SUMMARY OF REMARKS BY ALLEN W. DULLES DIRECTOR OF CENTRAL INTELLIGENCE AT THIRTY-FIRST ANNUAL NATIONAL BUSINESS CONFERENCE HARVARD BUSINESS SCHOOL BOSTON, MASSACHUSETTS 9 JUNE 1961, 7:30 P.M. (EDT) 'INCENTIVES IN THE SOVIET UNION'

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00161R000100170009-3
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 16
• Document Creation Date: December 12, 2016
• Document Release Date: May 30, 2002
• Sequence Number: 9
• Publication Date: June 9, 1961
• Content Type: SUMMARY

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we in government have received both from you in business and you in the
academy.
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aye.
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10
The Agency which I represent has been improved by clone association
with the Harvard Business School. Members of your faculty have visited
our Agency, and we see to it that our senior executives seize their oppor-
tunities to enroll as students in the school. You have added to our incentive
.d to improve management in a type of work which defies the ordinary rules of
SUMMARY OF REMARKS
by
ALLEN W. DULLES
DIRECTOR OF CENTRAL INTELLIGENCE
at
Thirty-First Annual National Business Conference
HARVARD BUSINESS SCHOOL
Boston, Massachusetts
9. June 1961, 7830 P.I. (EDT)
x
"INCENTIVES IN THE SOVIET UNIONS
I was honored to receive your invitation to participate in the 1961 f7li
National Business Conference and to visit again the Harvard Bueinesa School.
I can testify from personal knowledge to direct and specific benefits which
organization.
A war incites us to deeds of courage and exhibitions of fortitude. Leaders
of men, in free societies, in Government or in private life can also gain
without or engendered from within the individual.
External forces give incentive. A great crisis stirs men to action.
Incentives spring from two main sources. They are either imparted from
tion and action, that which moves the mind or stirs the passions.
Incentive, the dictionaries tell us, is that which incites to de.i.ermina-0
dominion over men's minds and become the incentive force that leads to
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action. Dictators can also do this on a massive scale.
And then there are the incentives which come from within us -- ambition?
religious fervor,.the urge to reach for fame or fortune, to create, or to
build. It may be an edifice, a work of art, a piece of literature, an
invention, a business enterprise, a career.
In an open, free society, in a government of the people, and for the
people, it is from the individual that the major incentives spring.
In a closed society, the individual is forced to look primarily to the
dictator, to the leader, or to the State. But even here individual initiative,,
though restricted and often canalized by Government, may play a role.
Not many years ago we saw the strange and sad phenomenon of a great
country and a great people where a mad dictator, Hitler, took hold of the
people's minds and molded a controlling group into blind obedience to the
state. Individual incentive was lost in the image of the state. Their
bible was Mein Kempf because a written charter can help to serve as the .
instrument for inspiring end controlling incentive.
In the Soviet Union the major incentives are derived from the dictates
of the state.
True, as contrasted with the old Stalin days, there has been some
relaxation under Khrushchev. The framework is more ample. But it is still
the state which is the major element in providing and controlling the
people's incentives. Here, too, they have their doctrinal literature,
starting with the works of Marx and Lenin and, until his degradation, the
teachings of Stalin.
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An eminent student of Soviet affairs, Philip K. Mosely, writing in
the April issue of Fob Af 'faire, puts it this ways
"The picture of a Soviet system that has chosen, or been
driven ?- to abandon its police controls and to leave the way
open to all kinds of initiatives welling up from below is a most
appealing one, but one that can hardly stand the light of Soviet
day."
But the Soviets are showing some degree of pragmatism and flexibility.
Take the case of Lysenko, the notorious geneticist, whose theories have long
been ridiculed by Western scientists and even by some of his Soviet
colleagues. Khrushchev had this. to say of hims
"Lysenko is a narrow, authoritarian, sectarian individual
who wishes to impose his scientific doctrine on everybody by
sending all those who don't agree with him to Siberia. He's an
impossible person. However, I prefer a bad character who can
grow wheat to a good character who can't."
Khrushchev has recognized that politics can not dictate the findings
of the scientist But while the scientist may be-free to expound the laws
of sciencd, he is not free in charting the course of his conduct. There
must be a conformity with the needs of the state.
In.order to mold the Soviet people and to supply them the incentives
to contribute to the growth of the Soviet Union, there are a series of
incentive-creating principles which the Soviet leaders, and Khrushchev in
particular, teach.
The first, and possibly the most important, is the doctrine they
preach, of the supremacy of the communist way of life. Communism they
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portray as the wave of the future. We will bury you, Khrushchev says to
the rest of us, but not physically -- merely by evidencing the superiority
of our system, the decadence of yours. As capitalism took over from
feudalism, so communism will take over from capitalism, he preaches.
Second, Khrushchev preaches that communist society has found the keys
to industrial and scientific progress; that it is moving ahead at a faster
rate than its great industrial rival, the United States; and that in the
course of a decade or so it will surpass us in the actual value of its
industrial production. Meanwbile, the Soviets claim leadership in space,
in ballistic missiles, and in certain other fields of industrial endeavor.
And finally, to maintain communist growth, Khrushchev enjoins each and
every Soviet citizen to play his part in the manner and form dictated by
.the state. He must devote to the state the product of his mind; the fruits
of his toil. He must help to overfulfill the economic plan goals.
When Khrushchev visited Los Angeles in September 1959, he engaged in
a brisk debate with one of his hosts at a luncheon. The issue was as to
who had come from the humblest beginnings to the highest place in life and
society. In the course of it, Khrushchev called on the Chairman of the
Dnepropetrovsk Economic Council to rise and take a bow. He pointed out that
this official administered huge metallurgical plants and chemical factories.
A third of the ore mined in the Soviet Union comes from his region. No one
in the United States controlled so much wealth, he said.
Khrushchev went on to say that this official possesses nothing except.
the pants he wears. All the rest belongs to the people. However, Soviet
officials do possess great power as well as pants, and power is a tremendous
incentive to the ambitious Soviet citizen.
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There are other built-in incentives to the Communist scheme of things.
The Soviets were the first to develop the idea of the five-year plan
with an indication of how much should be produced each year. This makes
each industrial worker a kind of participant in the race to see that each
year's goal and the total is over-fulfilled.
In effect, every Soviet worker is taught to feel that he is an integral
part of this great industrial marathon between the U.S. and the Soviet Union.
Travelers to the Soviet Union report that on cowbarns in various parts of
the USSR the slogan "Beat America" is inscribed.
In a free society, we do not attempt to gear our industrial production
to that of any other country. It is largely a response to the demands of
the market place; what the people may desire to acquire to advance their
standards of living.
In addition to what I have been describing as the overall popular
incentive to help realize national goals, there are managerial incentives
applicable to industry. The nature of these incentives has been a matter
of unprecedented concern in the USSR over the past two years.
It is quite clear that Soviet political leadership has succeeded in
devising incentives which bring capable managers to positions of key
responsibility even though,'in the Soviet Union, the politicians do not
trust the business managers* To help control them they-have established
elaborate controls and checks on enterprise heads which are under the
supervision of local Communist party types. These includes the setting
of detailed production targets; the allocation of raw and semi-processed
materials; the control over manpower; the allocation of investment funds;,
the control over prices; and the monitoring of performance.
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The Party sees to it also that the managerial class is very well paid
by Soviet standards. Indeed the differential between the average worker's
wage and the manager's total income is probably wider in the USSR than in
the U.S. This is not, of course, advertised and much of what the successful
manager receives are the fringe benefits in the form of an apartment, a
country house, the use of an automobile, travel and expense accounts and
the like.
Until quite recently, the major criterion for the compensation of
business managers in the USSR bad been the fulfillment of physical output
goals, assigned to the plant by central authorities. This has meant, and
it has been one of the difficulties of their business organization, that
costs of production have, for too long, been relatively unimportant to
Soviet managers. They have operated under conditions of a perpetual seller's
market with emphasis on physical volume of production.
In the Soviet Union there is no question of price competition since
the Soviet government is the sole purchaser for the vast majority of the
Soviet production. Quality has, until recently, been too much neglected.
For example, the output of shoes by Soviet factories has-not been in
a quality competition with shoes produced by any other factory. Speaking
of shoes, in October 1959 a letter to a Moscow newspaper signed "Soviet
citizen" said that the writer was more interested in new shoes than he was
in Sputniks or TU-114 airliners. He said that as far as transportation was
concerned, he was perfectly happy to ride the streetcar. However, he pointed
out that his only pair of shoes was four years old and that'they wouldn't
have lasted that long except they were a Western brand. The Moscow news-
paper printed this letter calling the writer a slug and an earthworm, who
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was incapable of understanding the higher flights of the Communist way of
life.
As a matter of fact, one of the difficulties the Soviets have been
running into in connection with some of their fareign aid programs is the
fact that the goods delivered under these programs ---I am not speaking now
of military equipment -- have in many cases not been up to standard.
What I have said here applies chiefly to the consumer goods area of
their production and light industry. Their ablest managers and skilled
workmen are largely reserved for their heavy industry, particularly in their
defense programs.
I wish now to turn briefly to the
ly political environment in which the
Soviet manager finds himself.
In the final analysis, there is only one industrial corporation in the
USSR -- the Soviet State. This monolith, through the hierarchy of administra-
tive organs, is an industrial giant whose employees number one-fifth more
than the total number of workers in all manufacturing plants in the United
States.
The chairman and members of the board of directors are the chairmen
and various deputy chairmen of the Council of Ministers. In effect, the
stockholders of the corporation are members of the Communist Party of the
USSR.
It is no more coincidence that Mr. Khrushchev is both chairman of the
board and majority stockholder, in his.-dual role as Chairman of the council
of Ministers and First Secretary of the Communist Party. Furthermore, at
the highest levels, a duality of individual roles in party-state positions
is the Yule rather than the exception.
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In spite of recent gains in living standards, the ordinary Soviet
citizen still finds himself essentially the residual claimant on output
allowed him by the Party leaders.
The highly advertised "Communist Man" one who gives according to
his abilities and receives according to his needs -- has yet to appear on
the Soviet scene. Until he does, it is the principle of material gain that
is applied as the primary motivating force for the Soviet managerial class.
Salary scales are fixed by the USSR's State Committee on Labor and Wages
in consultation with -- believe it or not -- the All-Union Central Council
of Trade Unions.
Salaries are set first of all on the basis of importance of a particular
industry to State. This means the major financial rewards are in managing
heavy industry and military facilities, not consumer goods plants. Thus,
salaries are much higher in coal, metallurgy and machinebuilding industries
than in food and textile plants,
Pursuing higher income and prestige, the Russian plant director, like
the American manager, will strive to move from a small plant to a larger
one, from a low-priority industry to one of higher, priority.
Or the plant director, being a member of the Communist Party, could
.seek advancement in industry through Party channel advancement. He might,
for example, be appointed to the strategic position of Secretary in one of
of the regional Party Committees,
Besides earning his salary, bonuses, expense account, car and
preferential housing to which I have referred -r- the Soviet manager has
other concerns which affect his advancement.
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The Soviet manager has much more responsibility for his workers than
does his American counterpart. He controls schools,, housing, rest homes,
and part of the food supply of all the workers in'-his plant. He has,
justifiably, a strong sense of paternal power.
In addition to many,"carrots," the Russian system of incentives for
its managers also includes a number of "sticks." If a manager fails to
perform as expected, not only. does he lose his home, but also he can be fired, demoted, or, reassigned to a job in a less important plant.
If failures involve violations of the law, and they are quite likely
to, he can be fined or imprisoned. He can also be expelled from Party
membership, which would mean the end of his career as a manager.
Khrushchev made this plain at a major party meeting this January.
Responding to a question on what to do with Soviet executives who concoct
inflated figures and fake statistics, he said,
"Out of the Party with them. These people are not
Communists, they are hangers-on and should be punished,
..* if we don't restore order, the plans will be statistically
filled but there won't be enough products. As is known, you
cannot make pancakes out of statistics."
Although an unsuccessful Soviet manager is not likely to be sent off
to Siberian forced labor camp these days, penalties for failure under the
-Soviet system are more severe than they are under ours.
Yet plant managers do occasionally manipulate output and inventory
data even at the risk of stiff jail terms and the ruin of their careers.
There is plenty of evidence on.this practice printed in the Soviet press
almost daily. Why do 'Soviet managers take such chances?
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Basic reasons, are:
(1)
centrally determined plant production goals
are set very high, ands
(2)
a director's best efforts to meet goals are
often frustrated by the failure of suppliers to deliver necessary materials.
He takes a chance with a hope of being able to "Catch up" in the next'
accounting period.
As long as a production enterprise is functioning reasonably well, the
great variety of political "watchdogs," which are always stationed right
in the factory,'look the other way. If a director needs to "borrow" a few
per cent of next month's expected output to meet this month's plan goal,
they allow him legal elbow room. But borrowing must be made up. If a
director continues to fall behind, compounding shortages, one or another of
the enterprise watchdogs will denounce him to higher authorities and receive
credit for uncovering unsavory scandal.
The key question for a Soviet manager is, how much did you turn out
last month, not how much profit did you show?
Impelling as it was towards maximization of output in the USSR, still
a major goal, this incentive system had some built-in die-incentives. To
earn bonuses, managerial actions taken were not always in the beat interests
of the State.
About two years ago the Central Committee of the Communist Party took
up the whole question of efficiency in industry, and last July they decided
upon a number of specific reforms. which are now being introduced.- They
include:
1. Bonus arrangements for plant managers are now tied to
reducing production costs, and in some cases to quality of
product. Bonuses previously paid solely for fulfilling physical
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production plans are being discontinued.
2. To stimulate research and development on new high per-
formance equipment, all experimental costs on such machines, up
to the stage where they go into series production, are no longer
paid for by the enterprise doing the development work. All these
costs are now paid for out of a special fund, administered from
the center at Moscow. This should have the effect of reducing
prices on new equipment, as well as stimulating its development
and production.
3. Large bonuses are now available to reward plant personnel
who are directly connected with what. is called "creation and
introduction" of new technology. The size of the bonuses is cow-!-..`
puted by a complicated measurement of cost reduction achieved
.through introduction of new technology. Savings are computed
innovation can be adopted,
not only in the plant making the innovation, but also allowance
is made for savings elsewhere in other facilities where the
Zt. Bonuses are now'paid quarterly instead of monthly to
reduce end-of-month pressures and borrowing from future production.
5. At least 20 per cant of what is called "enterprise
;,of .equipment, eta,
now be spent for the introduction of new technology, modernization
fund," which essentially is a plant's retained earnings, must
These incentives to promote greater technological advances and
managerial efficiencies, important as they are, are not the end.of
changes. We can expect that there will be other measures introduced next:
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year and in years to come, as the Soviets strive for increased efficiency
to promote a high rate of economic growth.
While it is always hazardous to forecast, it appears that the Soviets
are on the right track in the major overhaul of methods of meunagerial
compensation.
The incentives in industry, which have worked reasonably well and
which if corrected as contemplated will work even better, are not reflected
in the field of agriculture. Agriculture has been the "ugly duckling" in
on the production line and accept his pay as full compensation for his work#
all in the Soviet system of collectivization. A man will contentedly work
farm; the satisfaction of outright ownership which has not been reflected at
.the Soviet economic drive. There is an affinity between the farmer and his
A farmer who tills the soil which belongs to a State cooperative finds
little incentive to increase or economize in production. In any event, the
farm continues to be a headache for Mr. Khrushchev and the statistics indicate
a breakdown in the incentive system.
For example, the Soviet Union employs about seven times as many workers
on the farms as we do in the T.S. and producesone-third less in terms
value than do we.
In any-event, we must conclude that Marx was not much of a. farmer an
.the principles of Marx and Lenin have not helped much in the field of
Turning briefly to the professions, the incentives differ very largely
between different branches. Soviet medical and legal professions enjoy
neither the social status nor the income advantages of-their counterparts
.in the U.S. But as a lawyer, I regret to have to add that this is because
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country it is less, than five. .percent.
About one-third of the lawyers in the Soviet Union are women. In this'
This compares with Just over five percent in this country.
Pr ofessions. Three-quarters of Soviet doctors and phyeicisxs ars women.
The Soviet leaders have offered a special incentive to women in the
suits in the Soviet terminology,
in the Soviet Union these professions are considered non-productive pur-
fields. But the fact remains that the extensive use of women in these
I willingly grant. that women have special skills and talents in these
for work in priority Soviet defense and heavy industries*
professions and in the more highly paid teaching profession, does free men
Some reforms in the so-called non-productive professions are in prospect,,
important to them and for us than their overriding incentive or goal to
system that prevails in Soviet economic life, these are perhaps less
In spite of what might seem to be serious defects in the.incentive
the coming year.
I understand that a new wage scale will give them some more income during
throughout the world.
roduce to advance the cause of communism both in the Soviet Union and
The Soviet leaders seem to have acquired a keen sense of what is
forts of their citizenst 4n nraew +:..:,.,... ~~_ .
important for these purposes. They have long neglected the creature com-
I into the essential;
induced 'their citizens to accept this*
underpinnings of strong industrial and military power and they have
The extent of their success should be clearly recognized by us.
Whatever the excesses of their propaganda, they can rightfully claim truly
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remarkable industrial and scientific accomplishments.
We do not accept their view that communism is the wave of the future.
However, this is the conviction; this is their incentive for action; this
.is the basis for their domestic and foreign policies; and this is the
nature of the threat and the challenge which they present.
I wonder if we are as clear in our own minds about our incentives as
they are about theirs? The free world does not have a monolithic unity.
We do not gear our industrial machine to compete in a statistical race with
the communist' world. We do not try to impose our political system on others.
Each of us has some sense of conviction about the ideals'of freedom, demo-
cratic institutions, and the dignity of the individual.
At the same time, we seem dedicated too much to our creature comforts,
too little to the advancement of the great principles. In November of
1959 your former Governor Christian Herter, who was then Secretary of State,
made an eloquent address to the Foreign Trade Council, pointing out the
.stakes, the incentives, and the challenge. He said%
and interests of us all. That means subordinating our private
interests to the.paramount public interest. It also means
"We have, of late, been too absorbed, I feel, in the mere
enjoyment of a prosperous life behind our defense curtain of
nuclear power. We must realize instead that the fateful com-
petition with communism has placed a first claim on the energy
using our econoDy less for the things which do not really matter,
and more for the things which do -- for the uses which would
train and inform our minds, promote the health of our society
and keep our country free."
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More recently, the President told the American Society of Newspaper
Editorsi
"The message of Cuba, Laos,, of the rising din of communist
voices in Asia and Latin America -- these messages are ale, the
sans. The complacent, the self-indulgent, the soft societies
are about to be swept away with the debris of history. Only the
strong, only the industrious,, only the determined, only the
courageous, only the visionary who determine the real nature of
our struggle can possibly survive."
You here tonight know perhaps better than anyone else the state of
our economy, the proportion of our effort as divided between our national
security and our own comforts, and it is for you -- as it is for all of
iti
al
ways.
c
to reexamine what our true incentives should be in tease cr
Let us make no mistake about communist intentions and capabilities.
They are not about to inherit the earth economically, but they are going
to use the period of so-called coexistence to carry out their political,
economic and subversive plans and thus endeavor to expand their power and
also to advance their prestige in the world. Even'if they do make more
concessions to the consumers, the major thrust of their economic develop-
ment remains directed toward specialized industrial,, military, and national
power goals. The major thrust of our economy is still directed to production
of consumer goods and this adds little strength to our national security.
Comparisons between gross national products or indices of industrial.
production are not the important consideration. Our concern must be with
the uses to which industrial strength is put.
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The true measure of our relative power positions in the final analysis
depends on what we do to defend our national security and to advance the
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