Compendium: Soviet-Type Economic Planning (STEP) and the Formulas of its Accounting System

Soviet-Type Economic Planning (STEP) relies on its own methodology of calculating economic growth/contraction and the overall productivity of nation-states under Marxism-Leninism. Included in this methodology is a distinct accounting system and formulas. The accounting system is known as the “Material Product System” (MPS). MPS derived its basis from Karl Marx’s interpretation of Value being based on “Productive Labor” and “Unproductive Labor.” 

For accountants interested in Socialism, it is a shame that Marx never bothered with the proposed conceptualization of an accounting system under Socialism. Marx was more concerned with understanding the characteristics of Capitalism, less so with outlining the specifics of how Socialism would operate in both theory and practice. It was one of the historical considerations as to why MPS was devised by the Soviet Union, not to mention why MPS was never given greater usage as a competitor to Liberal Capitalist accounting systems.  

There is something to be discerned from the implications of MPS for the SMP Compendium. It should be interpreted as an attempt, however flawed it may be, to offer a genuine alternative to Liberal Capitalist accounting. Unfortunately, it is doubtful that MPS is practical for any application of the Work-Standard. Since the Work-Standard relies on its own accounting system, knowing the details behind MPS are crucial in order to set the Work-Standard’s accounting system apart as well as to determine where MPS went wrong for the Soviets and Eastern Bloc countries. 

MPS organized the accounts of the nation-state based on three categories: Productive Enterprises, Non-Productive Sphere, and Households. Every conceivable enterprise that produced goods and raw materials was considered part of the first category. Often, this included most Natural and Industrial Sectors to the exclusion of the Services and Information Sectors of the national economy. But the Soviets and the Eastern Bloc never organized their Command Economies to the extent that it would have made MPS practical. 

The tables used in MPS also lacked the ability for state planners to find more precise numbers, relying instead on approximate estimations that may or may not be entirely accurate. All of the tables were formatted as separate sets of inputs and outputs, where the Soviet accountants would try to balance subcategories ranging from production and consumption to the State and household wealth and assets. 

One of the problems with this type of formatting is the tendency toward calculating the numerical values of Productive Enterprises and the Non-Productive Sphere as a total sum. Every enterprise from all conceivable sectors of the national economy drew from the same pool of money. What the Soviet planners would do is try to balance the accounts concerning production of goods and services with their associated expenditures. A similar approach was also applied toward the Household accounts, where income had to be balanced with expenses. 

To demonstrate how it works, let’s assume for a moment that there are three State-Owned Enterprises (SOEs) employing 12,000 people. All of the accounts at the SOEs and the people employed there are denominated in Soviet Rubles (ISO Code: SUR). Those SOEs had produced three different finished goods valued at ₽634,181, ₽570,427, and ₽721,690 SUR. The total expenditures of the finished goods were ₽154,720, ₽364,800, and ₽432,371 SUR respectively. The targets set by the current Five-Year Plan mandate that all three SOEs must maintain production figures above ₽500,000 SUR and their expenditures below that same amount.  Assume that the Inflation Rate has been accounted for and not the Attrition Rate of the Work-Standard.

Before we can figure out how much all 12,000 workers can be paid, the state planners must calculate the differences between the inputs and outputs of the three SOEs. This is done as the following:

₽634,181 – ₽154,720 = ₽479,461

₽570,427 – ₽364,800 = ₽205,627

₽721,690 – ₽432,371 = ₽289,319

In short, the three SOEs had Outputs of  ₽479,461, ₽205,627, and ₽289,319 for this month. The combined total is ₽974,407. The Soviet planners would take the ₽974,407 and calculate it with the rest of the Soviet Command Economy, both Productive and Non-Productive, as a single sum total. From there, they can figure out how much could be allocated to the State, how much could be distributed to the SOEs, and how much could be given to the workers in the form of wages and other payments. For the latter, this is where the Household category becomes applicable.    

Missing from MPS within the Household category are important factors such as the absence of accounts for household savings and disposable income. This absence also shares similar absences with the other two categories such as the amount of Schuld (Debt/Guilt) that somebody might owe to somebody else, and the apparent inflexibility to differentiate between specific enterprises and economic sectors on the part of the state planners.  

The metric used in Soviet-Typed Economic Planning to calculate the total value of all economic activities in the national accounts is known as the “Net Material Product” (NMP). NMP is STEP’s equivalent to the Liberal Capitalist Gross Domestic Product (GDP). Just as GDP has its equations for Production, Income, and Expenditures, NMP also has its own set of equations for those three areas.

For the Production method, the equation is calculated as such:


The “GSP” is known as the “Gross Social Product,” which refers to the value of outputs being produced by a Soviet-style Command Economy. This value is subtracted from the “IMC” variable, the “Intermediate Material Consumption.”  In order to avoid operating at a loss, the GSP must be higher than the IMC.

For the Expenditure method, the NMP equation is calculated as:

NMP = FMA + AOE + L + NE

“FMA” is the “Full Material Consumption,” which includes the value of personal household and social consumption. “AOE,” the “Accumulation & Other Expenses,” are related to inventory changes, accumulation of fixed assets, and other expenses. The “L” represents the losses in national income, while the “NE” denotes the Net Exports of goods and services. 

And as for the Income Distribution method, this NMP equation is far more complicated than the other two methods: 

NMP = HI + TT + ET + SC + NPE + A + PNM

The “HI” is the “Household Income,” which are the wages paid to everyone who works under the Command Economy. The “TT” is a Turnover Tax, STEP’s equivalent of a Value-Added Tax (VAT). The “ET” is External Trade, denoting income earned from exports. 

The variables  “SC,” “NPE,” “A” and “PNM” are all related to the economic activities of State-Owned Enterprises. “SC” refers to the “Social Contributions” that SOEs put into the State pension system. “NPE” is the “Net Profit of Enterprises,”  “A” being the “Allowances” set aside for budgetary and non-budgetary purposes related to the SOE, and the “PNM” being the income gained from the operation of social services and basic essentials like water, electricity, sanitation, heating & air conditioning, and so forth.

As one can probably surmise from the three sets of NMP equations, they are not the most reliable for anyone wanting to find more precise values. The equations are dealing with approximate estimates that may not necessarily be accurate. But in doing so, there is a consistent pattern of attempts made to ensure that there was a balance between the production of goods and services and the accumulation of incomes for the Soviet State and its Totality. Everything seems to be simple from the outset on paper. In actual practice, however, there are too many variables where there is the possibility of calculations being inaccurate. Those problems becomes more apparent when considering the NMP equation for calculating any foreign trade with the Soviets and Eastern Bloc as part of the Council of Mutual Economic Assistance (CMEA).

Consider the equation for calculating trade: 

T = (Id – Iw) + (Ew – Ed) = (Id – Ed) + (Ew – Iw) = (Id – Ed) + Bw

The “Id” and the “Ed” are the domestic Import and Export Prices, while the “Iw” and “Ew” are the international Import and Export Prices respectively.  The “Bw” denotes the international exports with international exchange rates. The Soviet state planners will format the above equation as the following: 

T = (Id – Ed) + (Ew – Iw) * Bw 

Bw = Ed/Ew

Again, this is not the most reliable methodology for calculations. The Work-Standard cannot be expected to use these equations as part of any genuinely serious Socialist Monetary Policy. Practical applications of the Work-Standard will not only need its own equations, but also be capable of calculating the productivity values of both Liberal Capitalist and Socialist economies. It must be capable of operating under a Socialistic framework and still be practical enough for all economic conditions.  

In “Neoclassical economics,” the formal taxonomy for post-Bretton Woods New Keynesianism, an equation was devised on understanding how Soviet-Type Economic Planning would function in practice. The equation in question called for a balance between the amount of Kapital in circulation and the amount of goods and services in production:

P * Q = Y + TP – S – T

The “P” denotes the Retail Price Level and the “Q” is the Quantity of goods and services produced. “Y” represents the total household income or Wages and “TP” are the Transfer Payments doled out by the central government as Social Welfare payments. Both the Y and TP variables are to be subtracted from the “S” and “T” that denote the Savings and Household Taxes.

Theoretically, the equation needs to be balanced by the amount of goods and services produced and the amount of Kapital being paid. Note that Kapital is used to describe the type of Currency involved here rather than Geld as in the case of the Work-Standard. This is because it is virtually difficult to achieve a proper balance since the Price of Kapital has a tendency to fluctuate, depending on whether it is pegged to Schuld (Debt/Guilt), Gold and Silver, or a Liberal Capitalist Currency like the US Dollar.

Another aspect has to do with the so-called “Economic Calculation Problem” posited by Ludwig von Mises and Friedrich von Hayek. The argument is that it is impossible for central planners to know everything that goes on in the national economy, the crux of their logic having everything to do with the inefficiencies of dealing with Kapital. This is part of the justifications behind the Work-Standard and the need to differentiate between Kapital and Geld as two different types of Currency.    

Categories: Compendium, Economic History, Philosophy, Politics

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