POLITICAL ECONOMY - ECONOMIC ACCOUNTING AND PROFITABILITY

Political Economy

Part III : THE SOCIALIST MODE OF PRODUCTION

B. THE SOCIALIST ECONOMIC SYSTEM

CHAPTER XXXIV : ECONOMIC ACCOUNTING AND PROFITABILITY. COSTS AND PRICE

Economic Accounting and the Profitability of Enterprises

The economic structure of socialism is free from the contradictions of capitalism, which lead to a tremendous waste of materials and labour. The socialist system of planning the national economy makes possible and necessary a much greater saving in means of production and labour than in all preceding modes of production.

All the various forms of economising in society can be reduced in the last resort to savings in labour time, to economy in living and past labour—i.e., they imply the growth of the productivity of social labour. “The less time required by society to produce wheat, cattle, etc.," Marx wrote, “the greater the time gained for other production, material or spiritual. Both for each individual and for society, all-round development, consumption, and activity depend on the saving of time." (Marx-Engels Archives, Russian edition, Vol. IV, p. 119.)

Economy in labour-time is objectively necessary for socialist society. It is one of the main factors which make the uninterrupted growth of production possible. This makes it enormously Important for socialist economy systematically to observe a regime of economy. The regime of economy is a principle of socialist economic management; it consists in saving, in the interests of society as a whole, working time, materials and money, in all enterprises and institutions.

One of the basic tasks of the Socialist State in its economic organising work is to bring about the strictest economy of resources.

The Communist Party and the Soviet State rally the mass of the people in a struggle for economy, so that every hour of social labour which is expended, and every unit of equipment, fuel, power and raw materials, will lead to ever-increasing output. In the capitalist system, economy in production outlays is obtained at the expense of the working people, by worsening their working conditions and by increased exploitation. As against this, economy of expenditure of labour and material resources in a socialist system serves the interests of the whole of society and leads to improvements in the position of the working people; it is therefore the affair of the whole people.

Economy of both living and congealed labour is effected in socialist society by means of economic accounting. Lenin pointed out that socialism can be built, and tens of millions of people can be led to communism, “not directly relying on enthusiasm, but aided by the enthusiasm engendered by the great revolution, and on the basis of personal interest, personal incentive and economic accounting". (Lenin, “The fourth anniversary of the October Revolution", Selected Works, 1950, English edition, Vol. II, Pt. 2, p. 601. [N.B.—The words “business principles", used in the edition quoted, are here replaced by “economic accounting", a more precise rendering of the Russian original.—Editor.]) Economic accounting is a method of planned economic management in socialist enterprises, based on the operation of the law of value: it requires the comparison of the input and output of economic activities in money terms, compensation for the expenditure carried out by an enterprise out of its own income, economy of resources, and ensuring that the enterprise is profitable.

Economic accounting is based on the utilisation of the law of value. As was stated above, in socialist society the input and output, the income and expenditure of socialist enterprises, are expressed and measured in a value and money form. Economic accounting is the method of socialist management which makes it possible, using the money form of value, to calculate so as to compare the expenditure of an enterprise with its income and disclose its profits or losses.

Economic accounting presupposes the need to compensate enterprises for their expenditure by income from the sale of their products at prices laid down by the State. This expresses how the requirements of the law of value are taken into account.

Economic accounting is aimed at achieving the best economic results for the smallest expenditure, ensuring the profitability of enterprises through economy and rational utilisation of resources. Profitability means that the receipts of an enterprise from selling its output replace its costs and provide an extra income in addition. Profitability is one of the most important indications of the economic effectiveness of the work of an enterprise in a particular period. “The profitableness of individual plants and industries is of immense value for the development of our country. It must be taken into account both when planning construction and when planning production. It is an elementary requirement of our economic activity at the present stage of development." (Stalin, Economic Problems of Socialism in the U.S.S.R., 1952, p. 62.)

Economic accounting provides a material stimulus to improvement in the economic activity of an enterprise, fosters a spirit of rational conduct of the enterprise in its leaders and other workers, disciplines them, teaches them to calculate exactly the amount they produce, to introduce advanced technique, to raise the productivity of labour, to lower costs of production and to increase the profitability of the enterprise.

Based as it is upon the operation of the law of value, economic accounting is at the same time the means of realising the requirements of a basic economic law, the law of planned development of the national economy, and other economic laws of socialism.

Economic accounting, which stimulates economy in working time and the mobilising of the internal reserves of enterprises, contributes to the continuous growth of socialist production on the basis of the application of advanced technique and steady raising of the productivity of labour in the interests of the fullest satisfaction of the growing demands of society as a whole, of the working people.

Economic accounting is the necessary condition for realising the requirements of the law of planned, proportional development of the national economy. It is used as an instrument of the State for planned guidance of enterprises. Economic accounting has the task of ensuring the fulfilment and over-fulfilment of the State plans with the least expenditure of labour and means of production, with a rational use of all resources. It serves as a means for checking on the fulfilment of plans in both quantitative and qualitative respects.

In socialist economy, over and above the profitability of particular enterprises and branches of production, a higher measure of profitability, inaccessible to capitalism, is attained—profitability on a national scale. This signifies that profitability is determined not only from the point of view of particular enterprises and branches of production, and not only within the limits of a single year, but also from the point of view of the whole national economy and over a long period. At the same time an increase in the profitability of individual enterprises and of whole branches of the economy is a necessary condition for acceleration of the rate of development of the whole national economy.

In socialist economy, as already mentioned, in addition to profitable enterprises, there may be enterprises which are of great national economic importance, but which are temporarily unprofitable and even making a loss. The Socialist State supports them by State subsidies, and at the same time takes steps to make them profitable.

Thus, during the 1941-5 war, the system of covering the losses of heavy industry by subsidies was inevitable. But it hindered economic accounting, and weakened material incentives to reduce output costs. Therefore the system of subsidies was abolished after the war (from 1 January, 1949). This was done by increasing labour productivity and reducing costs, and also by temporarily raising output prices in certain branches of heavy industry. Wholesale prices were fixed to correspond with costs. The abolition of subsidies assisted and improved economic accounting, provided incentives to economise in labour and material outlays in industrial production, and established suitable conditions for the subsequent reduction of wholesale prices.

The strengthening of economic accounting demands of the economic organs a struggle for the fulfilment of their accumulation plans by all enterprises; it is incompatible with the practice of taking resources from enterprises which are working well and transferring them to those which are working badly.

Economic accounting expresses the inter-relationship between the Socialist State and its enterprises, and also the relations between individual enterprises.

Economic accounting is based on the combination of centralised management of socialist enterprises by the State with economic independence of operation for each enterprise. An enterprise is independent in its economic operation in that it receives and has at its disposal State-owned resources, both material and financial, and can exercise considerable initiative in the most rational use of them for the best possible achievement of planning targets.

The Socialist State distributes means of production among its enterprises and provides each of them with sufficient resources in materials and money to fulfil their plan. The enterprise, as a juridically independent economic unit, enters into economic relations with other enterprises and organisations, recruits its skilled workers, and organises its own production, supplies, and sales. It has a current account in the State Bank where it deposits its money resources; it also has the right to receive bank credits, and has an independent balance-sheet.

The independent economic operation of State enterprises takes place within the framework of public: ownership of the means of production: the Socialist State continues to own the means of production which it has transferred to the use of a particular enterprise. It arranges the connections between different enterprises in a planned way, taking into account the part played by each of them in the general system of the national economy. The relations between socialist enterprises are not competitive, as under capitalism; they are relations of collaboration in fulfilling public tasks.

Economic accounting implies that an enterprise and its management are responsible to the State for fulfilling the plan and for using resources rationally.

The enterprise is responsible for paying wages to manual and clerical workers on time and in the right amounts, for making payments due to the State Budget on time and in full, and for making proper use of Budget appropriations and bank loans which it receives.

Economic accounting also implies that the enterprise is materially responsible to other enterprises and economic organisations for meeting its obligations.

Economic relations between enterprises are regulated with the aid of economic contracts. Enterprises acquire the means of production they need, and sell their output, by contracts which conform with the general State plan.

The contract sets out: delivery conditions; the amount, variety, and quality of output; times of delivery; the price; times and methods of payment; and forms and extent of responsibility for violating the conditions of the contract. It fixes material penalties for breaches of its provisions.

One of the most important requirements of economic accounting is that contract discipline should be strictly observed by enterprises.

Economic accounting is based on the material interest of the enterprise, and of its workers and managerial personnel as a body, in fulfilling the plan, in increasing production continuously and rapidly, in economical and rational management, and in making the enterprise profitable.

This material interest of an enterprise and its workers in plan fulfilment and in improving production is made possible primarily by the fact that the enterprise receives money according to the results of its economic work. Further, part of the income, or profit, remains at the disposal of the enterprise and is used to supplement circulating funds, for capital investment, to improve the cultural and living conditions of the clerical and manual workers and to reward the best workers.

Economic accounting is connected with the utilisation of the economic law of distribution according to work. Distribution according to work provides personal material incentives to the workers to increase labour productivity and economise resources, and leads to a strengthening of economic accounting. In its turn economic accounting facilitates the systematic application of the law of distribution according to work, and the improvement of the well-being of the working people. The higher the income of an enterprise, the greater its possibilities of rewarding its workers by improving their material position and cultural and living conditions and rewarding workers who are foremost in productivity. The more effective economic accounting becomes, the more widely bonuses far economising resources can be paid.

Economic accounting presupposes constant rouble control of the work of an enterprise and its separate sections. Rouble control means that the quality of the work of an enterprise is disclosed by the indices of its economic activity expressed in money (costs, profitability, etc.). The enterprise receives its money according to the quality of its work and the extent to which it fulfils the plan. It is required to make its statutory payments an time (returning loans to the bank, payments into the Budget, etc.). It has to settle its accounts with other enterprises (suppliers or purchasers) on time, in conformity with its contracts. Rouble control over the work of enterprises is carried out by economic organisations, financial institutions and the banking system. Mutual rouble control is carried out by enterprises which have signed contracts with each other. Within an enterprise, rouble control is carried out by keeping accounts of its input and output and comparing them in money terms.

The rational organisation of socialist production requires that elements of economic accounting should be used in shops and production departments within each enterprise. The shop and the department are parts of the enterprise which have some independence in production technology, but are not independent in their economic operation as the enterprise itself is. Economic accounting is therefore used here only to a limited extent. Elements of economic accounting which are used in shops and departments include accounts of their expenditure in money form, comparison of this expenditure with targets laid down by the plan, and material rewards to those workers who have achieved the best results in economising resources.

Systematic enforcement of economic accounting increases the material interest of the enterprise and its workers in production results and in fulfilling the plan, and thus helps to increase productive activity and socialist emulation by the mass of workers, aiming at the full and rational use of resources, and at the careful and prudent management of the economy. Economic accounting seeks to improve continuously the utilisation of all funds at the disposal of enterprises.

Funds of Enterprises. Fixed and Circulating Funds

Material and money resources issued to, a State enterprise are public property and constitute the funds of these enterprises. Means of production are the production funds of enterprises. As has been shown, the means of production of State enterprises in the U.S.S.R. are not in essence commodities; but they retain the form of commodities, of values, they appear not only in physical but also in money form, and have prices. The distribution of means of production is effected not by supply free of charge but by their being sold for money. In this sense, circulation of means of production takes place; consequently these funds go through a continuous process of planned turnover, passing in turn through the production and circulation stages. In conformity with this they change their form —the money form changes to the productive; the productive to the commodity form, the commodity to the money form, and so on. According to the character of the turnover, the production funds of an enterprise are divided into fixed and circulating.

Fixed funds serve production over a long period, retaining their physical form. The value of fixed funds enters production outlays gradually, in parts, to the extent that these funds are worn out.

Fixed production funds include the means of labour—production buildings, installations, machines, durable tools and implements, and means of transport. Circulating funds are entirely consumed in the production process during a single production period, and their value is fully expended in the outlays on producing the commodity concerned. The circulating production funds of an enterprise include raw and other materials, fuel, semi-manufactures, and other objects of labour. Fixed funds are the production apparatus of socialist society; their volume, and the degree to which they are put to use, are an important factor influencing the amount of output produced.

The planned development of technique under socialism demands that the economic effectiveness of the introduction into production of each new type of machine be considered from every standpoint, together with the prospects of its further utilisation.

The invention and putting into use in production of new, more productive and economical machines means that the machines now out-of-date become morally depreciated before the time for their physical depreciation is up. The conception of moral depreciation of machinery in socialist society is very important, since the rapid tempos of technical progress demand that out-of-date technique be replaced without delay by new, and new by newer still. The moral depreciation of machines under socialist conditions differs in principle from the moral depreciation of machines under capitalism. The replacement of obsolete equipment by new takes place under socialism not spontaneously or through competition but in a planned way, so that these replacements do not lead to the ruin of small and medium enterprises and are not accompanied by the wastage of productive forces that takes place under capitalism. The planned conduct of the national economy creates extensive possibilities for the rational use of all available technique.

To replace fixed funds as they are worn out the enterprise has a depreciation fund. Allocations for depreciation should ensure constant renewal of the production apparatus. The depreciation fund is formed by including a definite part of the value of the fixed funds, corresponding to the extent to which they are used up, in the outlay on every unit of output. Part of the resources of the depreciation fund (the amount is fixed by the State) is used in planned fashion to replace fixed funds which have gone out of use, and the rest remains at the disposal of the enterprise to be expended on capital repair of the existing fixed funds.

In addition to funds in the sphere of production, enterprises possess resources functioning in the sphere of circulation, or funds of circulation.These consist of finished output ready for sale, and the money resources of the enterprise, required for purchasing raw materials and fuel, for paying wages, etc.

Circulating production funds and funds of circulation taken together constitute the circulating resources of an enterprise. The circulating resources of an enterprise are divided into its own and borrowed resources. These are both formed in a planned way.

An enterprise’s own circulating resources are allocated to it by the State to cover its minimum needs. It also needs supplementary or temporary circulating resources; for example, it has to acquire seasonal stocks of raw material and fuel, and it has to finance goods in transit. These are covered by borrowed resources (State Bank credits), for the use of which the Bank charges a fixed rate of interest. This system of allotting circulating resources encourages the enterprise to use them as rationally and economically as possible, and to speed up their turnover.

The socialist system of economy ensures the continuous growth of fixed and circulating funds and makes it possible to make considerably better use of them than capitalism does. The State fixes standards which are obligatory for the enterprises—progressive technical, and economic standards of utilisation of machines and equipment, standards of consumption of raw materials, fuel and other elements of the circulating fund per unit of finished output (iron ore and coke per ton of pig-iron, sugar-beet per ton of sugar, etc.) and standards of stocks for each constituent part of the circulating fund and of the finished output. The correct fixing of these standards is an important factor in the systematic raising of the level of utilisation of the fixed funds and circulating resources.

In the iron and ,steel, enterprises of the U.S.S.R. the effective utilisation of blast-furnaces was in 1940 nearly double what it had been in 1913. In 1954 the utilisation of blast-furnaces was 43 per cent and of open-hearth furnaces 48 per cent above the 1940 level.

The velocity of turnover of circulating resources is one of the main qualitative indices of the economic activity of an enterprise.

The velocity of turnover of the resources of an enterprise depends, firstly, on the time of production, in the course of which these resources are in the sphere of production, i.e., in the form of production stocks, unfinished production, or semi-products, and, secondly, on the time during which these resources are in the sphere of circulation (in the form of stocks of output ready for sale, etc.)

Increasing the velocity of turnover of circulating resources is of great importance in giving effect to the regime of economy and in freeing supplementary resources for increasing production. Accelerating this turnover is an important factor for the enterprise in fulfilling its output and accumulation plan, and ensures the fulfilment of the plan with a smaller amount of circulating resources.

Accelerating the-turnover of circulating resources demands reduction in the time of production and the time of circulation and a constant struggle against the formation of surplus (above standard) stocks of raw material, semi-products and finished products. Reduction of the production cycle is achieved by accelerating the production processes on the basis of using advanced technique, applying the latest achievements of science to production and improving the organisation of labour. The time of circulation is reduced by increasing the quality of transport work and by more rational organisation of the supplying of the enterprise and the marketing of its products.

Socialist emulation is of great importance in strengthening economic accounting and in increasing the velocity of turnover of circulating resources. The use of circulating resources by State enterprises is made considerably more effective by reducing the production cycle, by improving the organisation of supplies to the enterprises and of the sale of their output, and by reinforcing financial discipline.

In addition to production funds and funds of circulation, enterprises also have fixed funds which serve the consumer—housing, clubs, and other social and cultural buildings and amenities with their equipment.

Economical and effective utilisation by socialist enterprises of their fixed and circulating funds makes it possible to increase the volume of output and to reduce its cost.

Production Costs

In socialist society all expenditures of social labour on making a particular product are social production outlays. The social outlays on the production of commodities constitute the value of those commodities. Production outlays on the means of production are also expressed and measured in a value or money form. Social production outlays in socialist society consist of the following three parts: (i) the value of used-up means of production; (ii) the value of the product created by labour for itself; and (iii) the value of the product created by labour for society.

The first two parts of the social outlays of production enter into production costs in socialist enterprises. Production costs are the expression in money terms of that part of the value of production which makes up the expenditure of an enterprise on used-up means of production and on wages. Costs therefore embody both past labour included in the used-up means of production, and that part of the newly-expended labour which creates the product for itself.

The category of production costs in socialist enterprises must not be confused with the category of capitalist production outlays. It does not express outlay of capital. Savings in capitalist production outlays are achieved by increasing exploitation of the working people, but reduction in production costs in socialist economy expresses saving in social labour in the interests of the whole of society.

Production costs show what, concretely, it costs a particular enterprise to manufacture and market its products. The calculation and planning of costs are a very important condition for the realisation of economic accounting.

The value of used-up means of production is reflected in production costs through prices for equipment, raw material, fuel, etc., which may deviate from value.

In practice, production costs in State enterprises consist of (i) outlays on raw and other materials, fuel and power, used up in production; (ii) depreciation charges; (iii) wages of manual and clerical workers, with the additional charges calculated on the basis of wages paid; (iv) various money expenditures for administrative and management purposes and credit payments. The additional charges to wages and credit payments are the expression in money of part of the product for society.

The inclusion in costs of certain elements of the value of the product for society is connected with economic accounting, being caused by the need to separate off as a special category the monetary expenditure of enterprises on the production and realisation of their products, regardless of the sources of this expenditure.

There are two main forms of industrial production costs—factory or works’ costs, and full (or “commercial") costs. Factory or works’ costs cover the expenditure of an enterprise on the production of its output. Full costs consist of factory costs plus expenditure with sale of output (maintenance of sales offices and bases, charges, and the expenditures of trusts and combines on economic administration).

In 1954 about three-quarters of industrial production costs in the U.S.S.R. consisted of material outlays (on raw materials, fuel, power, depreciation, etc.), and one-quarter consisted of wages.

The entire productive work of an enterprise, together with its activity in connection with obtaining supplies of material and disposing of the finished product, finds generalised expression in its costs of production.

The lower the costs (providing that the output plan has been fulfilled and that output is of the appropriate quality), the higher the level of the economic work of an enterprise. “Reduction in the costs of production, transport and building is the most generalised index there is of the quality of the work of the national economy. Costs depend on the degree of productivity of labour and the expenditure on labour-power, on the level of utilisation of equipment, on economy and the observation of standards in the use of raw material, fuel and’ other materials, and on the expenses of circulation, especially transport." (L.M. Kaganovich, Speech at the First Session of the Supreme Soviet of the U.S.S.R., 24 April 1954.) The State systematically sets planned targets for reducing output costs, on the basis of raising the productivity of labour, with progressive standards of labour outlays and of the utilisation of the fixed and circulating means of production, acceleration of the turn-over of resources, and reduction of expenditure on the upkeep of the administrative apparatus.

Systematic reduction of the costs of production of socialist enterprises means constant economy of both living and past labour. It reflects the demands of the law of steady raising of the productivity of social labour. Reduction of costs is one of the central tasks of socialist management. Every percentage by which the costs of production, transport and building are reduced gives socialist society milliards of roubles which are used to extend production and improve the people’s welfare. Active participation by the masses in the struggle for economy in the national economy is of very great importance for the reduction of costs.

The costs of production are being systematically reduced in the State industries of the U.S.S.R. Thus, the cost of production was reduced as compared with the previous year, taking into account the reduction in prices of raw and other materials and fuel and the costs of electrical and thermal power and freight charges: in 1951 by 7 per cent, in 1952 by more than 8 per cent, in 1953 by more than 5 per cent and in 1954 by nearly 4 per cent.

The national economy of the U.S.S.R. contains large unused reserves for the reduction of production expenses. A considerable section of our industrial enterprises do not fulfil their planned tasks for reducing the cost of production, do not effect the necessary economies of raw and other materials, fuel and power, do not carry on a resolute fight against unproductive expenses. One of the main causes, why plans for the reduction of costs are not fulfilled is the existence of extensive losses due to spoilage in production. A serious improvement in the qualitative indices of production in all enterprises is one of the conditions necessary for the further advance of Soviet industry.

The Net Income of a State Enterprise. The Centralised Net Income of the State

The difference between the value and cost of production constitutes the net income of society, in which is expressed the product for society created by the labour of workers in socialist production. Thus, whereas the cost of production is one of the main elements of the value of this production, the second element of this value is the net income. In the State sector the whole of the net income is public property. It is expressed in money, and takes two basic forms—the net income of the State enterprise and the centralised net income of the State. Both forms of net income are created in the sphere of production, in socialist enterprises. They differ in the methods by which they are accumulated and used.

The net income of a State enterprise is that part of the net income created by labour for society, which is accumulated in the enterprise concerned and is used to a considerable extent for the enterprise’s own needs. The centralised net income of the State is that part of the net income of society which is concentrated in State hands to be used for public needs.

These two forms of net income are made necessary by the system of economic accounting, on the one hand, and, on the other hand, by the fact that socialist economy needs to centralise a considerable part of its net income. This enables the Socialist State to make sure that the workers have an interest both in increasing the profitability of every individual enterprise and in satisfying the needs of society as a whole.

In everyday economic practice the net income of State enterprises is called “profit". But in socialist society the conditions in which the economic category called profit can exist have completely vanished, for profit expresses the economic relations of capitalist exploitation. In view of this the net income of a State enterprise is not in essence profit. The size of the net income of an enterprise depends on the extent to which production, sales and cost-reduction plans are fulfilled. Costs and net income are closely connected: a reduction in production costs leads to a rise in the net income of an enterprise.

The net income of enterprises is used by the State in a planned way. Part of it is allocated to the extension of production in the enterprise or branch concerned (by capital investments and the increase of its own circulating resources), and another part forms the enterprise’s fund, for improving the cultural and living conditions of the workers and improving production. The part of the net income remaining after these needs have been met is transferred to the State in the form of what are called “deductions from profits".

An enterprise fund is formed in all State industrial enterprises which operate under the system of economic accounting and have an independent balance. The condition for the formation of this fund is the fulfilment or overfulfilment by an enterprise of the State plan for the output of marketable products as a whole and in respect of basic items, and also the plan for reduction of costs of production and for accumulation of net income (profit). The source from which the fund is formed is the net income (profit) of the enterprise; in enterprises where the plan does not provide for the making of a profit, the source is economies achieved by reducing the costs of production. When the plan for the accumulation of net income and the tasks assigned for reducing costs of production are overfulfilled, from 20 to 50 per cent of the amount of net income (profit) above the planned figure, or of the amount beyond the planned figure that has been saved on costs of production, is allocated to the enterprise fund. Thus, the formation of an enterprise fund depends on the quality of the economic activity carried on by the enterprise. In this way the fund plays a great part in providing a material stimulus for the fulfilment or overfulfilment of the plan, the strengthening of economic accounting and the raising of the profitability of production.

Half of the funds in the enterprise fund are spent on introducing new technique and improving existing equipment, extending production, and on building and repairs to houses belonging to the enterprise, over and above the plan’s provision for capital investments. The other half of the funds go on improving the cultural and living amenities of the workers of the enterprise (extending subsidiary economies, institutions for children, equipment of holiday homes and sanatoria, canteens, clubs, physical culture facilities), and also on the award of individual bonuses to workers, office-workers, and engineering and technical personnel, providing travel-warrants to holiday homes and sanatoria and making grants-in-aid to employees of the enterprise.

The net income of enterprises is continuously rising as a result of the continuous and rapid increase in production and labour productivity, and of the reduction in costs. Total net income (profits) of enterprises and economic organisations of the U.S.S.R. was 6.6 milliard roubles in 1932, 31.8 milliards in 1940, 89.8 milliards in 1953, and according to the plan was to be 143.3 milliards in 1955.

The size of the net income of a State enterprise directly depends to a great extent on the work of the enterprise itself—on the extent to which it reduces its costs per unit of output and fulfils its. production and sales plan. A rise in net income enables the amount transferred to the enterprise fund to be increased, and ensures an increase in the circulating resources and capital investments. Thus the net income of a State enterprise is indissolubly connected with economic accounting, and provides a direct incentive to improve the quality of the work of the enterprise.

The Socialist State plans the amount of the net income of enterprises, and, thereby determines the standard (or level) of profitability for particular kinds of production and enterprises. The profitability standard of an enterprise is the ratio of its total net income to the full costs of output sold, expressed as a percentage.

The profitability standard of a socialist enterprise is different in principle from the rate of profit under capitalism, which is connected with relations of exploitation. In socialist economy the law of the average rate of profit and the price of production does not operate. The profitability standard is not the result of an. equalising of the net incomes of enterprises; it is fixed by the State on the basis of the specific conditions in which the enterprise works, and takes into account both the interest of the latter in securing net income and the need to enforce rouble control of the work of the enterprise. In doing this the State takes into account the need to lay down a profitability, standard for the enterprise which does not allow the latter to accumulate excessive cash resources, and continuously encourages it to reinforce economic accounting and reduce production costs. If the standard of profitability is too generous the enterprise can obtain a considerable net income without waging a struggle to reduce costs of production.

The centralised net income of the State comes into the State Budget in the form of various allocations from the incomes of socialist enterprises. The main part of the centralised net income of the State comes into the Budget in the form of allocations made from the incomes of enterprises according to fixed rates; these allocations enter into the prices of industrial products in amounts fixed beforehand. Allocations according to fixed rates are in practice called “turnover tax". They are not at the disposal of the enterprises and immediately after the products are sold they pass into the State Budget. The amount of this section of the centralised net income (“turnover tax") which falls on a unit of production, e.g., a yard of cloth or a pair of shoes, does not directly depend on the enterprise’s fulfilment of the plan regarding costs, However, the amount of the net income (profit) of the enterprise does depend directly on the extent to which the cost of a unit of production, e.g., a metre of cloth or a pair of shoes, has been reduced. The lower the cost of production, the higher the net income of the enterprise.

Even though part of the centralised net income of the State passes into the State Budget at fixed rates and is called “turn-over tax", it does not have the nature of a tax, or of deduction from the incomes of the working, people in any form. Thus, the level of wages is decided by the Socialist State on the basis of the need systematically to increase the real level of wages—and this takes into account the prices of consumer goods, including the so-called turnover tax. In the process of distribution, part of the net income of State enterprises is also transferred to the centralised net income of the State in the form of deductions from profits. Furthermore, into the centralised net income of the State pass charges for social insurance needs calculated on the basis of the total wages bill, which for practical purposes are treated as an element of costs but in essence form part of net income, etc. In addition, part of the net income of co-operative and collective farm enterprise is transferred to the centralised net income of the State.

Price in State Industrial Enterprises

Costs, the net income of the enterprise, and part of the centralised net income of the State in the form of the so-called turnover tax, all form part of the price of industrial output.

In the State industry of the U.S.S.R. there are these two basic forms of price: the wholesale price at the enterprise and the wholesale price of industry. The wholesale price at the enterprise is equal to the planned cost plus the net income of the enterprise (profit).

The wholesale price of industry includes the wholesale price at the enterprise and that part of the centralised net income of the State which is allocated to the Budget at fixed rates, the “turnover tax".

The net income of society is created in all branches of production—in industry, in agriculture, in transport, etc. However, part of the centralised net income of the State, allocated at fixed rates, passes into the Budget through the price mechanism primarily from those branches of the economy which produce consumer goods. Prices for the output of branches which produce means of production, as a rule, are fixed below the value, since they do not contain parts of the net income created in these branches. Thereby this part of the net income passes from heavy industry into light industry and the food-producing industry and is realised in the prices of consumer goods. This ensures a relatively low level of prices for the means of production which are used in industry, agriculture and building, and reduces their cost of production accordingly.

The wholesale price at the enterprise ensures for the enterprise compensation for its planned expenditure and the receipt of net income. Infixing wholesale prices at the enterprise at levels which ensure the profitability of enterprises, the State takes into account the operation of the law of value. Wholesale prices at the enterprise playa big part in the system of economic accounting and rouble control of costs. The requirements of economic accounting demand a level of wholesale prices such as will stimulate improvement in the quality of an enterprise’s work, encourage it to economise resources and reduce costs. Wholesale prices which do not guarantee that when the enterprise fulfils the plan as regards costs it will make a profit or even recover its expenses lead to a weakening in economic accounting and in the enterprise’s incentive to raise the quality of its economic activity. On the other hand, high wholesale prices which guarantee profitability even when the enterprise uses backward methods of work do not stimulate the application of progressive production standards.

The continuous growth and improvement of socialist production provides the basis for reduction of wholesale prices. The Socialist State consistently carries out a policy of systematic reduction of costs of industrial production and reduction of prices of industrial commodities. In turn, the reduction of prices serves as a factor in the reduction of costs. So as to have net income when prices are reduced an enterprise must restrict in every possible way its expenditure per unit of production.

By reducing wholesale prices, the State encourages the managements of enterprises to reduce expenditures so as to keep production profitable, to improve the organisation of labour, and to find and utilise hidden reserves in the economy.

In the period from 1950 to 1955, on the basis of the growth of production and reduction in the costs of production, a threefold reduction of wholesale prices in industry was carried out, as a result of which wholesale prices in heavy industry in the middle of 1955 were below the level of wholesale prices prevailing at the end of 1948, before the system of subsidies to cover the losses of heavy industry was abolished and a temporary increase in wholesale prices introduced for the products of certain branches of heavy industry.

The systematic reduction of wholesale prices strengthens economic accounting and provides the basis for reducing retail prices.

BRIEF CONCLUSIONS

(1) Socialism makes widely possible economies in all production resources, and these economies lead in the long run to a continuous saving in labour-time; i.e., in living and congealed labour. Economy of labour, both living and congealed, in socialist enterprises, is effected by means of economic accounting. Economic accounting is the method of planned management of the economy of socialist enterprises. Based on the operation of the law of value, it involves the measurement of production outlays and results of economic activity in money terms, the meeting of expenditures out of the income received by enterprises themselves, economy of resources, and ensuring production at a profit. Economic accounting presupposes that the enterprise has independence in economic operation, is responsible for using the resources placed at its disposal economically, and is materially interested in improving the results of its work. It is aimed at the fulfilment and overfulfilment of plans in respect of both quantitative and qualitative indices.

(2) Production funds of State socialist enterprises are divided into fixed and circulating. The circulating funds, and the funds of circulation, together make up the circulating resources of an enterprise. The socialist system of economy ensures the fullest possible and most appropriate use of fixed funds and circulating resources.

3) Production costs are that part of social production outlays, expressed in money form, which comprise outlay on used-up means of production and wages. They are a most important index of the quality of the work of an enterprise. The systematic reduction of costs and prices is one of the basic principles of socialist economic management.

(4) The product of labour for society constitutes the net income of socialist society. Net income in the State production sector is received in two basic forms— as the net income of State enterprises and as the centralised net income of the (1) State. The net income of State enterprises is that part of the net income created by labour for society which is accumulated in a particular enterprise, and is used to a considerable extent to meet its own needs. The centralised net income of the State is that part of the net income of society which is concentrated in the hands of the State to be used for general public purposes. Such a division of the net income is caused by the necessity, on the one hand, of ensuring that economic accounting should work properly, and, on the other hand, of making centralised use of a considerable part of the net income of society for general State requirements.

(5) In the State industry of the U.S.S.R. there are two main forms of price: wholesale price at the enterprise and wholesale price of industry. The wholesale price at the enterprise is equivalent to the planned cost plus the net income of the enterprise. The wholesale price of industry includes the wholesale price at the enterprise and part of the centralised net income of the State, allocated to the budget at fixed rates.