The Cost-Profit-Output Relationship in a Soviet Industrial Firm

Abstract

The interrelationship of costs of production, profit, and output of a firm is a central problem of modern economic analysis. This problem has been so far conceived and investigated chiefly for a free market economy. The corresponding analysis of the equilibrium of a firm under the conditions of perfect and imperfect competition represents the first stage of what is known under the name of “the theory of value.” This analysis is a joint contribution of economists of many countries and a cornerstone of modern economics.The parallel problem in a nationalized industry subject to complete government control (the problem of the interrelationship between controlled costs of production, controlled profit, and planned output) has so far escaped the attention of analytical economists. This gap in analysis is due partly to the fact that the dogmatic treatment of central planning in the hands of political writers has induced some authors to believe that central planning and nationalization succeed in abolishing this important problem altogether. Outputs are believed to be determined by targets and hence to be independent of profit considerations. In addition, some economists have been led to believe that the tools of modern economic theory in general, and the intellectual apparatus of the theory of value in particular, are inappropriate for dealing with what are believed to be problems of administration rather than economic problems proper.