4 Efficiency and the Rate of Growth

WITH the establishment of the course toward autarky, industrialization, and preferential development of capital goods industries in December 1925,¹ the Soviet policy makers and planners raised a question which has since taken on an increasingly obsessional character not only for them but also for a large part of humanity. The question is: how long will it take the USSR to surpass the level of development of the most advanced industrial countries?

The XVth Party Conference affirmed at the end of October 1926 that “all the efforts of the party and of the state” would be directed toward this aim so as to reach it “in a minimal historical period.”² The goal of a maximum pace of growth in capital accumulation and industrial output—a pace necessarily faster than in the United States—became the overriding goal of the Soviet strategy of development long before the world’s informed public opinion had seriously considered either the magnitude of the Soviet challenge or the vastness of the means being mobilized for its achievement. But if the XVth Party Conference boldly asserted that the capitalist rates of growth would certainly be surpassed thanks to the “rational and planned utilization of all the resources available in the national economy,” in fact policy makers and planners were sharply divided as to what methods to use for determining a priori the size of capital accumulation, the distribution of the investible resources, and the rate of growth in capital accumulation and output, in order to reach the posited goals in the shortest possible period.

A number of economists openly challenged the idea that the Soviet Union could or would match Russia’s prewar rate of capital accumulation, maintain rates of output indefinitely at the levels attained during the NEP, or use efficiently all its investible resources. The most outstanding theoretician of the inevitable fall in accumulation and output rates was V. A. Bazarov. Assuming, first, that a socialist system could not keep consumption below the prewar tsarist level, Bazarov asserted that the USSR would for investment purposes dispose of a share of its income “not greater but rather smaller than a capitalist economy which is at the same level of development of its productive forces.”³ Stating that any recovery process takes the aspect of “a curve descending smoothly to the level of [the pre-disturbance] equilibrium,” Bazarov pointed out that in such a process the rate of speed of growth in output necessarily “slackens as the difference diminishes between the given state of the system and the state of its stable [prewar] equilibrium.”⁴

The idea of slackening rates of growth in both capital formation and output appeared under various other forms not only in the writing of Bazarov but also in the official planning documents released up to 1928. The assumptions concerning the fall in rates changed, however, significantly from one document to another. For example, the planning documents elaborated by a “Special Commission on the Reproduction of Fixed Capital”—which played a key role in the mid-1920’s—embodied the idea of falling rates because, according to their authors, the initial all-out effort of accumulation required for launching the economy on the path of reconstruction could not and need not be matched subsequently by efforts of a similar intensity.⁵ Other economists— Krzhiz-hanovskii, for instance—stressed that increasing rates of growth in capital formation might lead to decreasing growth rates in output, for a variety of reasons, notably the dispersion of investment on a wide front in order to keep in production plants of low efficiency, the sinking of large investment into long-term construction projects, etc.⁶

Split into various tendencies but united in their distrust of the “pessimists,” most of the party’s economists, of the left and center persuasions, rejected completely the theory of the “falling growth curve” and its underlying assumptions. The Left stressed that a high level of capital accumulation was attainable by shifting the “terms of trade” against the peasants. The Center asserted that a high accumulation was completely within the reach of the system even with price decreases in favor of the consumer, thanks to the extraordinary productive potentialities of socialist “planning and rationalization.”

The party’s economists next tackled the question of falling rates of output. A. Boiarskii pointed out that the processes of recovery and reconstruction interpenetrate each other so that no one could draw a fine line between them. However, thanks to massive introduction of new techniques, a qualitative “leap” occurs between the two processes as the economy is shifted onto a higher technological level where new and higher rates of output become possible.⁷ Carried away by the idea of shifts in the pace of growth due to massive shifts in technology, certain party enthusiasts claimed that U.S. levels of industrial output could be reached and surpassed at a headlong pace. Fel’dman himself had affirmed that the “country had to think not only of the upper limits of industrialization, but also of its minimal rates,” and defined these minimal rates as rates necessarily higher than those prevailing in the United States: “ten or at the maximum fifteen years is the period in whose course we must accomplish the reconstruction of all productive relationships in the economy.”⁸ At the end of 1929 a whole set of articles or pamphlets —by Zolotarev, Sabsovich, Kovalevskii—stressed the possibility and the necessity of very high rates of growth and promised the realization of “full communism” in less than ten years. According to Zolotarev there was no point in planning beyond 1936, since “beyond the second Five-Year Plan, during the transition to a mature communist economy . . . the concept of a plan will of course change in a radical way; it will grow into the planning of a classless society in which the functions of the state will begin to wither away.”⁹ Sabsovich asserted that planning should be based not on decelerating but on “gradually accelerating” rates of growth, since the introduction of new technology would necessarily lead to massive increases in productivity. He affirmed that “with respect to the scale of industrial production we shall considerably exceed, within fifteen years, the present level of development of the most advanced capitalist country, the USA, and leave far behind in eighteen to twenty years the level which it will be able to reach at that time, if it continues to develop under capitalist conditions.”¹⁰ Kovalevskii, who rejected Sabsovich’s projected intersectoral relationships as conservative and his computations as too empirical, asserted, on the basis of generous assumptions of his own, that his sectoral projections guaranteed “the attainment of American consumption levels in ten years and a threefold increase over American consumption in fifteen years.”¹¹

Under the conflicting premises of the pessimists, who influenced the Right of the party, and of the “ultras,” who reflected in an exaggerated way, particularly from 1928 on, the hopes of the leading bureaucracy engaged in the ruthless industrialization and collectivization drive, Gosplan steered a very uneasy course. Its approach to perspective planning was strictly empirical. On the basis of rough estimates of available physical resources and on the basis of some crucial technological options, the planners set “intuitively” the key targets for capacity and output of the priority branches— electricity, steel, and machine tools. From scheduled expansions and from sectoral and branch allocations, a sort of model of intersectoral relationships was constructed in physical terms. From these scheduled physical flows, national income and its division into accumulation and consumption was finally derived by the use of planned prices. The projected rates of growth in capacity and output of the leading branches were from the outset, and continued to remain, the determinants of the plan.¹²

The question remained: how to avoid a projection of these basic growth rates which would prove either too low (for time is of the essence) or too high (for the economy cannot be geared toward unachievable goals without terrific strains)? This is a problem for which the Soviet planners have not yet found the answer. The workers of Gosplan and of the Supreme Council of the National Economy, the leading organ of the state industry, were in the 1920’s veering right and left according to the changing fortunes of the leading factions in the party’s Central Committee. By 1927, when the Center under Stalin felt sufficiently strong to repudiate the Left and then to use the latter’s own arguments for breaking the Right, the planners passed through a phase of feverish revaluation of the scheduled rates of growth included in their drafts of the first Five-Year Plan. The first draft of a five-year perspective plan drawn by Gosplan scheduled an increase in the gross value of output of industry by the end of the plan period of 67.9 per cent and 87.0 per cent in the minimum and maximum plan variants respectively. In its own draft, the Supreme Council of the National Economy proposed an increase of 97.6 per cent. Revising its assumptions and its estimates, Gosplan upped its targets by 1927 to 83.6 (minimum) or 98.7 per cent (maximum). After the XVth Party Congress in December 1927 the Supreme Council prepared a number of drafts in which the scheduled rates of growth of industrial output jumped from 108 to 122, 140, and finally to 167.7 Per cent for the period 1927/28-1932/33. The Supreme Council’s draft of August 1928 scheduled an increase of 141.7 per cent in the gross value of output of sector A (heavy industry) and of 109.6 for sector B (light industry). The December draft, which served in fact as the plan, scheduled an increase of 221 per cent for sector A and 130.3 per cent for B.¹³ In theory, in 1932 group A increased by 290 per cent and group B by 163 per cent and “completion” of the plan was proclaimed a year ahead of schedule. While these official figures are questionable, since they were computed on the basis of doubtful weights,¹⁴ it is nevertheless certain both that the over-all pace of development was extremely fast and that vast disruptions were caused in the economy as a whole by the unprecedented development of the heavy industry branches.

By 1932 Trotsky himself was warning from his exile against “adventurism” and was suggesting the need of a pause in the drive for industrialization.¹⁵ The leading bureaucracy was not, however, ready to accept any suggestion which implied the need of a slowing down in the pace of development of the key industrial branches. It may be interesting to recall that in 1928 party optimists were forecasting a yearly growth rate of 26.3 per cent for group A and of 18.2 per cent for group B over the next three quinquennia. Officially, the growth rates for the first three long-term plan periods (the last interrupted in 1941) reached: for group A, 28.5, 19.0, and 15.0 per cent; for group B, 19.2, 17.1, and 13.2 per cent. Output growth rates did in fact follow, even in the distorted mirror of 1926-27 prices, a falling curve. The explanation may be due to the deep disruptions caused by the incredible forging ahead of the heavy industry branches, the progressive exhaustion of the advantages arising from economies of scale, full utilization of capacity, rationalization,¹⁶ and finally, the fact that without regular increases in the productivity of capital a rising growth rate in output requires in turn a rising ratio of investment to total output¹⁷— while the share of capital accumulation in national income rose in real terms but perhaps not sufficiently over time.

When the great industrialization and collectivization drive got under way in 1929, most of the so-called “pessimists” advancing the theory of falling growth rates were tracked down by Stalin’s secret police. Two infamous mass political trials—of the engineers and of the former Mensheviks— at the beginning of the 1930’s set the stage for the bloody purges of the middle and late 1930’s. The engineers, who helped planning in its initial stages, and the former Menshevik or “bourgeois” statisticians and theoreticians, who helped formulate some of the most pertinent problems concerning planning theory and methodology—Groman, Bazarov, Kondrat’ev, Ginzburg, and many others—were first publicly humiliated, then condemned under trumped-up charges as “saboteurs” and “wreckers,” and finally liquidated in Stalin’s prisons.¹⁸

The top Soviet leaders believed that in order to attain their political and economic goals they alone must determine in detail the direction of the main processes of industrialization and the interconnections between them, that they alone must regulate the intensity of industrialization (and hence must set the level of capital accumulation), must decide on the extent and kind of capital construction, order the key outputs, play the role of innovator, and provide for the training and distribution of manpower. Hence, from the opening of the all-round planning era at the beginning of 1929, they concentrated vast administrative and operational powers in their own hands. The emphasis placed on strategic priorities, technological options, intuitive goal-setting, and mechanical balancing of key outputs, and an enormous number of directives from the top down toward the “planning front” as a whole, were deemed sufficient to insure the rapid and systematic growth of the economy in accordance with the leaders’ political and economic goals and their attendant price policies. Cost-price considerations (in Marxian parlance, the operation of the “law of value”) were not regarded as useful guides in the decisions of the central planners. The determination of a value yardstick to facilitate choices among different ways of producing future outputs was left to the discretion of engineering project makers and their designing bureaus. Finally, “profitability” (returns above cost) was established as a guiding principle (but not always as an automatic yardstick) for enterprises which since the early 1920’s had been placed on a so-called autonomous business basis.

The Soviet leadership rejected the use of any normative principle in selecting among different types of future outputs. Deprived of any value yardstick and lacking both an integrated input-output balance of the economy and adequate information on the activities occurring in each branch and sector, the policy makers and planners concentrated their full attention on the expansion in output and capacity of a limited number of key intermediate producers’ goods (steel, coal, metals, electricity) and of some basic consumers’ goods (grains, fats, meat) and on their direct apportionment among processing industries. Tight control over intermediate products and their apportionment, plus price manipulations of various inputs, were designed to ensure, along with a second set of material and financial controls on the finished outputs themselves, that the operational managers would behave as the central planners wished them to—that is, that they would produce the desired output mix with the specific means provided for the purpose.

Their disregard of value considerations in central decisions, their apportionment of the main inputs, their reliance on a maze of often contradictory controls, and their use of price distortions did not mean that the central planners were indifferent to the problem of efficiency; they did not ignore the need to secure maximum returns in relation to the goals set by the policy makers. The truth is rather that the planners viewed efficiency as a narrow technological problem which could by and large be solved on technological grounds. In its planning directives to Gosplan, the XVth Party Congress ordered that “the plan of capital construction should aim at the most effective utilization of capital outlays,” and that “yearly capital outlays must provide maximum investment in a number of comparatively basic new plants and of leading enterprises chosen for the reconstruction.”¹⁹ But the directives did not indicate how “the most effective utilization of capital outlays” could actually be measured.

With these cryptic orders in hand, Gosplan drew up its plans on the assumption of maximum effective utilization of available capacity and maximum utilization of present and potential resources, with attention to regional peculiarities and full employment, but with the aim of minimizing the absorption of labor in industry, using the most advanced technology, and reducing unit costs. Within this loosely defined framework it is hard to ascertain the actual criteria used by project makers and designers to choose among alternative processes, to decide between expansion of old plants and construction of new ones, to select among present and postponable outlays, etc. What is clear, however, is that a well-nourished discussion developed around these problems in the late twenties but did not yield either a satisfactory theoretical formulation or a yardstick acceptable to the party’s leadership.

The trouble with this discussion in the 1920’s—and with various Soviet discussions since then in the same field—is that many of the participants confused the question of (a) fixing the final output mix, and the capital allocation for the purpose (these decisions were made by the central planners) with that of (b) choosing among alternative ways of producing this final output mix within the limits of the specified allocations of capital. Those who got involved in the question of determining the structure of output and the pattern of capital allocation raised again a question that had been answered during the debate on the strategy of development and its specific pattern of priorities. Such persons searched for criteria of “effectiveness” by relating changes in output to increments of capital (or of both capital and labor), and thus raised the problem of the utilization of capital. Those who, on the other hand, eliminated the question of output from their calculations altogether, and who attempted to relate investments to savings in cost, deliberately reduced their search for effectiveness to a choice among processes— a choice in capital intensity, not in capital allocation—for producting a predetermined output mix.

Among those who raised anew the question of the over-all strategy of development itself a typical example is N. A. Kovalevskii, to whom we have already referred.²⁰ His suggestions for drawing up a general plan, following Fel’dman’s schemata, were rejected because he proposed that value relationships, and not physical output targets, be taken as the starting points of a perspective plan; because he further affirmed that certain interconnections necessarily prevailed among value categories; and finally, because he advised that capital-output ratios be used to rationalize the planner’s choices among alternative patterns of investment. From the debates on Kovalevskii’s proposals at the Communist Academy one gets a revealing glimpse of the official approach to value indicators and of the planning techniques prevailing in the late 1920’s. “The economic meaning of the concept of effectiveness is very vague,” says A. I. Petrov. “We should plan labor productivity on the basis of technical calculations in various specific sectors of the economy. Once we have obtained this expected growth of productivity we should then fix the division of national income into parts to be consumed and to be accumulated.”²¹ “Kovalevskii considers only the productive forces, without any regard to our economic policy,” adds R. E. Vaisberg.²² “It is very curious,” stresses A. Kon, “that at the basis of all the constructs of comrade Kovalevskii there is a certain coefficient, the coefficient of effectiveness.” After affirming that this coefficient is both “illegitimate and irrelevant,” Kon adds: “We are not concerned with the ratio of net output to expended labor, but with net output and capital funds which embody technology, in all its varieties, as well as live labor.”²³ Only the central planners, on the basis of established strategy, can determine both the level of the key output targets and the means—i.e., the capital allocation and the technology—with which to produce them. This is a point on which the Soviet policy makers have never accepted compromises.

Any attempt to use profit as a criterion for determining the pattern of industrialization, even below the level of “top planning decisions,” was looked upon very suspiciously. This was the case with the suggestions of N. N. Shaposhnikov and R. Gol’dberg, who emphasized the importance of profitability at the enterprise level. After affirming, tongue in cheek, that once one accepts the idea of autarky, it is certainly “better to have a state industry that is more costly and less efficient than foreign private industry, than to have no industry at all,” Shaposhnikov asserted that from this “theoretical point of view” no one could oppose the domestic development of any specific new industrial branch or give a categorical answer to the question if “one should rather have [first] the Volga-Don Canal and [then] Dnieprostroi, or the other way around.” But, added Shaposhnikov, economic science does establish a criterion which if considered will not interfere with economic policy. This criterion is: “the more profitable any enterprise is, the more beneficial for the community.”²⁴ Gol’dberg pointed out that within the Soviet economy “profits are being assessed every day and everywhere by the most haphazard, antediluvian and home-made methods” and that a precise criterion of profitability was indispensable. This criterion, affirmed Gol’dberg (generalizing the Cobb-Douglas type of analysis applied in the United States for the period 1899-1922) is the ratio of change in output to the increments in capital and wage bill. Efficiency, according to Gol’dberg, will improve when the rate of increase in capital per worker is smaller than the reduction in number of workers (and in the total wage bill), with output staying the same.²⁵

Other economists—S. Rozentul, for example—tried to provide a sophisticated synthetic formula which would take into account not only the efficiency achieved on the level of enterprises “as measured by the increase in their profitability” but also other secondary effects, such as benefits obtained by the labor force, the increment in income received from “nonproductive” expenditures (services), etc.²⁶ L. Iushkov finally noted that a “norm” of effectiveness could be derived for the economy as a whole from (a) the centrally scheduled targets and the centrally scheduled volume of capital investments and pattern of allocations by branches, and (b) the capitaloutput ratios resulting from the various alternatives tentatively selected at the level of enterprises. Once the “limit of effectiveness” was found at which all contemplated investment would be absorbed, the final choice among alternatives would, at each level, be made in relation to this norm, taken as a sort of “objective” rate of return. Only the projects with ratios above the norm would be implemented, with preference for the alternative with the highest returns.²⁷

But if the state leadership was stressing the idea of profitability at the level of the state-owned, autonomously managed state enterprises, it was not at all eager to depart from its haphazard home-made methods of assessing profitability, or to take profitability into account at the higher planning level for the allocation of resources. “Profitability” was to remain only a yardstick for checking the performance of enterprises in relation to the goals set, not a criterion for setting these goals.

Departing from output coefficients, la. Rozenfel’d and G. Abezgauz showed how the managers were in practice getting around the question of the relationship between profitability and investment: they simply ignored it, and related each investment to reductions in cost. Ia. Rozenfel’d indicated that, in the choice among alternative ways of producing a given output, the “arbitrator” could be the ratio of investment to cost savings per unit, times producible units during the estimated life of the asset.²⁸ Abezgauz affirmed that what mattered was the pace at which the “pay-back” of investments was achieved through savings in cost. Since both investment outlays and recoupments vary from year to year and asset to asset, the choice among alternatives should be made by taking into account the specific pay-backs over a period of perhaps ten years (i.e., of two perspective plans), with preference for the project with the highest pay-back percentage.²⁹ This shift in focus from problems of capital allocation to those of capital intensity did not, however, satisfy the leading bureaucracy for many years, and the official fog on the question of “efficiency” remained dense for decades.

Denying that any single criterion could be selected to help either the planner in allocating capital or the project maker in choosing among alternative processes, some economists suggested that planning and project making were, in the given Soviet conditions, necessarily “eclectic” in their choice of criteria. Rejecting specifically Abezgauz’ approach, M. Barun asserted that any capital outlay had a lot of “different effects” (concerning location, technology, scale, organization of production) in either a private or a centrally run economy.³⁰ Professor L. N. Litoshenko, who by that time was severely pulled between the need of toning down his critique of the planners and his own standards of professional integrity, noted that in a monetary-commercial system—be it capitalist or socialist—the same criterion (profit) should in principle prevail in respect to capital allocation; but, since none of the conditions which make profitability meaningful exist under socialism—especially mobility of capital among branches, and rational prices—the planners, as the Gosplan’s texts demonstrate, must resort to a whole set of criteria, e.g., the needs of various branches assessed by the balancing method, closeness of raw material, obsolescence of existing equipment, etc. The result, Litoshenko pointed out, may perhaps appear adequate for each specific case; but freedom to combine the various criteria in a number of ways excludes the possibility of ascertaining whether the plan which finally emerges is really the best plan.³¹

The lack of any acceptable criteria of choice led in practice, as Krzhizhanovskii himself noted by the beginning of 1929, to insoluble conflicts between the objective of full employment and the drive to rationalize production “at all costs;” between the aim of introducing the highest technology and the need to keep obsolete plants in production in order to meet the prescribed goals; between the possibility of borrowing the most advanced technology and the lack of investible resources and skilled labor for using them; between the drive to increase production quickly and the tying down of large investments in long-term projects.³²

The decision to draw up the plan on the basis of physical flows and the deliberate distortion of cost-price relationships rendered impossible, within the Soviet planning framework, a solution of the question of rational allocation of resources. How, then, can one account for the impressive growth of the Soviet system notwithstanding the wastage of resources in relation to the planners’ goals? The achievement of high levels of capital accumulation by direct allocation of basic intermediate products, such as steel, at the place of production; the allocation of physical resources to the key branches in the quantities and qualities desired; the concentration of efforts integrally and sequentially according to priorities from the first to the next down the line; the introduction of the most advanced technology for the main processes in the leading branches; the continuous prodding of operational management and labor to keep them in line—all these contributed to achieving the high defense and industrialization objectives set for the USSR by its Communist leadership. These are typical “war economy” methods; the uniqueness of the Soviet experience consists in the fact that they have never been applied on such a vast scale and for such a long time anywhere else.

The goal set in the 1920’s, to reach and surpass in fifteen years the United States’ industrial capacity, industrial output, or standard of living appears incredibly unrealistic today. The United States’ growth has far exceeded Soviet expectations, while Soviet growth has fallen below Soviet forecasts. The critical “fifteen years” is still presented as the period necessary to overtake the United States, but today, after decades of intensive industrialization, this goal projects heavy shadows on the late 1960’s and early 1970’s.³³