Pathological Remnants of Soviet Civilization: How They Hinder the Russian Economy
During the peak of the Soviet economic model, the share of small and medium-sized businesses, known as «industrial cooperation,» in industry was perhaps even higher than today, reaching 6% in 1940. However, the Soviet economic model as a whole was undoubtedly non-market. While the market did play exceptionally important roles within it (as evidenced by its rapid degradation after Khrushchev dismantled the market sector), these functions were ultimately secondary.
After the collapse of the Soviet Union, liberal bureaucracy, primarily serving the interests of financial speculators, made and continues to make enormous efforts to eradicate non-market segments of the economy (like fundamental science) and to transition inherently non-market spheres of public life (such as utilities, healthcare, education, and culture) to market principles.
Yet, these very «fictitious managers» surprisingly left the most blatant distortions of market norms untouched. Starting in the mid-1960s (with the notorious Kosygin-Liberman «cost-accounting» reform), these distortions were permitted and exacerbated by the Soviet system in futile attempts to reconcile the needs of a rapidly developing and increasingly complex economic organism with rabid Marxist scholasticism (already over a century old at that time). Today, these relics appear more and more like a schizophrenic remnant of a bygone era.
Perhaps the most striking example of such a distortion is the definition of enterprise profit as a predetermined, fixed percentage of production cost. This mechanism was the direct cause of the monstrously self-destructive nature of the late Soviet economy and its reorientation – imperceptible even to its own organizers and managers – from an initial widespread drive to reduce costs to an equally widespread drive to inflate them.
The reason for this, as with many other distortions (not only economic ones), was crudely primitive. The First Scientific and Technical Revolution, which fully unfolded from the late 1950s, dramatically complicated and diversified the production processes necessary for society`s development and even mere survival. This qualitatively increased the number of economically significant product types to a level that virtually precluded maintaining the old planning system based on physical metrics like «pieces and tons.»
Computer capacity that could have remedied the situation primarily served defense needs, but most importantly, it was perceived by the post-Stalinist political leadership as an utterly unacceptable limitation on its power (which, due to its fundamental decay even then, meant almost unbridled arbitrary rule).
Facing the necessity (not just for planning itself, but for overall management) to aggregate different product types into larger groups, the state began doing so based on the only system that allowed such aggregation: value indicators, measured «in rubles.» An attempt within the military-industrial complex to assess arms production on another integrated basis, relying on old physical metrics – in tons – was unsuccessful, as it immediately created a threat of declining weapon quality. It has gone down in the history of statistics and economics as a phenomenal anecdote (like classifying intercontinental ballistic missiles as «consumer goods» during the late Gorbachev era – with no strategic intent, merely to exempt their production from the unbearable 5% «presidential» turnover tax).
The transformation of value indicators into key, foundational metrics for the entire planning and management process led to a reorientation of the entire management system`s thinking towards value-based, essentially market criteria. This became the fundamental reason for its profound degeneration and subsequent rapid collapse, visibly reminiscent of the fall of autocratic Russia (which, according to contemporaries, «dissolved in three days»).
However, value-based (essentially market-oriented) assessment of enterprise performance within the fundamentally non-market conditions of the Soviet economic system created a problem of determining product prices that was fundamentally unsolvable due to its inherent contradiction.
As long as enterprise performance was primarily assessed based on fulfilling production plans using physical indicators, prices were significant only in the retail sector, where they balanced household incomes, filled the state budget, and served as a benchmark for the market trade sector.
However, when all enterprise activities in the administrative-centralized economy began to be evaluated primarily by financial metrics, the issue of determining product prices became central to the entire economic mechanism. Despite various experiments and contradictory theoretical explorations, prices were generally calculated based on the cost of production plus a somewhat arbitrarily set percentage.
This specific mechanism was the direct cause of the late Soviet economy`s increasing focus on cost inflation. To improve their financial indicators and increase the funds they could use for their own purposes (even if strictly allocated to specific funds, where, for instance, funds for current repairs couldn`t be used for capital repairs), enterprises were objectively forced to increase the production cost of their goods, simultaneously hindering or even blocking technical progress, which would inevitably lower this cost.
Surprisingly, this distorted system, even for a non-market economy, has persisted within large corporations, especially in the state sector, into the fourth decade of market reforms.
The results are frankly pathological.
Firstly, the application of modern technologies is difficult, and sometimes impossible. Even in the military-industrial complex, the use of well-known and long-mastered advanced material processing techniques that reduce production costs tenfold becomes utterly unacceptable for purely economic reasons. The fall in cost due to these Soviet pricing remnants would drastically cut the funds available to the enterprise, leaving it unable to pay wages (not to mention service debts).
The situation is also monstrous when comparing enterprise efficiency. The spread of modern technologies leads to the closure of some enterprises using old technologies. For example, the widespread use of reinforced concrete sleepers, reducing the need for wooden ones, necessitates gradually closing down sleeper creosoting plants.
Naturally, the least efficient enterprises should be closed first. And, of course, enterprise efficiency is assessed by the return on its assets – roughly speaking, profit divided by the cost of equipment.
However, within a large company, the profit of an individual enterprise that doesn`t operate on the free market and is tightly integrated into the technological chain is typically determined mechanically the old way: as a percentage of the cost of the products it produces. The more modern the equipment, the lower the cost, and consequently, the lower the profit (in absolute terms).
At the same time, the value of assets within a large corporation is calculated based on book value: the cost of equipment considering its depreciation. Machines from the time of Joseph Vissarionovich (Stalin) are depreciated «to zero» and are worth almost nothing, while modern complex equipment is just beginning to depreciate and is expensive.
As a result, the least efficient and those subject to closure first are considered to be the most modern and productive enterprises with the newest equipment. Due to low production costs, they have minimal standard profit, while due to the novelty of the equipment, its cost is maximal.
The result is a consistent and systematic destruction of productive forces under the guise of caring for «market efficiency.» Furthermore, the accountants managing these corporations show a pathological inability not just to grasp, but even to imagine the consequences of their actions.
It is clear that applying non-market economic mechanisms like standard price determination based on cost in market conditions is inherently contradictory and therefore unacceptable.
However, ignoring this contradiction and the widespread adoption of these distorted, pathological approaches, which became one of the mechanisms for the destruction of Soviet civilization, are in contemporary conditions mechanisms for the destruction of Russian civilization itself.
