Russia: Borrowing from the Capitalists

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“The economy,” said Lenin, “is the main field of battle for Communism.”

In a fashion the old revolutionary could hardly have intended, the Soviet economy has become today a battlefield of explosive ideas that threaten nearly every precept and practice of Communism in the past generation. Whether conservatively toeing their Marx or boldly advocating such heretical Western-style reforms as the primacy of profits, every important planner, apparatchik and economist in Russia is caught up in Communism’s greatest debate since Stalin set backward Russia on its cruel—but successful—forced march into the 20th century industrial world.

Russia’s flirtation with market mechanisms comes at a time of swift and startling economic change across the whole Communist-bloc spectrum. Hotel lobbies from Warsaw to Bucharest are jammed with Western businessmen scrambling to get into Communist markets. The “imperialist agents” are getting an interested reception in ways unthinkable a few years before. Negotiators for West Germany’s giant Krupp empire last week were tidying up a deal to build plants in Poland that will be German-owned but will employ Polish labor, and Hungary and Rumania have expressed lively interest in similar permanent, paying capitalist boarders of their own.

Pepsi-Cola is negotiating with at least four satellite countries, and both Firestone Tire & Rubber and Universal Oil Products will build major plants in Rumania. Hardly a week goes by without the announcement of a new trade agreement between a Western nation and a member of the East bloc, typically for double the amount of previous trade. Last year commerce between East and West soared to $9 billion—a 100% jump in seven years. In his State of the Union address, President Johnson asked the nation to explore new ways “to increase peaceful trade” with Communist countries—a goal that may well multiply twelvefold American exports to Russia alone in the next five years.

Command Economy. As the increasingly independent Eastern European satellites are opening up to the West, so they are boldly opening up their own internal economies to Western techniques. Fortnight ago, Czechoslovakia inaugurated a massive decentralization program drawn up by Prague Economics Professor Ota Sik. Except for general growth goals set by the state and controlled prices in some key sectors, each Czech factory will have wide freedom for its own development. East Germany, too, has relegated planning to groups of enterprises, freed the prices of some raw materials, is toying with profit incentives. Hungary has intro duced a form of profit sharing, and in a deviation from Marxist ideology unique in the bloc, has imposed an interest rate of 5% on capital. To push exports, Poland has permitted three firms to set up their own foreign-trade pipelines, bypassing Warsaw to deal directly abroad. Yugoslavia long ago created a “Socialist market economy”—relatively competitive enterprise under state ownership.

Russia itself has lagged behind the satellites in the economic shift toward Western ways. At stake is nothing less than Russia’s vast “command economy,” with its Kafkaesque, topheavy bureaucratic fiefdoms regulating every pulse and throb of the nation’s economic engine. And though Marx never mentioned central planning and Lenin came to it only late in life, such is Stalin’s historical shadow that at stake, too, are a generation of ideological maxims boastfully vaunting the superiority of Socialist planning over capitalism, the pervasive power—and perhaps the jobs —of some 10 million planners large and small, and ultimately perhaps the amenities of life of millions of ordinary Russians.

Clearly, such unsettling prospects would not even be countenanced in the Krernlin were it not for yet a grimmer vista already looming. That vista is a continuing turnabout in the Soviet growth rate, whose longtime double-figure performances led Nikita Khrushchev as recently as 1961 to assure the world that the U.S.S.R. would over take the U.S. by 1970 as the world’s mightiest economy. It has been slowing down ever since. Last week Moscow reported that industrial output grew at 7.1%, a sizable figure for a mature economy but the lowest in Russia since 1946. And each year the evidences of waste, mismanagement, inefficiency and planning gone berserk multiply.

Ukrainian Contribution. Russia’s growing community of pragmatic, highly professional economists and engineers understands very clearly what has happened, and is sure that it has the cure—even if much of it has to be borrowed from the capitalists. Among the foremost is Kharkov Economics Professor Evsei Liberman, 67, whose quizzical smile masks an imperious and demanding intelligence, and who as much as any other Russian is credited by the West with initiating Russia’s great debate. A stocky Ukrainian with a quick and witty command of English, Liberman is typical of Russia’s new breed that has used the freedom of the post-Stalin era to correspond with and receive Western economists, is as at home in Moscow’s ministries as conducting a postgraduate seminar.

The crux of their arguments for change comes down to the fact that the Soviet economy has grown too complex and sophisticated to be efficiently manipulated by pushbutton from Moscow. The economic reformers are not out to undermine Communism but to improve its efficiency. Nonetheless, the solutions they have proposed are distinctly Western: the use of profits on invested capital as the single best indicator of factory performance, flexible prices responding to the market forces of supply and demand—and, of all things, charging interest on the use of government money by shops and factories.

Sensible pragmatism or rank heresy? Khrushchev himself provided the reformers with a text, if not an answer, late in 1962, when the debate was beginning to gather momentum. He reminded the Central Committee of “Lenin’s directive that we be able, if necessary, to learn from the capitalists, to adopt whatever they have that is sensible and advantageous.”

Eighteen months later, it had plainly become “necessary.” Moving the debate off the pages of Pravda and into the industrial arena, Khrushchev gave the reformers a place to test their theories. Two clothing factories—Moscow’s Bolshevichka and Gorky’s Mayak—were cut loose to negotiate prices and sell their suits and dresses directly to 22 retail stores. The stores told the two factories what kinds of goods the consumers wanted, and the factories were judged by the profits made on what goods were actually sold.

Bolshevichka and Mayak showed such a resounding improvement in efficiency—and such “deviationism”—that many Kremlinologists assumed they had contributed to Nikita’s downfall.

Not at all. One of the first acts of Premier Kosygin’s new leadership was to extend the experiments. Kosygin announced that in gradual stages the new system would be spread throughout the whole of the consumer-goods industry. Last month the first 400 clothing and shoe firms scattered across Russia were authorized for the changeover—together, significantly, with 78 of their raw-material suppliers, who also had to be freed from the restrictions of the planners if the Kremlin really meant business in the reforms. Kosygin went even farther, asserting that eventually the reforms would be extended to all of Soviet industry.

The Car Urge. What the reforms seek to do is liberate the Soviet economy from the stifling economic dictatorship that Stalin imposed on it as a mirror image of his political tyranny. Determined to rush the transition to industrial power that had taken the U.S. and Britain 200 years to accomplish, he turned Russia into a gigantic state corporation that ruthlessly seized every bit of excess capital it produced in order to feed it back into its heavy industries—above all, steel—which are the sinews of a modern economy. With such a single-minded goal, planning was relatively easy.

But by the time Stalin died, the economy had grown so complex that no army of planners, however large, could possibly keep up with Russia’s exploding technology. And for the first time, the Soviet consumer began to have enough money, and enough of shoddily made goods, to refuse to buy what failed to please him—and to want more of everything from hand cream and weekly hairdos to haute couture. As Izvestia unabashedly admitted fortnight ago: “The urge to have one’s own car is as compelling as technical progress itself.” This was a kind of consumer pressure that the Kremlin planners had never before encountered.

Hydra-Foiled. In his pursuit of “Goulash Communism,” Khrushchev tried to cope with it, and with all his economy’s mounting problems, by replanning the planners. No fewer than six times in ten years, he scrambled the organization table, veering from decentralization back to recentralization in the vain hope of finding the magic mix for what he called “better utilization of the country’s industrial potential.” It eluded him each time—and his constant shufflings left the Russian economy at the mercy of the monster planning Hydra, with its multiple overlapping bureaus on the national, regional and local level, even more than before.

Soviet planning’s faults are chiefly two: too many cooks from the Supreme Economic Council on down, and more often than not the wrong recipe in 15 copies. Two months ago, a Supreme Soviet Deputy cited the example of the Izhora factory, which received no fewer than 70 different official instructions from nine state committees, four economic councils and two state planning committees—all authorized to issue Izhora production orders.

Since factory output goals are either laid down in weight or quota by the planners a knitwear plant ordered to produce 80,000 caps and sweaters naturally produced only caps: they were smaller and thus cheaper and quicker to make. A factory commanded to make lamp shades made them all orange, since sticking to one color kept the assembly line uncomplicated. Tire production one year was fixed without checking the plan for motor-vehicle output. Taxi drivers were put on a bonus system based on mileage, and soon the Moscow suburbs were full of empty taxis barreling down the boulevards to fatten their bonuses.

No Ceiling. The tonnage norms particularly piqued Khrushchev’s peasant common sense. Machine builders used eight-inch plates when four-inch plates would easily have done the job. “We make the heaviest machines in the world,” sighed Nikita. His choice complaint, however, had to do with a Moscow chandelier factory: the more tons of chandeliers the plant produced, the more workers earned in bonuses. The chandeliers grew heavier and heavier, until they started pulling ceilings down. They fulfilled the plan, admitted Khrushchev angrily, “but who needs this plan? To whom does it give light?”

Many able economists and engineers had long known that much of the Soviet economy was a joke, and started saying so. Typical was the protest about the construction of the Novo-Lipetsk steel mill. The plans took up 91 volumes comprising 70,000 pages, specified precisely the location of each nail, lamp or washstand—everything, in fact, except whether the project was economically sound. An engineer estimated perhaps half in jest that at the rate the paper-wafflers were multiplying, by 1980 the planning agencies might well employ every man and woman in the Soviet Union. One mathematician made the astonishing calculation that Russia’s G.N.P. might well be doubled simply by cleaning up the planning mess.

Last year, in Russia’s largest republic alone, deliveries of 257 factories had to be suspended because their goods simply would not be bought. Moreover, state trade organizations returned or marked down 20% of all clothing, 10% of hosiery and 9% of shoes produced. Russian refrigerator factories received 56,000 written complaints about faulty products—including refrigerators from the Baku factory lacking refrigerant gas in their coils. As a result of the consumer’s stiffening standards and an increased inclination to complain, an incredible $3 billion worth of unsellable junk has accumulated in Soviet inventories.

The Right Man. As early as 1956, Evsei Liberman had published an article in Kommunist suggesting that local plant efficiency and quality could be improved by greater emphasis on profitability. For Liberman, then still an obscure scholar in a provincial school, it was merely the modest proposal of a man who knew the day-to-day problems of a plant manager.

Born in the Ukraine’s Volyn in 1897, Liberman attended a gymnasium and took a law degree at Kiev University, went on to study engineering in Kharkov. For some 15 years he worked in various factories near by, including six years as planning chief in a large farm machinery plant. After a wartime stint in a Moscow government job, Liberman went back to the Engineering Institute in Kharkov as a teacher and part-time factory consultant, earning his doctorate in economics in 1956 and the title of professor in 1959.

The provincial professor’s 1956 essay went virtually unnoticed—except by some far more influential economists in Moscow who had already been rethinking the system. Perhaps the most important was Vasily Nemchinov, a mathematical eminence grise regarded as the dean of Soviet economists. He saw in Liberman a potential stalking horse for all the reformers, invited him to Moscow. When in 1962 the economy’s growing malaise could no longer be ignored by the Kremlin, Nemchinov persuaded Khrushchev to give Liberman’s theories a showcase in Pravda. On Sept. 9, 1962, Liberman’s “The Plan, Profits and Bonuses” was published, and the great debate began.

What’s Good for the Factory. Profits had long been used in Russia, but only as one among a dozen capriciously applied, yardsticks for determining plant efficiency. Liberman urged that profit be made the prime element, arguing that “the higher the profits, the greater the incentive” to quality and efficiency. “What is good for the factory is good for the society,” Liberman insisted.

One by one, other economists leaped into the fray, blasting the “cult of the plan,” and insisting that plant managers be given more autonomy. The eminent Nemchinov himself, fast going blind and nearing the end of his life (he died last October at the age of 70), called for something very close to a state-owned market economy. Planning decrees would be replaced by contracts between enterprises and the government, with the lowest bidder getting a particular job—and setting its prices as a result.

Charging Interest. Except for the cardinal Red principle of state ownership of property, no part of the Soviet economic edifice was eventually spared the reformers’ wrecking balls. One editor proposed abolition of Russia’s 50% consumer goods tax, argued that all Soviet revenues could be derived from a profits tax, once profit was made the universal indicator. Denouncing the fact that under planning today, over one-fifth of Russia’s factories operate at a subsidized loss, he urged that government funds be rechanneled into firms running in the black.

An important bureaucrat took these ideas a logical step farther, demanding an interest charge on capital and prices rooted in economic reality rather than planning fiction. Academician Vadim Trapeznikov, revered in Russia as the “father of Soviet automation,” threw his weight in with the reformers all along the line, noting that “one hears the view that interest on capital is a concept of capitalistic society.” Wrong, he insisted. “In fact, the form here is identical, but the essence is different.”

Lost: 500,000 Days. It was by no means only economists who poured through the breach that Liberman had opened. The manager of a giant construction complex even went so far as to use the phrase “supply and demand” in pleading for a freewheeling open market for consumer goods, admitting that it would necessitate major reliance on that old capitalist technique of market research by firms. A director of Odessa’s Red October Plant wrote to Pravda that the machine-tool industry in the Black Sea area was working at less than three-fourths the capacity called for in the plan. The reason, he complained acidly, was the “host of directives” from the planners, which caused “insurmountable barriers and innumerable hindrances.” Leningrad managers complained that they lost 500,000 man-days of work during 1964 running back and forth to Moscow to get decisions from central planners.

Liberman himself passed on a foundry’s complaint that it lost $11,100 worth of metal because its plan would not permit an additional outlay of $2,500 for salvage workers. In another instance, the plan specifies that workers at the Victory Candy Factory (1964 quota: 5,460 tons) at Vilna, in Lithuania, wear sanitary white smocks and caps at all times. Though they handle each piece of candy at least four times, nowhere are they asked to wash their hands. So absurd have planning’s excesses grown that even some of the planners themselves were converted to the reformers’ cause. One regional planner complained angrily that his bosses had amended his 1962 Voronezh sovnarkhoz plan 133 times within nine months.

Great Dangers. To the entrenched planners and old-line ideologues, such prerevolutionary criticisms were a screaming red flag, and soon outraged rebuttals began to fill the columns of the press. “If we give up centralized planning of salaries, work production, production costs, investments,” complained the prestigious Academy of Sciences’ Kirill Plotnikov, “we give up regulation by the state of the most important parts of the economy—in fact, of economic planning. This path is full of great dangers.”

“The aim of socialist production is not to make a profit!” objected one critic. “Lenin put forward the principle of organization against laissez-faire and petit bourgeois negligence,” said another, “against opportunism and anarchy, liquidatorism, dumping.” Amen, cried Academician Fedorenko: “We must never forget that unique economic ‘planification’ which is centralized is one of the great victories of the socialist regime. We must not weaken but improve central planning.”

A Strange Utopia. For support, many of those who resist the Liberman philosophy are allying themselves with Russia’s computer specialists, who argue that central planning can be saved by the use of modern machines.

Solving the equation of the Soviet economy would clearly be a computer expert’s supreme triumph, since it would involve programming some 50 million unknowns and 5,000,000 constants all in motion. The Kremlin has endowed a Central Economic-Mathematical Institute to explore the feasibility of a network of 50 key computer stations across the U.S.S.R. linked to a “Big Daddy” blinker in Moscow. Presumably the monster would constantly engorge raw data on the economy at the local level, process it in Moscow, and electronically burp prices and other economic orders back to the provinces.

This Orwellian vision draws scalding scorn from the liberal economists. “Do you mathematicians expect to be able to see from the main computing center,” asks Ivan Malyshev, deputy chief of the Central Statistical Administration, “all our vast territory from the cold rocks of Murmansk to the flaming sun of Kolkhida in the Caucasus, to see how people sow and reap, how every chemical complex functions, how every machine operates? If something goes wrong in Khabarovsk, can you merely press a button and straighten things out? A strange Utopia. Society is not the sum of mathematical zeros and digits. It is a living, creative body.”

No Sides. Though Khrushchev permitted these polemics to take place, he probably never fully understood what the argument was all about. Still, he let the reformers start their experiments in the Bolshevichka and Mayak factories.

Escaping from the plan at first proved an unsettling business for the two firms. Despite Moscow’s explicit authorization, many of the suppliers were suspicious—and unwilling to guarantee delivery dates in advance. Stores, however, were delighted at last to be able to order what their customers wanted with the reasonable certainty that they would get it, and get it on time.

Orders in hand, Bolshevichka and Mayak set their own production schedules, decided how many workers would be needed to do the job. Profits were pegged only to what their stores could actually sell, and worker piece-rate bonuses were accordingly awarded for quality. To get a better reading of consumer tastes, Bolshevichka set up its own shoppers’ clinic. Within six months, both profits and quality had soared and, of critical interest to the Kremlin, inventories were sharply reduced: the turnover of Bolshevichka and Mayak goods in the retail stores was speeded up by some three weeks.

Bolshevichka today gleams with pride: flowers adorn each work table, the walls are freshly painted and adorned with photographs of its workers shaking hands with Party bigwigs, who arrive in ever increasing numbers to see the miracle that has come to pass. To one and all, beaming Director Petr Noskov reports that Bolshevichka’s profit margin has risen to 7%, that the average pay is up from $94 a month to $110, and that the factory is now making better suits at a cheaper price ($85 v. $96) and are (oh, that Capitalist idiom) “selling like hot cakes.”

McNamaraish. Now, at the top of all this, stands Premier Aleksei Kosygin, a trained economist, widely and well-traveled in Western economies.

Far more at home with a balance sheet —or a Western businessman—than with the shadow-boxing of Leninist theology, Kosygin has long been the whiz kid of the Communist bureaucracy (at 44 he was the youngest member of the Politburo). Now 60, he probably understands the Soviet economy better than any man alive, and with his pragmatic, McNamaraish fetish for efficiency, took the part of the reformers even under Khrushchev. If any Communist leader can turn the experiments “into the law of the land, it is Kosygin. The cautious, rational, step-by-step method he has adopted in extending them is in itself an encouraging sign, points out U.S. Economist Marshall Goldman, who has made a careful study of the Soviet economic controversy. “They had to make changes,” he adds. “If they had not, the economy would have gone straight down. It was really more a question of saving the economy than simply strengthening it.”

If, under Kosygin, Evsei Liberman is at all surprised to find himself at .least nominally in the vanguard of modern Communism’s potentially most far-reaching reform, he shows no sign of discomfort in the role. Although he retired formally two years ago, he still teaches three classes a week in the Kharkov University skyscraper overlooking Dzerzhinsky Square. When asked if he tries to inculcate his students with notions of profitability, he smiles and says, “Yes, but very carefully: I say that it is my opinion, but there are many objections. I explain them all, and the students draw their own conclusions.”

“Stop—Go.” Nor are his days of experiment at an end. Last month Liberman was in Lvov, explaining his theories to the Town Economic Council, which has been authorized to make the first area (as opposed to industry) test of the “profit incentive.” Lvov is of particular interest because the five industries in the test include a coal mine and a mobile-hoist manufacturing plant —the reformers’ first venture outside the confines of light industry. Liberman stoutly denies that Western capitalism has had any influence on his theories, and has referred to Western reporting of his work as “capitalistic” as the work of “the snipes in the swamp.” But he plainly follows with careful interest what is written in the West about the great debate, promptly fires off tart letters to editors in excellent English if he has any quarrel with the interpretation.

Whatever the final outcome of the debate, the fact that it has taken place at all in such frankness and freedom is remarkable testimony to how far Russia has come since Stalin. Some Sovietologists think the enemies of the reform are simply biding their time, confident that sooner or later the experiments are bound to cause economic dislocation that will force a retrenchment. For the new system to really work, the Kremlin will have to eventually free prices. And then unemployment may result, which no Soviet regime is likely to tolerate. Goldman thinks that progress will likely be on a “stop-go” basis, a little at a time to permit the economy to adjust to the wrenching changes that the switch from a command economy will inevitably entail.

Liberman admits as much. “It is clear that, at first, shortcomings will turn up in the course of practical application; that people will surely rail at the system and its authors, and that people will say it must be abolished and thrown out immediately,” he told a group of fellow economists. “I foresee all this, but if we economists work together in a united front, go through the painful period of the introduction of the new system together and do not panic, we will be performing a good service in building the technical base of Communism.”

Ad Men? Technical base for Communism or not, there is no escaping the fact that having in effect posted a suggestion box, the Kremlin has found Pandora’s name on it. Last month a Moscow economist proposed that the profit motive even be extended to agriculture, Russia’s perennially insoluble problem. Last week in Trud, a trade official named Lazukov suggested that Russians should learn to advertise capitalist-style, with TV commercials, trailers in movie houses, and professional Madison Avenue men. Izvestia recently lamented that while the U.S. has 50 university-level business-management schools, Russia has none. Though the Russians insist none of this has anything to do with capitalism —at least in “essence”—the fact remains that Peking, which once complained that Russia was fast turning into “capitalism without capitalists,” is now taunting Moscow for its “capitalism with capitalists.”

Liberman is of course right in insisting that he is not ushering in “capitalism”—that dirty word the Communists have never really understood for all their ranting against it. But the current search for incentives to get the Russian economy moving again is nonetheless an eloquent testimony to the failure of one of Communism’s cardinal creeds: that the profit motive is wrong and evil, and unnecessary in running a society. People, insists Marxism, can be made to work like soldiers—or saints—solely for the good of the state. The great debate, whatever comes of it, has demonstrated that this is simply not so; that given a chance, man does not want to live by slogan alone.

100 Flowers? Western experts differ widely on how far Russian economic reform can go, and what it means. “I think this is a permanent reform,” says Pennsylvania’s Herbert Levine, “except for a major outside political event. I don’t expect that there will be an easy retrenchment to a central economy.” But Stanford’s Roger Freeman insists that it is “only a period—like China’s 100-flowers period. It may appear to open up the Soviet Union, but eventually it must die.”

Others suspect some sort of balance will be struck: “Within carefully defined limits,” says the Rand Corporation’s Sovietologist Abraham Becker, “the consumer will be allowed to determine the major part of his buying habits. But the central planners will still set the limits as they see fit.” Still, he admits, “it would not be beyond the realm of possibility that Soviet society would resemble Yugoslavia’s within ten years.” State Department experts, however, tend to take the view that, since “the new experiments inherently mean curtailment of the control of Party members,” sooner or later it will become a political issue—and the experiments will be scrapped, just as NEP, Communism’s first essay in capitalism from 1921 to 1927, was dismantled by the political commissars.

Erosion Elsewhere. Perhaps the most hopeful analysis for the West of Communism’s great debate comes from Harvard’s respected Soviet Analyst Abram Bergson. “This is a shift toward pragmatism—an erosion of doctrine in economic affairs. It might be argued that erosion of doctrine in economic affairs could lead to erosion of other Communist doctrines. For it enhances the spread of pragmatism into politics, and thus into foreign policy.”