the authorities now rely primarily on financial incentives and dis incentives, rather than on directives, to enhance the working of profit and bonuses and to ensure that they operate in accordance with current policy objectives. J. WILCZYNSKI Royal Military College of Australia, Duntroon, University of Nef.O South Wales Historical Background I A. DOGMATIC COMMUNIST VIEWS ON PROFIT To Marx and his orthodox followers, profit became a symbol of the evil of the capitalist economic system and the ultimate source of egoism, social stratification, class conflict, unemployment, crises, colonialism and wars; but above all responsible for the systematic exploitation and immiseration of the toiling masses. As such it was regarded as bearing the seeds of destruction, bound to lead to the inevitable breakdown of the system of which it became the most distinguishing feature. In his vision of the ideal communist society - to be marked by the social ownership of the means of production, distribution based on the principle 'from each according to his ability, to each according to his needs' and the absence of market relations - Marx saw no place for profit as an economic category.! In Marx's social framework, the profit-seeker is the private capitalist, the villain who in the pursuit of profit opens Pandora's box. He is not interested in satisfying social wants but in squeezing out the maximum gain for himself: Use-values must therefore never be looked upon as the real aim of the capitalist; neither must the profit on any single transaction. The restless never-ending process of profit-making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser.2 1 K. Marx, Capital, London, George Allen & Unwin, 1946, pp. 166-9, 391- 426; K. Marx, Critique of the Gotha Program, Moscow, FLPH, 1947, p. 27; K. Marx, Value, Price and Profit, London, George Allen & Unwin, 1947, pp. 64-74; K. Marx and F. Engels, The Communist Manifesto, London, Lawrence & Wishart, 1948, pp. 16-23, 34-5. 2 Capital, pp. 13o-1.