15: The Retention of Profit by the Enterprise

In order that profit may function as the regulator of social production under conditions where production is planned by the enterprises themselves, each enterprise must retain sufficient of the profit it makes to enable adequate material incentives to be drawn from it to be of significant economic interest to the personnel of the enterprise responsible for making that profit.

A feature of the propaganda campaign preceding and associated with the "economic reform" was, therefore, the demand that the proportion of an enterprise's profit accruing to the state should be significantly reduced and the proportion retained by the enterprise significantly increased:

"It is necessary to considerably increase the share of the total sum of profit which remains at the disposal of the enterprises and is used by them to expand and improve production, increase their assets, replenish their circulating funds, and for bonuses and the social and cultural needs of their personnel".

(L. Gatovsky: "The Role of Profit in a Socialist Economy", in :"Kommunist" (Communist), No. 18, 1962, in: M.E. Sharpe (Ed.): "Planning, Profit and Incentives in the USSR", Volume 1; New York; 1966; p. 103-4).

"That part of profit which remains at the disposal of the enterprise's director for purposes of collective and individual incentive.. must be increased"

(V. Shkatov: "What is Useful for the Country is Profitable for Everyone", in: "Pravda" (Truth), September 1st., 1964, in: M.E. Sharpe (Ed.): op. cit., Volume 1; p. 203).

The "economic reform" did increase significantly the proportion of an enterprise's profits retained by the enterprise:

"It is necessary to leave to the enterprises more of their profits".

(A.N. Kosygin: "On Improving Industrial Management, Perfecting Planing and Enhancing Economic Incentives in Industrial Production", in: "Izvestia" (News), September 28th., 1965, in: M.E. Sharpe (Ed.): op. cit., Voume 2; p. 21).

The average proportion of an enterprise's profit retained by the enterprise rose between 1966 and 1969 as follows:

1966: 26%

1967: 29%

1968: 33%

1969: 40%

(N.Y. Drogichinsky: "The Economic Reform in Action", in: "Soviet Economic Reform: Progress and Problems"", Moscow; 1972; p. 207).

16: "Economic Incentives"

Under the socialist system which formerly existed in the Soviet Union, the system of material incentives to the personnel of an enterprise -- other than wages and salaries -- was based on fulfilment, or over-fulfiment, by the enterprise of the targets laid down in the central economic plan:

"Our present planning methods and practice proceed from the premise that the most reliable assessment of the work of enterprises upon which their financial rewards depend is fulfilment of the plan".

(E.G. Liberman: "Planning Production and Standards of Long-term Operation", in: "Voprosy ekonomiki" (Problems of Economics), No. 8, 1962, in: M.E. Sharpe (Ed.): Planning and Incentives in the USSR", Volume 1; New York; 1966; p. 76).

"The system of material incentives for the personnel (is) mainly based on reward for over-fulfilment of the plan".

(A.N. Kosygin: "On Improving Industrial Management, Perfecting Planning, and Enhancing Economc incentives in Industrial Production", in: M.E. Sharpe (Ed.): op. cit., Volume 2; p. 26).

The abolition of centralised economic planning and the establishment of the profit motive as the regulator of social production clearly required the replacement of this system of material incentives to the personnel of an enterprise.

Accordingly, in the propaganda campaign which preceded the "economic reform", the demand was put forward for its replacement by a new system in which these material incentives would be based on the rate of profit made by the enterprise and drawn from that profit:

"The higher the enterprise's profitability, the greater will be its share of the profits.... The larger the profits, the larger the bonus fund".

(E.G. Liberman: "Cost Accounting and Material Encouragement of Industrial Personnel", in: "Voprosy ekonomiki" (Problems of Economics), No. 6, 1955, in: M.E. Sharpe (Ed.): op. cit., Volume 1; p. 12, 13).

"The main thing here is that all the types of bonuses come out of profits".

(E.G. Liberman: ""Planning Production and Standards of Long-term Operation", in: "Voprosy ekonomiki" (Problems of Economics), No. 8, 1962, in: M.E. Sharpe (Ed.): op. cit., Volume 1; p. 71).

"It is proposed to establish a single fund for all types of material incentive and to make it dependent upon profit (in percent of the production assets)".

(E.G. Liberman: "Plan, Profits and Bonuses", in: "Pravda" (Truth), September 9th., 1962, in: M.E. Sharpe (Ed.): op. cit., Volume 1; p. 86).

"The enterprise must possess a fund for material incentive, the size of which must depend upon the actual level of profitability".

(V.S. Nemchinov: "The Plan Target and Material Incentive", in: "Pravda" (Truth), September 21st., 1962, in: M.E. Sharpe (Ed.): op. cit, Volume 1; p. 111).

The "economic reform" brought this system of material incentives into operation:

"At present.. the achievements of the enterprise in increasing profits and the profitability of production do not have any direct effect on the earnings of the staff of the enterprise.

It is necessary to change this system in order to give the personnel a greater material interest. It is necessary to introduce a system under which the enterprise's opportunities for increasing remuneration of its workers and employees would be determined, above all, by... increased profits and greater profitability of production...

The enterprises must have at their disposal -- in addition to the wage fund -- their own source for rewarding personnel for individual achievements and high overall results of enterprise operations. This source must be a part of the profit obtained by the enterprise".

(A.N. Kosygin: ibid.; p. 25-6).

"Under the new conditions, the stimulating role of profit rises considerably... The material incentive funds and the fund for the development of production will be created from profits. The funds must be considerably larger than the previously existing enterprise fund... The greater the profit obtained by the enterprise, the higher will be the allotments to the incentive funds and the fund for the development of production".

(V. Garbuzov: "Finances and Economic Stimuli", in: "Ekonomicheskaya gazeta" (Economic Gazette), No. 41, 1965, in: M.E. Sharpe (Ed.): op. cit., Volume 2; p. 49, 50).

In the four years from 1966 to 1069, the average size of the material incentive funds of enterprises rose four times. (N.Y. Drogichinsky: "The Economic Reform in Action", in: "Soviet Economic Reform: Progress and Problems"; Moscow; 1972; p. 207).

The method of distribution of these economic incentives among the personnel of each enterprise will be discussed in Section 18: "The Distribution of 'Socialist Profit' ".