The 1965 Soviet economic reform, sometimes called the Kosygin reform () or Liberman reform, named after E.G. Liberman, was a set of planned changes in the economy of the USSR. A centerpiece of these changes was the introduction of profitability and sales as the two key indicators of enterprise success. Some of an enterprise's profits would go to three funds, used to reward workers and expand operations; most would go to the central budget.
The reforms were introduced politically by Alexei Kosygin—who had just become Premier of the Soviet Union following the removal of Nikita Khrushchev—and ratified by the Central Committee in September 1965. They reflected some long-simmering wishes of the USSR's mathematically-oriented economic planners, and initiated the shift towards increased decentralization in the process of economic planning. The reforms, coinciding with the Eighth Five-Year Plan, led to continued growth of the Soviet economy. The success of said reforms was short-lived, and with the events of Prague in 1968, fueled by Moscow's implementation of the reforms in Eastern Bloc countries, led to the reforms being curtailed. Economists like Lev Gatovsky and Liberman were instrumental in framing the theoretical underpinnings of the Soviet economic reforms of the 1960s, advocating for the use of profit motives and market mechanisms within a socialist framework.
Background
Under Lenin, the New Economic Policy had allowed and used the concepts of profit and incentives for regulation of the Soviet economy. Stalin transformed this policy rapidly with the collectivization of farms and nationalization of industry, which was the result of the acceleration of central planning as exemplified by the "Five-Year Plans".Katz, Economic Reform (1972), pp. 8–17. Since about 1930, the Soviet Union had used a centralized system to manage its economy. In this system, a single bureaucracy created economic plans, which assigned workers to jobs, set wages, dictated resource allocation, established the levels of trade with other countries, and planned the course of technological progress. Retail prices for consumer goods were fixed at levels intended for market clearing. The prices of wholesale goods were fixed, also, but these served an accounting function more than a market mechanism. Collective farms also paid centrally determined prices for the supplies they needed, and unlike other sectors their workers received wages directly dependent on the profitability of the operation.Adam, Economic Reforms (1989), pp. 5–11.
Although Soviet enterprises were theoretically governed by the principle of khozraschet (, or "accounting")—which required them to meet planners' expectations within the system of set prices for their inputs and outputs—they had little control over the biggest decisions affecting their operations.Adam, Economic Reforms (1989), pp. 11–13. Managers did have a responsibility to plan future gross output, which they chronically underestimated in order to later exceed the prediction. The managers then received bonuses (premia) for surplus product regardless of whether it was produced in a cost-effective manner or whether their enterprise was profitable overall. The bonuses for output came in amounts sometimes equal to the managers' base salaries. The system also incentivized pointless increases in the size, weight, and cost of production outputs, simply because "more" had been produced.Tubis, Decision-Making in the Soviet Economic Bureaucracy (1973), pp. 22–27. "The amount of premia was determined on the basis of the fulfillment of the norms for each plan index, and a certain rate was established for fulfillment and higher rates for overfulfillment of each norm. Since gross output was considered the most important index by the leadership, it carried with it the highest rates. The manipulation of these bonuses was very important because management personnel oriented production to get the most favorable sums, especially since the premia often amounted to a sum equal to the manager's regular salary. Moreover, whereas bonuses for workers and lower management personnel, e.g., a shop chief, were paid out of the enterprise fund made up of a part of the enterprise profit, the bonuses of the managerial personnel were, for the most part, paid out of the State budget. Thus, the premia of the manager and his staff came from fulfilling the production plan regardless of how the enterprise did financially."
Rise of the optimal planners The economic reforms emerged during a period of great ideological debate over economic planning. More mathematical, "cybernetic", viewpoints were at first considered deviant from orthodox Marxist economics, which considered the value of goods to derive strictly from labor.Ellman, Soviet Planning Today (1971), p. 4. This doctrine, elaborated in such works as Stalin's 1952 book, Economic Problems of Socialism in the USSR, described the price system as a capitalist relic which would eventually disappear from communist society.Ellman, Soviet Planning Today (1971), p. 30. "In Economic Problems of Socialism in the USSR (1952) Stalin repeated the familiar Maxist–Leninist argument that price-market relationships in a socialist economy are a relic of capitalism, the persistence of which in a socialist economy is due to the existence side by side with the socialist sector of a cooperative sector (the collective farms), and that these price-market relationships are destined to wither away under communism."
Nevertheless, computerized economics gained an important role for top planners, even while conventional Marxist–Leninist political economy was taught in most schools and promoted for public consumption.Ellman, Soviet Planning Today (1971), p. 11. "Political economy is discussed in the press, lectures are given on it in the factories, and it is taught to students throughout the higher educational system. Economic cybernetics is a specialized academic discipline which is taught to future planners."Feiwel, Quest for Economic Efficiency (1972), p. 199. "The mathematical school represents a major breakthrough in the approach to price formation and resource allocation, even though its exponents--to a larger or smaller degree--are cautious in advocating an immediate radical overhaul of the present system." The rising influence of statistical planning in the Soviet economy was reflected in the creation of the Central Economic Mathematical Institute (Центральный экономико-математический институт; TSEMI), led by Vasily Sergeevich Nemchinov.Ellman, Soviet Planning Today (1971), p. 2. Nemchinov, along with linear programming inventor Leonid Kantorovich and investment analyst Viktor Valentinovich Novozhilov, received the Lenin Prize in 1965.Feiwel, Quest for Economic Efficiency (1972), pp. 197–198. "The impact of the mathematical economists is evident from the growing recognition and honors bestowed on them. In 1964 Kantorovich was promoted to the rank of Academician, and in 1965 the Lenin Prize was awarded to Kantorovich, Nemchinov, and Novozhilov for their pioneering work in planometrics. Even though, as can be expected, there were discordant voices among the economic fraternity, the mathematical school is gaining respectability by claiming the Soviet priority in input-output and linear programming." The battle between "optimal" planning and convention planning raged throughout the 1960s.Ellman, Soviet Planning Today (1971), pp. 11–12.
Another tendency in economic planning emphasized "normative value of processing", or the importance of needs and wants in evaluating the value of production.Tubis, Decision-Making in the Soviet Economic Bureaucracy (1973), pp. 85–86.
Kosygin and Brezhnev replace Khrushchev
Major changes throughout the Soviet world became possible in 1964 with the ousting of Nikita Khrushchev and the rise of Alexei Kosygin and Leonid Brezhnev. Economic policy was a significant area of retrospective anti-Khrushchev criticism in the Soviet press.Katz, Economic Reform (1972), p. 105. "It was clear from the context of the articles that economic policy was a major, if not the major, area for condemnation of the deposed leader, and the three major subdivisions of the criticism were the issue of resource allocations, the successive reorganizations, and the mess in agriculture."Feiwel, Quest for Economic Efficiency (1972), p. 256. "Undoubtedly one of the major reasons for Khrushchev's ouster on October 15, 1964, was the state of the economy and his erratic handling of the situation." This 'reformist' economic tendency in the Soviet Union had corollaries and some mutual reinforcement in Eastern Europe.Katz, Economic Reform (1972), p. 123. "Throughout this period, there were numerous published reports concerning other Eastern European reforms in the Soviet press and journals, which undoubtedly served the purpose of propagandizing and stimulating the reform movement. [...] In addition to publicizing their efforts at reform, the Soviet leaders were actively engaged in discussion with the Eastern European regimes and actually had something to learn from their junior partners in the matter of reform."
Kosygin criticized the inefficiency and inertia of economic policy under the previous administration.Feiwel, Quest for Economic Efficiency (1972), p. 257. "In his report of December 9, 1969, to the Supreme Soviet, Kosygin assaulted the inefficiency of the planning system. He welt on the misuse of investment resources, the protracted construction periods and underestimated costs [...]. He condemned the enterprise's unwillingness and inertia in introducing technical progress and accentuated the inferior output quality. He pointed to the endless links in the chain of command, the superimposition of strata in administration, the muddle created by duplication of work in many agencies, and the ever-growing mutual coordination, often responsible for delaying solutions to arising problems." He presented a plan, including the ideas expressed by Liberman and Nemchinov, to the Communist Party Central Committee Plenum in September 1965. The Central Committee's acceptance of the plan became crucial for practical implementation of theoretical ideas.Tubis, Decision-Making in the Soviet Economic Bureaucracy (1973), p. 110. "The September, 1965 plenum thus acts as a bridge between the reform debate of 1962–1965 and the actual installation of the reform in the Soviet economy. In the case of the former, the Plenum represents the culmination of the debate with the Soviet leadership announcing which of the ideas and proposals of the reformers it found to be the most valid and compelling; in the case of the latter, the Plenum laid out the path which the infusion of reform proposals was to take."
Rationale
Lack of incentives
According to official rationale for the reform, the increasing complexity of economic relations reduced the efficacy of economic planning and therefore reduced economic growth. It was recognized that the existing system of planning did not motivate enterprises to reach high rates of production or to introduce organizational or technical innovations.Protocol of the 22nd Congress of the CPSU, Moscow 1961 There were no incentives for that.
Given more freedom to deviate publicly from party orthodoxy, newspapers offered new proposals for the Soviet economy. Aircraft engineer O. Antonov published an article in Izvestia on November 22, 1961, with the title "For All and For Oneself"—advocating more power for enterprise directors.Katz, Economic Reform (1972), p. 66.
Liberman's proposals