Air University Review, July-August 1968
In the last few years American economists have reported-not without a touch
of smugness-that the U.S.S.R. is adopting capitalist methods to improve its
sagging growth rate. Moreover, the facts support their conclusions rather well.
After several years of discussion in Soviet economic journals by academicians
such as Liberman, Nemchinov,
and Leontev, the Soviets in 1965 conducted an
experiment in two clothing factories, using profit as the primary measure of
success and allowing the factories to make contracts with both their suppliers
and their wholesale outlets. The experiment apparently succeeded because these
reforms have since been extended to about half of all the factories in the
Such changes certainly do not represent a return to private enterprise, but they do show the willingness of the present Soviet regime to use capitalist techniques to improve their system. The Communist hierarchy has sound historical precedents for these moves: Khrushchev in 1962 proposed the use of interest charges on invested capital, quoting Lenin himself as having said, “We should be able, if necessary, to learn from the capitalists, to adopt whatever they have that is sensible and advantageous.”
Now suppose we put the shoe on the other foot. If we in the
parallels
Planning and budgeting. Both the DOD and the Soviet economy operate from generalized five-year plans or goals. Each goes through an annual budget cycle, beginning with general guidelines from above and increasing in detail at each lower echelon. The proposed budgets then return up the command ladder for validation, coordination, and reclama action. Finally, the overall program is approved by the political decision-making authority and put into effect.
Command structure. While the great disparity in size lessens the value of organizational comparisons somewhat, there are close parallels in the forms of organization that have been tried. The Soviet economy is directed by a politico-technical center (Gosplan), which receives basic policy from the highest political source, the Council of Ministers, Gosplan administers vertically organized functional ministries, which operate autonomously once resources are assigned to them. This pattern coincides roughly with Our Department of Defense, which operates under the executive branch and administers vertically organized functional commands.
During the Khrushchev era the Soviets tried a system of horizontally organized economic units which directed geographic areas (sovnarkhozy). While these units proved easier to administer, there was excessive redundancy in services and research. In addition, each unit attempted to become self-sufficient, and this resulted in uneconomical production. In the DOD, we had already learned these lessons during the development of strategic strike forces and in space operations. We shifted to a functional (mission) organization several years before the Soviets reached the same conclusion.
Incentives for managers. The DOD and the
Resource allocation. In the absence of a
market system to allocate goods, both DOD and the Soviets use a plan. The
primary difficulty is in achieving optimum input of goods to maximize output
and maintain desired production. Just as the Soviets found in 1965 that they
had failed to develop their plastics industry sufficiently, the
Common service functions. Such services as transport, communications, supply, and housekeeping are common to all military organizations and governmental ministries. Both of the systems we are considering have grappled with the problem of providing these services efficiently without a large amount of slack and redundance in facilities or procurement. Neither has found a really effective solution.
Product evaluation. Because they have traditionally rewarded industry on a basis of quantity of goods produced, the Soviets have constantly encountered difficulty in establishing quality controls. Inspection systems seldom worked because inspectors usually had a vested interest in high production results. Our Defense Department faces a similar problem because inspectors are usually members of the organizations they inspect. In addition, our inspection system is primarily method-oriented rather than output-oriented.
So what?
Assuming that the parallels I have suggested are valid, what is to be gained by studying the Soviets? They certainly have not achieved any fame in the last ten years as management experts or as innovators in allocation or evaluation. However, they are operating a much larger system than our DOD and have far more people working on these problems than we have. Further, in the past three years the Soviets have shown a growing willingness to innovate and increasing attention to management as a key to improved performance. Thus, the similarity between the Soviet and DOD systems, coupled with the increasing pragmatism of Soviet leaders, strongly suggests that we should carefully evaluate their programs. Perhaps we could benefit from their experience.
The first Soviet experiment involved only two apparel factories, the Mayak ladies garment factory in Gorki
and the Bolshevichka suit factory in
Many Western observers predicted that the reforms would quickly degenerate into just one more bureaucratic reshuffle of the centrally directed command economy. However, it now appears that considerable decentralization has actually occurred in the planning system. Practical necessity apparently outweighed ideological resistance to the changes. Current reports indicate that all Soviet industry will be operating under the new system by 1969.
some lessons for DOD
In the Defense Department we hear many of the same complaints and problems as those voiced by Soviet economists and managers. For many years there have been recurring complaints of wasted and unused resources in the military. Air Force units do not manage their own budgets for fuel, so they often use airplanes to save airline fares, which are dollar-budgeted. Navy ships have frequently been used in commercial movie making. Quartermaster supplies are often stockpiled to protect against uncertain delivery. Units of all services try to spend all appropriated funds by the end of the accounting year in June, possibly to avoid the appearance of having excessive budgets.
Another area in which the military has been notoriously lacking in economic
efficiency is in the negotiation and administration of contracts. A report by
Joseph c. Goulden in the Philadelphia Inquirer
of
Still another major DOD inefficiency stems from the manager’s lack of accountability for invested capital. Funds appropriated for construction or new equipment are treated as sunk costs and do not necessarily require a compensating increase in performance or productivity. Thus, each commander continually seeks more funds to improve the appearance, convenience, or importance of his operation. Again, the Soviets faced an identical problem in their command economy, and they have introduced a charge for invested capital in their profit measurement. DOD could certainly benefit from such a system.
Consider one simple example. In 1963 a family housing project was completed at an Air Force base in the South for about 550 families at a cost of approximately $17,000 per unit or $9,350,000 total construction cost. Assuming an average annual savings of $1000 per unit in military housing allowance, the investment would be recouped in 17 years if the invested capital was free. If the going cost of Treasury borrowing in 1963 (about 4 percent) is added, the payout period of the project extends to nearly 30 years. But the needs of the military are transitory, so that by 1967 the base population had dwindled to the point that the quarters could not be filled. In addition, many military homeowners in the adjacent community were in economic distress, with no rental income and no housing market. Had the project been evaluated originally on its economic merits, it seems obvious that the commander would have found an investment with better expected returns.
possible applications
For obvious reasons the Defense Department could not apply all the practices which the Russians have adopted, nor could it apply these practices to all facets of DOD operations. Some operations might be unnecessarily inhibited by fiscal accountability. In other units there is no quantifiable product to measure. But these units probably constitute the exception rather than the rule.
Some of the Air Force functions that might most readily be economically decentralized are the service and support units, such as communications, transport, training, base housekeeping, weather service, supply, food service, and housing. As a starter, a controlled experiment might be conducted by several relatively stable units in the training or transport commands. Under the experiment the unit would pay for all its inputs and operate against target costs per unit of output. A charge for invested capital would also be included. After a period of time, the unit would begin to “sell” its product as the new system was extended to more units.
Eventually, a base commander would have complete independence in applying his budget. He would determine his personnel needs, contract with training units for new people, pay (and receive) bonuses for increased productivity, and sell his support services to the combat units on the base. In short, his operation would be almost identical to that of an independent division in a large corporation.
Limited attempts in this direction have already been made in DOD. The industrial funding system for purchasing airlift from Military Airlift Command is one example. A second step is the Resource Management System currently being implemented. But these applications are too timid and incomplete to achieve really significant results, since the charges are not realistic and the manager has no monetary stake in lowering expenses or increasing “sales.” Too many of the costs of military operations are simply accepted as “given” rather than as factors in the overall task of the manager. Until a means is found to give the manager a personal stake in costeffective operations, there is little hope of making major improvements in the management of military units. If such a system seems impractical or unrealistic, consider the uproar that must have accompanied such suggestions in a Communist economy. Nevertheless, economic pressure finally forced their acceptance. The rising cost of military operations and continued balance-of-payments squeeze have placed Defense in a similar position today.
With current military expenditures running at $200 million per day, it would be worth a lot of extra effort to reverse the upward trend of operating costs. Who knows, maybe we could learn something from the Soviets.
Air Command and
Major Robert H. Kelley (M.S.,
Disclaimer
The conclusions and opinions expressed in this
document are those of the author cultivated in the freedom of expression,
academic environment of
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