THE BEST USE OF ECONOMIC RESOURCES by L. V. KANTOROVICH English Edition edited by G. MORTON Reader in Operational Research, University of London Translated from the Russian by P. F. KNIGHTSFIELD PERGAMON PRESS OXFORD - LONDON - EDINBURGH - NEW YORK PARIS ' FRANKFURTPERGAMON PRESS LTD. Headington Hilt Hall, Oxford 4 and 5 Fitzroy Square, London W.1 PERGAMON PRESS (SCOTLAND) LTD. 2and 3 Teviot Place, Edinbureh # PERGAMON PRESS INC. 122 East $5th Street, New York 22, N.Y. GAUTHIER-VILLARS ED. ‘55 Quai det Grands-Augustins, Paris 6 PERGAMON PRESS G.mbil, Kasserstrasse 75, Frankfurt am Main Dutnbuted an the Western Hemusphere by THE MACMILLAN COMPANY NEW YORK unwuant to a special arrangement with Pergamon Press Limited Copyright © 1965 Prrcaston Press Lrp. Sg aera ARI BIB Seo Wis Cet 4 29 ' C2290) Library of Congress Catalog Card Number 64-21300- 3796" Patan Cres ten by Bloke a Son Lid, GogoCONTENTS Editorial Preface Author’s Preface Publishers’ Note Introduction How to improve planning and economic accounting I. Production Programming and the Valuation of Production I. iit. The problem of the best distribution of the programme among several enterprises Allocation and choice of means for work performance Maximum Fulfilment of the Programme with Available Re- sources. Valuations of Factors of Production General propositions Valuation of factors of production which increase labour pro- ductivity Advisability of using qualified labour and the valuation of labour force Measures for economies of scarce materials and their valuations Efficient use of equipment. Hire valuation Rational utilization of natural resources. Calculation of rent Planning of transport. Production problems connected with trans- port. The appropriate railway tariff The best use of the available production base.. A general system of objectively determined valuations and its importance Problems Connected with the Expansion of the Production Base. Efficiency of Capital Investment Short-term investments. Normal efficiency Long-term investments Ways of realizing optimal long-term planning Comparison with other proposals for the calculation of the effi- ciency of capital investments. Conclusion Appendices I. Mathematical Formulation of the Problem of Optimal Planning v vii xvii XX 44 152 262i CONTENTS. M1, Numerical Methods for the Solution of Problems Optimal Panning References to Appendices Hand It us “Author Index Bas uy Subyect IndenEDITORIAL PREFACE A CONSIDERABLE number of foreign works have recently appeared, concerned with problems of the organization and planning of production, and involving the practical use of methods of economic calculation—a new aspect of applied mathematics. This aspect, which has been developed abroad only in the last decade, is at present widely known as linear programming. In essence it deals with problems of the rational ‘selection of variants in the solution of questions of economic planning so as to use a set of mutually related factors within a given complex in the best possible way. The methods of linear programming can be utilized for the solution of the most diverse practical problems expressed in standard mathematical formulations. Under capitalism these methods are employed with a view to the better utilization of resources (materials, equipment, areas, means of transport, capital investment, etc.) in order to achieve greater profit; these methods are mainly employed by firms internally. The sphere of application of the methods of linear programming is not restricted, however, to problems of production only; a number of government departments in the U.S.A. (the National Bureau of Standards, the Budget Bureau, the Bureau of Labour Statistics), are also very interested in this field of economic and mathematical research, and encourage the development of new methods which they utilize for their own purposes. In a socialist economy quantitative methods of analysis and the solution of similar problems acquire an incomparably greater significance. The preparation of national economic plans embracing a vast number of mutually related and interdependent economic units and of factors of production, and the coordination of these plans— not only in space but also in time—in order to achieve the greatest possible economic or technical effect (at any given moment or in the long run) is a task of enormous magnitude. With the level of development of the national economy and the exceptional complexity of internal economic relations, the problem of finding the best viisi HDrTORGAL, PREFACE ‘possible system for planning would become insurmountable without 2 fundamental appreciation of the quantitative methods of economic calculations and without the utilization of the latest computing, techniques. The use of modem mathematical methods in the organization and planning of production provides a reat and very efficient answer to the problem, It is, therefore, not surprising that, fimear programmuns, as an independent duscrpline, first emerged in the Soviet Union. Important results in this field were achieved in 1938-9 by the author of this book, L. V. Kantorovich, and published by him in a number of works beginning in 1939, The first of theset contained fundamental advances and determined the content and farther development of this discipline: it examined the mathe- matically new type of “extremal” problems; it evolved a universal mtthod for their solution (method of sotution multipliers) as welt as various effcrent numerical algonthms derived from it: it indicated the more important fields of techmical-economic. problems. where these methods could be most usefully applied; and it brought out the econame significance of indicators resulting from an analssis of iptoblems by this method which are quite essential in problems of a socialist economy. It should be mentioned that an the period 1948-50, independent of the work referred 10, an extensive programme of research on linear programming was begun in the U.S.A. (It was precisely during this Period that the term “neat progeamming” appeared.) Eminent Amenean mathematieans and economists (Koopmans, Dantzig, Tucker, Charnes, Dorfman and many others) have been engaged in vatious theoretical researehes, and are showing the basic scope of the practical applieation of linear programming in a capitalist economy, tn establishing its connection with the theory of matrix games, and in working out various numerical methods of solution, G. Dantzig. 1m particular, produced the “simplex method'"t which 1s sufficiently universal and 18 now the most frequently used method, Up to the present time finear programming has been used abroad in various swaysin the solution of the most diverse technicat-economic probifem. ‘The literature on this subject runs into hundreds of titles. AL V Kantorouch: Matematfeheskie meiody erganotsit« planiroraniya isnatra (Matheratvsl Methods in the Organist Ine Frokcion Uenared Caner ng” ne Omen an Panne of {Yor a companson of Dantas's method and the methaus of the author see Appendee Mp. 310,EDITORIAL PREFACE ix Moreover, many of the findings of the work of L. V. Kantorovich (which were unknown abroad for a long time) were newly “dis- covered” in one way or another in American works in the period 1949-56. At the present time, the priority of Soviet science in developing the basic propositions of this new discipline is acknow- ledged even by the American scholars themselves. Almost at the same time as linear programming, a new trend in the utilization of mathematical methods in economics was formulated, ie. “input-output analysis”. The matrices of inter-sector activity developed by V. V. Leontief for the economy of the U.S.A.t were the principal element in this analysis. Soviet literature on economics shows that Leontief’s method was considerably influenced by Soviet economic ideas of the 1920’s and in particular by the first “Balance of the National Economy of the U.S.S.R. for 1923-4”. Leontief completed his studies at Leningrad University in the 1920’s and was familiar with Soviet balancing methods. Leontief’s model is a very special case of the linear programming problem. “Input-output analysis” can be applied to some problems not connected with the finding of extremal solutions (analysis of the balance of consumption and production, clarification of the structure of inputs, study of inter-sectoral and inter-regional relations, etc.). In this work offered to the reader by Corresponding Member of the Academy of Sciences of the U.S.S.R., L. V. Kantorovich, which sums up his extensive researches, methods of linear ar Programmi are Saetoewclation 6 of the problems under consideration much closer to concrete national economic conditions. In conditions of socialist production, methods of linear program- ming can be of enormous benefit. They are the principal means of + See, for example, p. 63 of T. C. Koopmans’ book: Three Essays of the State of Economic Science, McGraw-Hill, New York, 1957. tV. V. Leontief: The Structure of American Economy, 1919-1939. An Empirical Application of Equilibrium Analysis, Oxford University Press, New York, 1951. The first edition of this work, with calculations for 1919 and 1929 only, was published by Harvard University in 1941. A collection of articles by V. V. Leontief and other American authors has appeared in Russian under the general title Studies in the Structure of the American Economy, State Statistical Publishing House, Moscow, 1959 (a translation of the 1953 American edition).x EDITORIAL, PRETACE analysing and accurately solving those problems which arise when separate economic questions are brought into a schematic and mathematical formulatvon. “These methods have been tested in practice to a considerable degree in separate sectors of the national ‘econom. Proofs and illustrations of the possibilty of their practical applic thon in the solution of specific technical-economic and planning problems constitute the major part and the principal value of L. ¥. Kantorovich’s book. “This book 1s not intended for the professional mathematician and therefore the purely mathematical examination of problems is kept separate from the main bedy of the work, The author expounds sradually the baste ideas and concepts connected with the proposed: methods for the quantitate analysis of economic questions. In ‘examimeg separate problems the author explains the principal methods of calculation, while the systematic presentation and ‘mathematical principles are enen im the appendices. Theauthor'sexposition 1s based on convincingly selected examples, ‘which are simplified in ordet to shaw the essence of the approach he is using and (0 gne a step-by-step exposition of basic ideas. The analysis of each example 15 completed by the formulation of certain zeneral prnesples(conclustons), and the role and significance of these phneiples m specific economte conditions are explained. The mathe- matical analysis of each specific problem shous the auxiliary criteria ‘objectively determined by the problem itself, and evaluates materials, equipment and other factors of production involved. In relation to 2 specific problem, taken 1” isolation, the objectively determined valuations are a very important instrument for its sotution: they represent the particular technical indicators which characterize a given problem. The method of objectively determined valuations (solution multi plers) advanced by L. V. Kantorovich has been worked out for fully determined conditions when some of the resources among those ‘being utilized are scarce. In the present nork the author broadens the concept of scarce resources, and extends it to cover all resources available in a restricted quantity, ancludimg here both those already taken up fully (allocated) and those which are temporarily deficient, i.e. those resources in which temporary shortages have arisen. In the Proposed system of economic calculations, scarce resources receive aEDITORIAL PREFACE xi high valuation, while those available in excess receive zero valuation. The system of economic calculations using objectively determined valuations makes it possible—on the basis of the valuations of short- ages, scarcity and prior commitments of factors of production—to give a variant for their utilization which would ensure, with the given resources of these factors, the maximum fulfilment of the programme task (in terms of the given assortment of goods). In this lies the main interest of L. V. Kantorovich’s work. However, the author attaches to his valuations and to his system of economic calculations an interpretation of such amplitude and such a universal significance that it cannot be accepted. He has come to regard them as universal equivalents for the substitution of some resources by others. Arising from the condition that the sum of the valuation for production, on the basis of given resources, must be equal to the sum of the valuations of utilized resources, the author also begins to regard the valuations of various types of production in the same way as equivalents for the substitution of some products by others. Not only that—he attaches universal significance to these substitution equivalents, and demands that the utilization of factors of production according to objectively determined valuations should be included in costs of production. These claims by the author are completely unfounded. It should be pointed out that objectively determined valuations can only play a subsidiary role of valuations of shortages and scarcities of resources. They can only be successfully employed in the solution of specific problems connected with the rational allocation of a production task under given concrete conditions. The valuations are for purposes of allocation. They cannot be regarded as criteria for production and they must not be treated as costs. The author is right when he points out that rent from equip- ment can be calculated (hire valuation), although no money is paid (see pp. 78-9). But he is wrong when he begins to regard objectively determined valuations as cost elements. They only represent criteria of shortages or limiting factors, calculated for a given type of equip- ment only for fully determined purposes connected with such distribu- tion of the production task which must take into consideration the factor of temporary scarcity of available resources. Available resources of course characterize the conditions of the use of labour, but these conditions cannot be regarded as beingi EDITORIAL, PREFACE the sme as Iabour outlays. The fact that the author ignores the riven situation, leads him to anelude in costs not only oudfay on the means of production, but also the costs of their scarcity (eg, ‘commitments of transport and of equipment). In the mathematical formulation of a problem, L. V, Kantorovich introduces the cost of factors which increase the productive power of labour (various forms of equipment, natural resources, etc.) 2s mathematical variables, ‘equivalent to the expenditure of labour and outlays on the means of production (pp. 274,291). In practice thisleads the author tocompate the real outlay on repairs (p. 82) with the “loss of hire valuation” (Conditional expenditure). It is impossible to agree in any way with ‘comparisons ofthis type. ‘The introduction to the problem of conditional valuations (cultphers), which characterize the shortage and searcity of factors, only permits the solution of the question of choice of the most rational and expedient method of utilizing available resources, ensuring the most correct distribution of @ given production task oF programme. ‘The author lays claim to the universality of the proposed method of economic calculations based on objectively determined valuations. This lads him to a number of inconsistent and incorrect conclusions. On the one hand, the author stipulates that objectively determined valuations should not be ditectly linked with tariffs for electric power (p. 60), with wage rates (p. 65), or with prices (p. 135), while ‘on the other hand, all his examples are drawn up an such a way that the existing system of nattona! economic valuations (prices, tariffs) often leeds to wrong conclusions, and only objectively determined valuations give “complete harmony” (pp. 11, 32, 134). He'contrasts objectively determined valuations, which only reflect local conditions, with valuations emerging ftom the national economic objectives, valuations which he ealls a priori (pp. LL, 32), rejecting them for local problems and imparting to them a subsidiary role (p. 235). The author's desire to underline (p. 213) the common factor which links objectwely determined valuations with market prices—their divergence and not theit coincidence with the necessary expenditure of labouris typical. L. V. Kantoroviet's conception of an optimal plan is also very weak. For him, an optimal plan is only one in which objectively determined valuations, for products as well as for factors, areEDITORIAL PREFACE xiii consistent. The existence of consistent objectively determined valua- tions is the main condition for an optimal plan (p. 222). The author considers that as a criterion of normal efficiency and of optimality of a plan all other national economic criteria are not very essential, and in particular he devotes quite insufficient space in his economic analysis (p. 228) to the index of the growth of labour productivity. He ignores such an important aspect as the optimal character of the relation between consumption and accumulation. The plan itself is treated by the author in a very narrow sense, as a “collection of numbers” (p. 267, Mathematical Appendix). Of course, it is impossible to agree with the author’s point of view; it must be rejected. He imparts to one of the methods of economic calculations, which is very useful in a strictly limited sphere, a general and universal character which is alien to it. His objectively deter- mined valuations are only criteria which permit a numerical valuation of the scarcity of the conditions of production, the scarcity of resources, restrictions of equipment and the strain of the programme. These valuations do not characterize anything else. But this does not detract from their significance in a specific field. They permit, for example, the numerical determination of differential ground rent. Hire valuations for equipment are also, in their own way, valuations of rent. The author himself indicates the “rent” character of hire valuations (p. 79, footnote). However, objectively determined valuations have significance only in the solution of problems where the important role is played by processes of distribution and re-distribution. These criteria are particularly important when, by the nature of the problem, it is necessary to take into account shortages and the scarcity of resources. But these are not indirect costs, as treated by the author (pp. 227, 259), but merely a constant element of economic calculations of a par- ticular type, which take into consideration the scarcity of resources. These valuations cannot characterize the actual extent of costs nor, what is more, full national economic costs as the author asserts (pp. 92, 244) even if only because objectively determined valuations for surplus products and surplus resources are equal to zero (pp. 96, 264) and because the total profitability of the plan is also equal to zero (p. 121). They can take into account divergences from social costs only if the worst conditions for the application of labour (e.g. poor land) are operating, which only happens in special cases.aw "EDITORIAL, PREFACE Differential ground rent cannot be regarded as part of the social expenditure of labour (p. 208), since the conditions for the applica- tuon of labour do not create cost. Rent is only a part of the surplus product created by the socially necessary expenditure of labour. It can be isolated only in the process of the distribution of income, and in that cate the method of economic calculations based objectively determined valuations can be useful for the determination of rent as a separate part of the surplus product. ‘When the nature of objectively detcrmined valuations is under- stood correctly and when the unfounded claims of the author to the universality of the method are withdrawn, then only will the method of economic calculations put forward by L. V. Kantorovieh be used to advantage, In this field the author has done a not insignificant ser- ‘vce mn publishing hus work, despite a number of erroneous principles ‘and the controversial nature of a number of his conclusions. ‘Thus, wile the use of the methods and the objectively determined valuations advanced by L. V. Kantorovich do not raise any serious objections m relation to the solution of specific problems of economic planning, the extension to cover the national economy as a whole in order to achieve an optimal economic plan is controversial and has ‘been quite inadequately studied. ‘Of course the structure of an optimal plan is an extremal problem ‘which assures mathematical formulation and mathematical solution, but under conditions of accurate economic premises and formulae tions. Indeed, even bourgeois mathematical economists as repre- sented by the pure mathematical (so-called Lausanne) school and xs modified Anglo-American form also aim to find the maximut value of a certain “general utility function” or a “welfare function’ ‘This function, however, has nothing in common with the economic effect or with the development of the productive forces of a country and 1s an fact never realized. No less basic 1s the fact that Western mathematical economists arrived at this problem by rejecting an analysis of eausal connections, by rejecting the structure of a unified theory of pnces and of the categories of value, replacing the study of the latter—the basis of all value formations—by formal mathe- ‘ratical ealeulations to determine the interdependence among specific external manifestations of economic phenomena, As they under- stand i the relation of supply and demand is the cornerstone of this interdependence. EDITORIAL PREFACE XV L. V. Kantorovich is anxious to avoid such a usage of mathe- matics. He relates the objectively determined valuations not to the categories of demand but to the labour theory of value. He tries to give a real economic meaning to objectively determined valuations and tries to indicate a way of obtaining, by means of objectively determined valuations, the valuations of all goods on the basis of all the socially necessary labour expended on their production, in accordance with the Marxist concept of value. While disassociating himself, however, from the concepts of bourgeois economists he nevertheless introduces into his structure, to a certain degree, the dependence of objectively determined valuations on demand, though the role which the author assigns to this demand remains unclear. L. V. Kantorovich repeatedly points out that the methods of economic calculation and of objectively determined valuations put forward by him must be used within the framework—already pre- determined—of leading directives and main proportions; i.e. basically he determines not what is to be produced but how it should be produced (pp. 138, 184). In other words, these valuations cannot serve as a regulator of the allocation of social labour between the main sectors of the national economy. But nevertheless the character of these objectively determined valuations as interpreted by the author, is such that they do appear to a certain extent to be such a regulator, whether the author subjectively desires this or not. Of course, many of the proposals and conclusions of L. V. Kan- torovich relating to the conditions of price formation are worthy of note. Attention should be drawn to the timeliness and accuracy of the author’s formulation of the problem of the construction of a system of valuations—of prices, capable of serving as a basis for economic accounting and a means of finding the most expedient variant for the utilization of resources of the whole national economy. Naturally, in his research work the author could not finally elaborate theoretically all the numerous problems he touched upon which arise in the construction of an optimal plan for the national economy. It must be hoped that the publication of this piece of research, despite the controversial nature and theoretical imperfection of a number of the author’s principles, will influence the further fruitful development of the methods of planning and economic accounting. A number of the author’s arguments and elements of his constructionwi EDITORIAL PREFACE, ‘can be utilized in the future, though in a different context, both in the practice of the construction of the national economic plan and in the solution of specific problems of the socialist economy. ‘Academician V. S, NewcutNov. 6 June, 1959AUTHOR’S PREFACE THE present author wrote a study on the Mathematical Methods of Organizing and Planning (Leningrad University, 1939) arising from advisory work on production problems in 1938-9. It set out a method for finding the solution of technical and economic problems, such as the least wasteful allocation of work to machines, the cutting of material with the minimum loss, and the distribution of loads over several different means of transport. These investigations were continued in 1940-1 and 1948-50 at the Institute of Mathematics of the Academy of Sciences of the U.S.S.R. Some of the problems were further developed in special studies. Methods of cutting which resulted in the smallest waste were intro- duced into some Leningrad factories. Various computing techniques were generalized and simplified. Soon after this work began it became clear that the methods being developed there could find a far larger field of application to general problems in economic accounting and planning. The results of some of the investigations in this field were submitted by the author in 1942 to the Institute of Mathematics of the Academy of Sciences of the U.S.S.R. (at that time in Kazan), and in 1943 to the Institute of Economics of the Academy of Sciences of the U.S.S.R. in Moscow. This is a statement of the results of the investigations referred to above, supplemented by new calculations and examples to include economic data of recent years. It gives only the basic elements of a system of economic accounting. The essential problem appears to be one of constructing an optimal production plan which would ensure the best results by the greatest use of available resources, and also the study of the economic indices of such a plan. The work is in two sections. In the first, the optimal solutions of some specific economic planning problems (allocation of the pro- gramme, efficiency measures, utilization of equipment, effectiveness of capital investment) within a single factory, a group of factories, an economic region or a sector are analysed and solved. In the second, xviix ‘AUTHOR'S PREFACE some general economie accounting and plansing principles in a socialist society are explained on this basis. The results may be applied to economic planning and in choosing economic indices. ‘The main conclusion is that a system of production valuations correctly constructed and conforming to real conditions is an effec. ive means of analysing the best use of available resources. Under given.conditions in an optimal plan these valuations fully agree with the accounting cost of social labour necessary for the production of ‘a unit of output. To find such a system of valuation and an optimal plan, an effective approach and special accounting methods are proposed. Such a method is supersor to existing ones because many factors usually diseegarded or only considered qualitatiely are accounted for by quantity, as a result the choice of the solution conforms more fully to the national economic interest. ‘At present, calculations have not yet been made for the necessary andices consistent with the proposed methodology, but the author thinks that the results of this study, even at this stage, can be of real assistance in the solution of many practical economic problems. ‘The applicability and high efficiency of the methods of optimal planning for @ production unit, 2 workshop, factory or group of enterprises are undoubted, They have been sufficiently tested in practice, However, experiments in the use of optimal planning methods on a seale covering the whole national economy have yet to bbe made. The place and value of these methods in national economic planning can therefore not be considered sufficiently clarified, and any categorical assertions inthis respect would be premature. ‘One thing ts cortam: in a socialist soctety where the whole economy is built on a scientifically planned basts the field of application of mathematis! methods (especially of the extremal principle) is ime measurably wider; here, an contrast to capitalism, the possibility exists of applying mathematical methods in national economic planning. ‘The preparation of such a plan and is indices 1s an extremely complex task. For this reason it would be particularly important to introduce more accurate quantitative methods. ‘The application of mathemmatical methods to the analysis of economic planning in a socialist economy raises a whole series of ‘complex problems of method: the role and extent of the applicationAUTHOR’S PREFACE xix of these methods, the discovery of the economic meaning of the new indices resulting from the application of these methods, and their connection with the usual economic categories. In so far as these indices appear in an objective quantitative economic investigation, they should agree with and fit into the general assumption of the labour theory of value. In this book some attempts have been made to establish such relations, but the final clarification of these problems should follow from further investigations, and the constructive criticism of such problems by a wide circle of specialists in the field of economic theory as well as by practical workers. Many useful comments on this work were made by the editor in charge, V. S. Nemchinov, and the readers K. I. Klimenko, I. I. Lukomski, and A. L. Lure and also by V. V. Novozhilov, V. A. Zalgaller, A. L. Vainshtein, A. S. Konson, A. 1. Katsenelinboigen and G. N. Soloveichik. G. S. Rubinshtein was of great help to the author in compiling the appendices. L. I. Gorkov, A. A. Korbut, I. V. Romanovskii, L. S. Soboleva, V. N. Sokolova, and I. N. Sokolova checked the examples in the main text and worked out the examples in Appendix II. They also read through the final text. To these and to others who gave helpful advice and criticism the author expresses his warmest thanks.PUBLISHERS’ NOTE ‘The Publishers and Dr. G. Morton wish to acknowledge the valuable assistance rendered by Dr. P.F. Knightsfield, Mr. P, Basu and Mr. G. O. Harding in transiating this volume.INTRODUCTION How to Improve Planning and Economic Accounting PLANNING of the national economy and of individual branches within the framework of the state is only possible when private ownership of the means of production is replaced by common socialist ownership. Such planning becomes possible only when capitalist relations of production have been eliminated and 1eplaced by socialist ones. V. I. Lenin inspired the first scientific plans in the history of the Soviet economy—plans for electrification and co-operation in agri- culture. The genius of Lenin’s ideas about planning formed the basis for all plans for the development of the national economy of the U.S.S.R. Lenin’s ideas of building a communist society per- meated the target figures of the Seven Year Plan for the development of the U.S.S.R. as confirmed by the XXI Congress of the Com- munist Party of the U.S.S.R. The party has frequently emphasized that only with detailed and correct scientific planning is it possible to achieve full and balanced use of all existing resources and to demon- strate the general superiority of the socialist method of production which will guarantee the victory of socialism in the world-wide contest with capitalism. “In a socialist society there is no room for the contradiction which exists under capitalism between the social character of production and the individual manner of appropriation, there is no room for such phenomena as competition, anarchy in production, un- employment, economic crises. In the socialist society different economic laws have emerged : planned and proportional development of the national economy, and the continuous and rapid growth of production without depressions and crises. This makes possible the planning of the national economy, the direction of its development, the continuous increase of the volume of production, the efficient xxixii mstopucTion distribution ofthe forces of production with large-scale specialization and co-operation on the road to socialism.” ‘Much expenence has been obtained in the planning of an entire economy controlled by 2 socialist state. Socialist construction in the USS.R. has fully confirmed the basic principles of planning. Tn practice there sill are substantial shortcomings. This applies above allo the techniques and methods of planning and to economic accounting generally. The Communist Party and the Soviet Govera- ment have frequently tamed their attention to the imperfection of planning methods and construction of economic indices, and have persistently tried to improve these shortcomings. “Moreover, planning deficiencies exist as a direct result of economic seienee lagging behind the requirements needed in the building up ‘ofa communist state.t ‘These questions have received much attention in recent years when ‘a whole series of measures were taken; they were aimed at the removal of shortcomings in planning and in economic indices, especially in agriculture, and at mproving the organization of management mn industry. The task of further improving the methods of solving these problems remains topical. Herein he the essential reserves for the faster growth of the national economy. No doubt, correct planning methods should lead to the attainment of the optimal plan, ensuring the best use of all the resources and yielding the maximum quantity ofthe required products. Are all the exisung production plans efficient? There are no grounds for an affirmatwve answer to this question. ‘On the one hand, the work of out leading factories proves that _ateat unused potentialities exist. As a result of better utilization of avatlable resources, these factories reach outputs which greatly exceed the targets set by the plan. On the other hand, considerable losses take place even now— + Tater figarcs forthe development ofthe national economy of the USS R. foc 1959-65 "Report ofthe NXI Congress of the Cortnenst Party ofthe US S.R, sol Tip 61 ubSthy Ege 2 Seen of the Communi Fy of th Sv Sach tcltordner anda of slurs ta who ei of te oan he feklofeconome scene sdmzay th econamtshenocher Sethe by KV. Ostrowtianoy (ibid , p- 372) pewsINTRODUCTION xxiii idleness of labour and equipment, and losses in raw materials and fuel, owing to unsuitable programmes, rush work towards the end of the plan period and delays in supply, the freezing of materials in surplus stocks and in protracted construction—these are also evidence of the lack of sufficiently rational planning. No less significant are the indirect losses caused by the improper utilization of resources. As they are not recorded they are less noticeable. For example intricate equipment is used for simple work, with low efficiency, while in other places, where it could be most effective, the absence of this equipment causes delays or necessitates the use of primitive methods. This is also true of materials. Particu- larly frequent are the losses due to the lack of flexibility in alloca- tion, resulting in the lack of small quantities of any necessary material becoming a hindrance to raising output. All these losses are basically due to imperfect production planning and economic accounting, caused by inadequate methods, If, with identical production capacity, one factory yields two to three times less output than another, blame is usually laid on inadequate production aims, or the difficulty in obtaining raw materials or tools. Loss of production due to rush work alone was estimated at one time at about a quarter of possible output. The removal of these losses by improved planning techniques and better economic account- ing would make it possible, within a short time, to raise output by 30 to 50 per cent, using available resources only in the most economic manner at all stages of production, That is why the task of working out and introducing such methods is both important and urgent. It should be stressed that in order to solve the economic problems of industry, agriculture and construction, shortcomings in planning and in the preparation of economic indices have to be removed. The reorganization of management carried out by industry and construction makes it considerably easier to apply improved methods. What is, therefore, the main task in solving economic and planning problems in a socialist society ? All the purely economic questions, i.e. the extent to which produc- tion requirements will be met and the speed with which output will grow, may be divided into two types. (1) The correct choice of method in the production of a given output or the completion of a given operation. The type of resources (labour,air sTRODUCTION raw material and other materials, equipment, transport, power) and the quantities in which they witt be used will depend primarily on the production method choxen. For instance, should alumniniom or steel Alloys be used for components, wood of cement in building, exeavae tors of manual labour for foundation work, fucl brought in from a distance of local fuel? Theve are the questions which are decided every day in the somnarkhozy, factories, kelthozy, project bureaux, and in construction fiers. (2) The allocaun of the procromme end of the resources aiilsNe among indinttal enterprites and operations, ete. This tak rust be sofsed 30 as to ensure the correet componition of faa output, and not to disturb the peners} availabilty of resources, and to achieve balance between production and requirements ofeach typeof final of intermediary preddacts Upon the basic solution of this task sul depend the powubty of unvaterrupted work of the factories and hence the quantity of output Theis probierys are sotved by the fotganizations which perform the planning and exercise operational controt at all stapes Both these tasks ere intepsrahly linked. Only ina few wntances, where a piven factory er operation ean be considered in isolation 16 it posite to solve the fint problem andependently of the second Tor tntance, when a new operating method makes it possibte to produce more than previoutly with the ‘same equipment but with smaller expenditure on Isbourand materials, no gconore probem anes It 1s ofaious that the improved method should be piven preference Such eaves ate analysed in many mancals of apphed economics In practice the peocess more comples, For instance, it may be possible fo tur to focal raw materalt {but asa result the voleme of Production may decrease), to eeplzce one material by another; 0 increase the volame of produstien by adding to the existing equip. iment, to reduce the conwemption of fel hy spendingsubstantial sums fon boilers of a nea tyre The solution of similar problems will depend upon the operating condatwoas of many other enterprises and upon general eennomie conditions IF transport is ovetToaded, local raw materiale should be used inespective of the Yosser this may involve, If the means avatate for capital inveutment sre very Tiewted, plans for a ren bovler most be akandonad in spite of its superiority. In deciding. for instance, whether to teplace enc ton of tin by three of aluminium, the fact that one material is avsilableINTRODUCTION XXV at a given moment in large quantities should not be the deciding factor, but rather which material is of greater economic importance. The second task should never be solved independently of the first. The general balance of production and productive resources consists of the relationship between individual enterprises and organizations. Changes in this balance are only possible as a result of changes in the programme and operating conditions of individual factories. These two tasks cannot be solved independently. However, in practice, it is very difficult to solve both simultaneously. When solving production problems of a given factory which affect general relationships, an analysis of the latter could not be carried out on a national scale at the same time. But failure to consider such problems amounts to disregarding all the possibilities of improving the opera- tion of the factory. Meanwhile, when solving planning problems for the economy as a whole, a branch of it, or for an economic region, it is not possible to consider simultaneously all the operating conditions and possibilities of numerous individual economic units. To bring about an agreement between the general and the particu- lar is the basis of the difficulty of planning and economic accounting. This difficulty could be overcome by creating a method enabling the solution of planning problems for individual sectors and factories to be obtained separately, but at the same time maintaining the con- sistency between one another and leading to an optimal (or near- optimal) system of planned results. The first task referred to above may also be encountered in a capitalist society. A capitalist compares operating methods and chooses that which brings him the maximum profit. Of the two possible types of raw material the cheaper one is chosen; if economies in labour expenditure can be achieved by the increased use of electric power, the expediency of using one or the other is determined by a comparison of costs. The financier invests available capital where he can obtain the highest return. The decisive factors are the system of prices operating at the time, the system of tariffs, and the rate of interest on capital. The second task—the preparation of a general consistent balance —cannot arise under a system of private ownership of the means of production. This balance is automatically achieved as a result of the competition on the market and is accompanied by great losses. A spontaneous “system” of economic solutions cannot ensure theINTRODUCTION xxvii character. Frequently, the prevailing custom is important here, and so is the necessity of a solution which allows for the inflexibility of allocation when in spite of its undoubted superiority some method cannot be used owing to the lack of materials for its application. Against the background of the impressive progress of our industrial and agricultural economy these difficulties and deficiencies are less noticeable. Nevertheless it is essential that they should be removed; it should help to increase further the pace of development of the socialist economy. In the solution of the second task, a rational distribution of the programme and of resources, considerable difficulties arise. Fre- quently there appears to exist considerable disparity between the orders and requirements of individual firms for materials, equipment, electric power, transport, means of capital investment as against existing possibilities. Such disparity arises because orders fail to take into consideration the actual supply of a given factor of pro- duction and the requirements of other enterprises for such factors: this is due to the absence of sufficiently good methods of making such assessments. In fact, objective indices, showing the actual degree of importance of each order, are not applied or the characteristics are purely qualitative ones, such as, “very necessary’ or “‘absolutely indispen- sable”. In view of this, orders are usually cut, partly for those firms which are considered less important, and partly automatically by some percentage without any objective analysis of the losses that may result. Moreover, such arbitrary and subjective factors as the opportune moment for an order and continuity in the require- ments play an important part. As a result of these deficiencies in distribution, relative propor- tions are frequently much disturbed (not only in the plan but also in actual realization); this leads to losses like under-employment of the labour force, rush work (due to delays in supply), idleness of means of production (for lack of certain parts), greater use of manual methods and the consequent lowering of labour productivity (due to Jack of equipment and co-operation). Many of these losses could easily be avoided (for instance, in one firm wagons stay unloaded owing to the lack of motor transport, in another movements over distances of hundreds of kilometres are carried out by motor transport as a result of the non-arrival of railway wagons).INTRODUCTION Xxix criteria for finding the best solution. For this reason defects in the plan are unavoidable. Even though, in the experience of the chief planners, the basic instructions are determined correctly, the absence of competent, objective computational methods in economic analysis when such instructions are put into practice by subordinate bodies leads in numerous cases to less successful results; and hence waste occurs. Thus industry is far from using its full capacity. Once is confronted with the task of establishing methods that would ensure an objective approach and the best solution of the problems of economic planning. Such a solution, once it is required to be objective, must in- . escapably be quantitative, since one set of initial numerical data will furnish one solution while another solution will emerge from different data (to substitute a ton of aluminium for one ton of lead may be correct, but it might not be so for thirty tons and a qualitative approach is of no use here). It is, therefore, clear that such a method should represent some system of economic accounting. This book aims at clarifying some principles and procedures of such a method. A more detailed elaboration would require very much research, generalization and the analysis of an enormous amount of factual material together with long experience in planning. Such a task can only be solved by the efforts of a great number of scientists in various fields of specialization, and of practical workers. The object of this book is to bring out certain properties and possibilities of economic accounting in a socialist society which in our view are of fundamental importance, but which at present are neither utilized nor even duly considered. To ascertain the basic economic categories, the author was guided on the one hand by the fundamental propositions and methods of analysis in the economic theory of Marx, on the other hand by the assumption of the objective nature of the economic laws of socialism. Of course, the author does not aim here at a theoretical analysis of the basic economic categories of a socialist society. The scope of this work is considerably narrower and of a more practical nature: a preliminary exploration of the method of economic accounting making possible a systematic approximation of the optimal plan; in addition it aims at elucidating the approach to the further develop- ment of a method of solving economic problems which would ensureINTRODUCTION XXxi and government. In passing, we show the importance that the applica- tion of these results could have (see pp. 27, 43, 61, 73-85, 100,116, 197). A systematic analysis applied to problems of economic planning in an abstract and simplified form, consisting essentially in the substitution of some model scheme for the original problem, greatly facilitates analysis and makes it possible to carry it through quite fully, to apply objective computational methods and to arrive at exact quantitative solutions. In such cases, the results obtained refer only to the scheme under consideration. The incomplete agreement of this scheme with the complexity of real problems arising from necessary omissions makes it impossible to apply the results obtained directly to practical problems. At the same time we suggest that the more important basic economic factors can be calculated accurately enough with the aid of these schemes, and that the assumptions closely approach real conditions, For this reason, the results may still be of real advantage. This aspect which is common when using the abstract method in scientific investigation must be continuously borne in mind by the reader. The book is divided into the following parts. In Chapter I we consider questions of programme allocations under special limiting conditions in the presence of which the solution of the problem, that is, the finding of the optimal plan, may be attained by using only a certain valuation of production. Here we introduce the basic concept of objectively determined valuations which are intimately and in- separably connected with the optimal plan. The ratio of these valuations for two types of operation (of production) represents the real equivalent by which one operation may be replaced by another in the optimal plan. This is also consistent with the ratio of costs necessary for the completion of one or the other operation in any given situation, provided this cost is calculated correctly and fully. Moreover, under given conditions, the relationships shown may be determined by correctly allocating costs among types of products manufactured simultaneously without analysing in detail the structure of this outlay. In passing, an account is given of a numerical method of finding an optimal plan and objectively determined valuations for simpler cases. This method is quite easy, while the numerical analysis quoted in the examples is of great importance. It is necessary to absorb it fully as otherwise it may be difficult to understand the basic meaning of the concepts introduced.INTRODUCTION xXxxiii of certain propositions stated in the preceding chapters. In Appen- dix II we describe the procedures for solving these problems which are necessary for the utilization, in the more complex cases, of this method of economic accounting, as set out in the body of the text. This work deals only with the range of problems relating to planning and economic evaluation of methods of production. Some other problems closely connected with these are not subjected to systematic investigation and are touched upon only in passing; for instance, the question of choosing an index of performance for a factory consistent with the interests of the national economy in such a manner that the improvement in the operation of the factory (from the point of view of the general plan) should be reflected in an improved index. For this and many other problems our method may prove useful. In this book we have worked out some principles of the objective method of solving problems of economic accounting and planning. The details and technique of the use of this method in practice is not considered since these questions have not yet been sufficiently investi- gated and should be solved in the course of the practical realization of the work, depending upon actual conditions and on its progress. Certain concrete solutions of individual problems, the application of which may be recommended, are quoted in the book; but the number of such problems could be multiplied. - The book touches upon a fairly wide range of economic problems connected with the task of optimal planning; nevertheless, many of these have only been partially solved and our conclusions and pro- posals are necessarily rather sketchy. Familiarity with the proposed approach should promote discus- sion, further development and practical use which will open up new horizons.CHAPTER I PRODUCTION PROGRAMMING AND THE VALUATION OF PRODUCTION Section 1. The Problem of the Best Distribution of the Programme among Several Enterprises Statement of the Problem As a first problem of a technical and economic nature in the solution of which the application of correct economic accounting is of primary importance, we shall consider the question of the most suitable distribution of the production programme among several firms. We assume that there are many different ways of solving the problem—one and the same article may be put into production at several factories. The problem arises from the choice of an optimal distribution such that in the programme for each works are included only those articles for which it is best suited; as a result aggregate expenditure would be least. Just as the production of various articles is to a certain extent interdependent, the costs of their production are also inter-related. For this reason, a solution is called for both for the distribution of costs amongst the articles and for an objective determination of the necessary expenditure on each article. To explain the method of solution, we shall consider this problem with a practical example using a whole series of simplifying assumptions. EXAMPLE. To give the best distribution of the programme among factories under the following conditions: (1) Two articles have to be put into production: No. 1 and No. 2; the requirements for both are unlimited but it is necessary that they should be produced at a fixed ratio (problem of assortment), e.g. twice as much should be produced of article No. 1 as of article No. 2. (2) Each of these goods may be put into production at factories of I2 {THE WEST USE OF ECONOMIC RESOURCES, types A, B, C, D and E. The number of factories of each type and the production capacity per month of parts No. 1 and No. 2 are ‘gwen in Table 1. It is assumed that each enterprise will produce only one type of article, “Tans 1, NUs@IR OF FACTORIES AND MONTILY PRODUCTION CAPACTTY 7 | Production capacity | Relative labour content ia | “ofeach factory | the manufactured product “ype | Numer . ol tac | ‘Astcle No.2 | Ariel No 1 tecory|tatnes |For atc For are, A io} RST RE] eee sh omar 7 1s 2 os 8 ons. 4 025 ha oa Production costs of factones as a whole (in addition to raw ‘materials and baste materials), namely wages (the number employed is constant), eleetnc power, fuel, expenditure connected with equip- ‘ment, for other workshops, and general factory expenditure and depreciation are approximately the same whichever article is put into production at the works. ) All the necessary materials are available in the required amounts. Expenditure on basic materials (and also power and fuel, af required) per unit of @ given article 1s identical at all types of factory and constitutes, say, 10 roubles per unit of article No. 1 and 15 roubles per unit of article No. 2 (the latter figure, however, is not vety important in the subsequent analysis). (4) Transport problems are of no great importance; all the factones and workshops are situated in one town or in several towns close to each other. Briefly, all the productive expenses may be divided into two ‘groups: those which do not change at a given works, independent of the type and quantity of article of each type irrespective of where it is produced, and those which are proportiona! to output. tis necessary: (I) to determine the possible volume of the produc tion programme, (2) to distribute the programme among the firms in ‘the best possible manner, (3) to carry out a scientific allocation of the ‘costs incurred on the articles.PRODUCTION PROGRAMMING AND THE VALUATIONS 3 It is clear that an optimal plan is the one in which the proposed assortment in the programme is observed and in which production is at the highest volume. Such a plan would, of course, have its counterpart in the lowest costs of production as the cost of material (per article) is in all cases identical and the remaining sum of expendi- ture for the operation of the enterprise is constant; consequently, the “cost for a specified number of parts (and for each part) will be the smaller, the larger the total output. The general plan and the total output depend essentially upon the method adopted for the allocation among the factories. Let us quote an example (Table 2). The allocation was carried out in such a manner that in each type of firm parts No. I and No. 2 were produced approximately at the required ratio. In other words the programme is “allocated” to groups of factories. TABLE 2, ALLOCATION OF THE PROGRAMME Article No. 1 Article No. 2 Type of |—---———_________ factory | Number of | Aggregate | Number of | Aggregate factories output factories output A 1 100,000 4 60,000 B 2 800,000 1 200,000 Cc 10 200,000 30 75,000 D 2 400,000 7 350,000 E 1 600,000 1 250,000 Total 2,100,000 935,000 Table 3 shows another plan in which the output of both the first and the second article is smaller—this is an inferior plan. TABLE 3. INFERIOR PLAN . Article No. 1 Article No. 2 Type of |_—-~_, factory | Number of | Aggregate | Number of | Aggregate factories output factories output A - _ 5 75,000 B 3 1,200,000 — _ Cc - _- 40 100,000 D ~ _ 9 450,000 E 1 600,000 1 250,000 Total 1,800,000 875,0004 “init DIST UST OF ECONOMIC RESOURCTS The Optimal Plan 'A great number of various plans may be constructed. The optimal plan has to be chosen. How is this to be achieved? It is ‘vient that this will bea plan in which each factory will produce, as faras posable, the type of output for which itis bestsuited, To arrive at such a plan, we reason in the following manner. If we turned all the factories to the production of article No. 1, we shall produce {sce Table 1): $x 100,000-+ 3 x-100,000 + 40 x 20,000 +9 x 200,000 +2» 600,000 225,500,000 units of article No. 1. But we also require article No. 2; consequently, some of the factories must be turned to the production of article No. 2 and then ‘ve shall obtain a smaller quantity of article No. 1, How many less? Jn turning a factory of type AA from production of article No, 1 10 No 2, instead of 100,000articles No. 1 we obtain 15,000articles No.2 for instead of one article No. 10 15 article No. 2; simitarty, for a factory of type B05; a factory of type C-—0-125; a factory of type D—025, of type E—0 41 article No. 2 instead of one article No. t (sce Table I, last column). ‘As we see, st 8 most advantageous to turn the three factories of type B to the production of article No. 2: but this is not enough: we shall obtain 600,000 articles No. 2 and 4,300,000 articles No. ‘Afler these, we shall turn both factones of type E to the production fof article No 1 but ths too 1s insulictent as we shall obtain 600,000 + {$00,000 = 1,160,000 articles No. 2 and 3,100,000 articles No. 1, ie. Taste 4 Tue orm PLAS. + AweleNot [7 AneieN2 ‘amber of | Assrate| Number of | Agsresate Tacioneseunat; Tacores | outputPRODUCTION PROGRAMMING AND THE VALUATIONS 3 nearly three times as much. The next in importance is the ratio 0-25 which corresponds to factories of type D; however, if we converted all the nine factories of this type to the production of article No. 2 we should obtain too many of the latter. To arrive at the requisite ratio, six factories of type D need be used for article No. I and three for article No. 2. We come to the plan, given in Table 4—the optimal plan ensuring the highest production of the required composition. This plan furnishes an appreciably higher output (24-40 per cent more) than the plans in Tables 2 and 3. Objectively Determined Valuations The method whereby we arrived at the optimal plan merits attention. Let us take the problem of costs connected with the work for the production of articles No. 1 and No. 2. Naturally, here the relative importance of labour in the production of both articles must be accounted for. This has its own value for each type of factory. In the example under discussion, labour input for the production of either article at a given factory is inversely proportional to the productive capacity for that article. At a factory of type A, in the time spent on the production of one article No. 1, 0-15 unit of article No. 2 can be produced, i.e. in this factory labour input is 6-7 times higher for article No. 2 than for article No. 1. Similarly, it requires twice as much labour in a factory of type B, 8 times as much in type C, 4 times as much in type D, 2:4 times as much in type E (Table 1). Which figure should, therefore, be taken as relative labour input when taking the factories together? We must take into con- sideration that article No. 2 is in fact not produced at factories of type A (in accordance with the programme of Table 4); on the other hand, at the factory of type E article No. 1 is not produced. The only ratio of those mentioned which in fact is achieved in the optimal plan is the ratio of 4 for factories of type D. For this reason, it is natural to apply this ratio to all the factories together. Indeed, the cost ratios for various products must be assessed + It is important to turn attention to the fact that if, as in the given example, the production of the articles is interdependent (even if indirectly) then the question of necessary outlay for the production of each article may only be analysed simultaneously and for all the articles together. Shifting production of one article and reducing its production costs may change the cost of production of the other article.6 “THE BEST USE OF ECONOMIC RESOURCES, con the bass ofthe necessary expenditure for theie production, that is, Glumately according to the expenditure of tabour. Tn so far as the plan obiained 15 optimal under given conditions, expenditure Tieurred on it may be considered necessary. The possibility of comparing directly the eost of production of articles No. ! and No.2 Tctories of type D (and only if both articles are produced here ‘ultaneousiy) enables the ratio of expenditure for these articles to te established, and correspondingly the ratio of their valuations under the given conditions. ‘The valuations for outputs established in this manner we shall call “objectively determined valuations” (o.d, Valuations). In the present case, we have established only the lationship of these valuations, Le. 421 so that if, for instance, the taluation for article No. 1 equals a, for article No. 2 it equals da, Tis important to note that this ratio has not been chosen arbitrarily, but it is determined by the given conditions and is revealed in the course of analysis of the optimal plan. ‘Later on (Chapter 11), when considering the question of finding absolute values for objectively determined valuations we shall estab- Tish that the 0.4. valuations are arrived at by the total of the necessary costs of production which mmust be fully accounted for in the given conditions. Tin these earcurnstances it seems justifiable to apply the term “valua- ‘non’ and not “cost” or “price”: the valuations here obtained are to ‘some extent of a limited and Jocal nature since the analysis of costs and the plan are not cattied through for the economy as a whole but only for the group of factories under consideration. For this reason, such analysis 1s not complete enough to establish value relations. It should also be noted that we establish valuation not for an article asa whole but only for the operations necessary for its production and the application of the term “price” in such conditions cannot be generally accepted. Therefore, the term “necessary expenditure” (of Tabour) for production appears to us more appropriate in this case than “socially necessary” as the analysis of costs here does not relate to society a8 a whole but only to a section of a group of enterprises ‘under given conditions. The introduction of such a special term wonld be of to advaiae when considering the national economy as aw Let us statt from the ratio found—taking the valuation for article No, 1 as equal to a and of article No. 2 as equal to 4a. MorePRODUCTION PROGRAMMING AND THE VALUATIONS 7 precisely, these figures do not reflect the valuations of the articles themselves but the valuations of net production or the labour used on the production of these articles. We shall calculate in these valuations the monthly production by the factory of each type if one or the other article has been produced here. The results are given in Table 5 where the figures relating to the method adopted in the optimal plan are set out. TABLE 5. NET MONTHLY PRODUCTION BY FACTORIES OF ARTICLES NUMBERS 1 AND 2 EVALUATED AT @ AND 4a RESPECTIVELY Valuation of production Type of factory Article No. 1 | Article No. 2 A 100,000a 60,000a. B 400,000a 800,000a Cc 20,000a 10,000a D 200,000a 200,000a E 600,000a 1,000,000a As may be noticed, in the optimal plan each factory was used in ‘such a manner that its net output has the highest valuation. In solv- ing the problem of using factories and the allocation of the programme we observe (starting from the valuations mentioned above) the principle of the highest yield, ic. we obtain the maximum (net) production in value terms for a given outlay yielding the highest profit. This corresponds also to minimum expenditure per unit output (expressed in value terms). The results obtained in considering this question remain true and can be ascertained for other similar cases, in particular for any number of factories and types of articles. CONCLUSION 1.{ Of all the possible allocation programmes there is always one which is the best—the optimal plan. In this plan the ratio of the individual types of production satisfies the condition + By net production we mean the production of a given enterprise, i.e. the cost of material factors required by the enterprise is not included in the total cost. In other words, in the production is included not the article itself, but its (Costs of) processing. For instance, the net production of a clothes factory is not the over- coat but the operation of ‘sewing a coat”. +All the conclusions obtained here and below presuppose that the con- ditions remain as set out in the statement of the problem.8 "THE DEST USE OF ECONOMIC RESOURCES wen in the problem, output is larger (or equal) and the expenditure less than in any other plan that fulfils the sarne conditions. ‘The cost of production in this plan is Tess than (or equal to) that of any other allocation plan, Conctusion 2. With the optimal plan are associated determinate ‘valuations for each type of product, more exactly for the operations an the manufacture of a unit of each type of product—an objectively ‘determined vaiuation (0.4. valuation). “These valuations are such that, if they are taken as a basis, itis found that in the optimal plan the principle of profitably is observed, i.e. under this plan, each factory is assigned the production ‘of that type of goods on which it has the highest net product. ‘The principle of profitability as stated here is applied in a some- ‘what wider sense than generally accepted. It is necessary to explain now the meaning of this prinaiple of profitability, and its function and role. By the principle of profitability we understand the choice of an economic, planned solution on the basis of the effect expressed by ‘one value index; choice of technology affording the lowest cost; choree of a programme ensuring the maximum production in value fo maxitiui accumulation for a given outlays choice of the cheapest raw materials and other materials, te, ‘The conclusions to which the principle of profitability may lead are essentially dependent upon the initial system of valuations, ‘Ths principle operates fully under capitalism where it rests on the ‘current system of market prices. In the U.SS.R, it is of limited significance even in the computation of official sales prices since for various reasons it 1s sometimes necessary to abandon it. What is decisive m sich problems 1s not one or the other index for a siren sector but the interest of the national economy as a whole and the calculation of the effeets on it, Jn a socialist society higher proftabibty should not be an aim in itself (as under capitalism) but a means of attaining the best result or the lowest expenditure for the whole society. In this connection, the ‘order in which it is proposed to apply this principle—on the basi of the system of od. valuations, based on real conditions—is to subordinate it to the need of achieving the targets of the general plan ‘After having frst refused to be guided by profitability, the task ofPRODUCTION PROGRAMMING AND THE VALUATIONS 9 constructing an optimal plan led us again to conclude that this principle should be applied to each sector (in order to reach the general optimum), but on condition that the indices of cost shall be calculated on the basis of the o.d. valuations, taken from the given conditions and problems.} The question, considered in this section, of the correct allocation of the programme to enterprises is of great practical importance; as shown by experience, expenditure on the same article in one enter- prise may in many instances be two to three times higher than in another, even with the same technical equipment. In addition to defects in the organization of production, the unsuitability of the enterprise for the production of a given type and the insufficient allowance for this circumstance in the allocation of the programme play undoubtedly an important part. Use of Other (a priori) Valuations Objectively determined valuations have an inherent character: they are entirely determined by the conditions of the problem under consideration. As against these, there exist other valuations of production prepared independently of a given problem arising from allocation which may in this context be called a priori, external valuations. Among this kind of valuation may be considered current prices or the cost of some products. Naturally the question arises: are the objec- tively determined valuations necessary and could not any other available a priori valuations have been used instead? We shall show that this does not always lead to satisfactory results. Let us assume that the sale prices of articles No. 1 and No. 2 were previously determined on the basis of production conditions of factories of type B. It is clear that the cost of labour for the manu- facture of article No. 2 at this type of factory is double the cost for article No. 1, for instance 20 roubles and 10 roubles. And the full cost, allowing also for materials, will be 20+15=35 roubles for article No. 2 and 10-+10=20 roubles for article No. 1. + The conclusion reached on the necessity of applying o.d. valuations refers to the particular economic problem under consideration. Some observations about the importance of the results obtained for the national economy as a whole, and in particular in relation to price formation, are given in Chapter II, Section 8.10 “Tie BIST USE OF ECONOMIC RESOURCES Let us try to construct a programme starting from these prices, tne eateulate the production of each factory for one or the other article CTable 6), we can see that the highest production is obtained from article No. 1 at all factories, i, for all the factories it is more profitable to include in the plan article No. 1 rather than Inicle No, 2. If we followed here the principle of profitabitity, Anticle No, } would be pat into production at all enterprises. But then the required articles No. 2 would ot be available at all, and the Aeortment task would not have been fulilled. This forees us to depart from the principle of profitability and to put into production Srlicle No.2 although this may not be financially advantageous to the ‘Tanue 6 OUTPUT oF agrictts NunOEKS 1 AND 2 IN ROUDLES ex Pricts OF 20 AND 35 ROUBLIS RISPECTIVELY) ~ production of artiste No. 1 | Production of article No. 2 Type Menon article No.2 ‘of Nember of { Production | Number of [ Production factory, “grees | Conrovbles) j articles | (routes) 15,000 525,000 2300 $0,000 | 1,750,000 250000 | 8{780,000 mone> factory. Here its difficult to determine in which factories article No.2 should be produced. Ifatticle No. 2is necessary although fs produce tion 1s not profitable for any type of factory, the task of producing article No. 2isassigned to various types of firms. In this manner any “random” plan of the kind quoted in Table 2 may emerge. Let us note that such unsatisfactory results may also arise from valuations prepared on the basis of average costs at all firms where a siven output is produced even if the optimal allocation plan is taken into consideration in the calculations (see Chapter I, Section 6, pp. 97-9). ‘Thus, when arbitrary a prior! valuations different from the o.d. valuations are used, it 15 not possible to follow the principle of profitability and to satisfy at the same time the assortment condition (while in the case of the o.d. valuations full harmony was attained), Not only do these @ priori estimates fail to assist in finding an ‘optimal plan, but they confuse the issue. For instance, itseems fullyPRODUCTION PROGRAMMING AND THE VALUATIONS Il justified to produce article No. 1 at B-type factories when this task is considered in isolation, but should this be done it is most likely that the plan would be far from optimal. ConcLusion 3. Starting from any (qa priori) valuations, which differ from the objectively determined ones, it is usually not possible to follow the principle of profitability and to ensure the output of the necessary products. The application of the principle of profitability on the basis of such valuations may result in looking in the wrong direction for the optimal planned solutions. So we see that the comparison of valuations concerning the volume of production leads to the optimal plan when o.d. valuations are used. It is important to emphasize that to direct the allocation of the programme correctly the following two conditions were essential: that the comparison should be made on the basis of the valuation of the completed net production, and that for individual work correct valuations should be used. If either of these conditions were violated —if correct valuations for production were used but comparisons were made not for net output but for commodity production, or if in comparing net output incorrect valuations of production were used, then in either case we should be led astray in the drawing up of the optimal plan. When the problem of determining the production programme in pratice arises, prices are often used which have been fixed some years earlier under different conditions. Hence some articles appear “convenient” for the factory—their plans are easily fulfilled (in terms of gross production), others are “inconvenient”. Sharp differences in profitability lead managers to exceed the production targets of profitable outputs to the detriment of the production of articles important for the national economy but not advantageous to the factory. It is known, for instance, that owing to the unprofit- ableness of some articles of children’s wear, sufficient numbers were not manufactured.t The misleading effect of the valuation of labour efficiency is magnified by calculations that are made on the basis of gross production or of commodity production rather than of net produc- tion. All hinders the efficient allocation of the programme and fails + Paper of A. N. Kosygin at the XXI Congress of the Communist Party of the Soviet Union (Report, vol. 1, p. 160).2 “THe BEST USE OF ECONOWIC RESOURCES to arouse the interest of the Factory in the proper fulfilment of the assortment plan. In the allocation of the programme or in the placing of a given ‘order direct comparisons of expenditure are also used in order to minimize costs, but this way does not ensure either that the optimal allocation witl be secured. In fact, an optimal solution guarantees 8 minimum total expenditure of the whote production unit for all ‘outputs (namely that which is of interest to society as a whole!) At the same time, if we consider costs of each individual product, the best location ofits production does not, generally speaking, enstsea minimum of total costs. For this reason, the analysis of expenditure per unit product taken individually frequently does not lead to an optimal solution, To arrive at a correct solution it is necessary to analyse stmultancously the allocation of the whole programme over the entire production unit while bearing in mind the general objce- tives of a socialist society. On the basis of this analysis one should decide on the indicts to be uscd for comparison. The assessment of particular solutions in accordance with these indices ensures then the choice of solutions 1m agreement with the general interest (of the whole unt), This furnishes a harmonious combination of general and local interests.t ‘These principles are contmuously being used in socialist constrvc- thon. The method of obtaming an optimal plan and o.4. valuations furnishes means for a more precise and systematic construction of such types of indices, and thereby allows a fuller use of the pos- sibilities and advantages of a sosialist economic system. 4, These considerations confim the correctness of the statements in the press in four of substituting net production for gross and commodity production ‘when devetbng the volume of work casted out bya factory during given ume; thats sesounting only for the newly ereated value (and nol the transferred one) ‘Thismeasure s of course advasable When atthe same time the system of valuation ‘of mdindual ypes of production is amproved. 3 Here we have a typical example ofthe contradictions that may aise ia the planning of ur economy (between the particular interets—improving the ‘conditions of production for one product, and the general inerest—the full. rent of the whole plan) “Like all such contradicrons they have not, under sonalism, an antagonistic character. This contradiction 1s resolved by deler- ‘mining the indces on the basis of which the comparison of particular solutions 's made, starting from the tasks and interest ofthe society a8 a whole.PRODUCTION PROGRAMMING AND THE VALUATIONS 13 Criteria for an Optimal Plan We shall now consider the question as to how to ensure that a given plan is optimal. A direct comparison with all other plans is, as a rule, not practi- cable, as the number of possible plans could be enormous. Let us quote a convenient method for this purpose using the example given above. That the plan given in Table 4 was optimal we already knew when it was set out; however, two features make it clear had we not known this. First, the set ratio between the two articles is observed in this plan (the assortment task); secondly, in it the principle of profitability is satisfied for certain valuations (Table 5) of the given types of production (a and 4a). On the basis of these two features we can conclude that the plan is optimal. Let us assume the contrary. Let us suppose that there is some other allocation of the plan in which the requisite relationship is also observed, but the total output is still higher. In the case of such a typical plan a higher output is observed both for articles No. 1 and No. 2 than in the plan given in Table 4. Then, no matter what valuations be adopted for each article, the total valuation of net production in this hypothetical plan will be higher than for that of Table 4. This should in particular obtain if valuations a and 4a are used. But the total valuation of the whole production is made up of valuations of the outputs of individual factories; for this reason the volume of production (according to the valuations a and 4a) would be higher for one factory in the case of the hypothetical plan than with the one given in Table 4. However, such an assumption is impossible for, as shown in Table 5, by allocating any factory differently from Table 4, no higher valuation could be obtained for its production because in the plan Table 4 each enterprise was utilized in such a manner that the valuation of the attained output was at a maximum. The argument used here proves that there could be no plan yielding a higher output and for this reason the one given in Table 4 is optimal. The reasoning we have applied here is general,t and this brings us to Conclusion 4 which is essentially supplementary to Conclusion 2. Conc.usion 4, If in a certain plan (a) the target ratio of assortment set by the plan is observed (by types of production); (b) the principle + This reasoning is given in mathematical form in Appendix I,4 “TE BIST USE OF ECONOMIC RESOURCES of profitability fora certain set of valuations for different articles is Satisfied then first, the given plan is optimal—there can be no other ‘an in which the assortment condition could be fulfilled and the eajume of production increased or which would given 2 higher out put of each type of preguction than the given one, and secondly, Fhe above valuations are objectively determined for the given ease, Tt follows that if a non-optimal plan has a correct assortment ratio there ean be no valuations in which the principle of profitability fe observed (if such a valuation were found, the plan would be optimal), What would happen if such valuations were attempted for plan which is not optimal? Let us try to do thisin the plan quoted invTable 3, Let us assume that such a valuation will amount tom per faticle No. 1 and n per article No. 2, As one of the factories of type Eis used forthe production of article No, 1 and the second for prac No. 2, thea ifthe principle of profitability were observed, the Naluation of net production in both cases would be identical, ie, {600,000 m=250,000 n, from which n=2-4 m. Let us now try to verify whether the condition of profitability will ‘be observed in a factory of type C. We find that the valuation of the output for the method used (in the production of article No. 2) ‘equals 2500 1 of 6000 m, as n=2:4 my; in the case of the method not sed (in the production of article No. 1) it equals 20,000 m, so the principle of profitability is clearly violated, for 2500 n-<20,000 a (it ‘would not be violated if 2500 n 220,000 m). It is also immediately ‘dear how a plan can be obtained giving 2 higher output of one or the other aruele. Tn fect, turning type E factories from production of article No, 1 to production of article No. 2, for each additional unit lof article No.2 we lose 2-4 units of article No. 1, but changing type C factories from production of article No. 2to the production of article No. 1, by giving up one unit of article No. 2 we gain eight units of| article No. 1. Its evident, that by combining two such changes, We shall obtain a plan giving a higher volume of production for both articles. Such an improved plan is given in Table 7. As may be seen, fn this plan the volume of production of each article is 11 to 17 per cent higher than in that of Table 3. “Thus, the attempt to find valuations for a non-optimal plan failed—in arriving at such valuations we met with contradictory requirements.PRODUCTION PROGRAMMING AND THE VALUATIONS 15 Having revealed the impossibility of deriving such valuations, we have at the same time established what changes in the allocation could furnish a plan giving a higher production of each article and thereby revealed, or more exactly confirmed, in this case that the plan was not optimal. We thus reach: ConcLUSION 5. If it is impossible for a certain plan to yield valuations in which the principle of profitability is observed (for such valuations contradictory conditions are obtained), then the given plan is not optimal, that is, there is a plan in which the volume of production for each type of article is higher than for the given one. Meanwhile, the analysis carried out points to the possible way of improving the plan. TABLE 7. IMPROVED PLAN (AS COMPARED WITH THE PLAN IN TABLE 3) Article No. 1 Article No. 2 Type of }——-———__—_ —— factory | Number of | Aggregate | Number of | Aggregate factories output factories output A _— _ 5 75,000 B 3 1,200,000 - —_ Cc 40 800,000 - _ D —_— - 9 450,000 E _- 2 500,000 Total 1,025,000 Thus, it becomes evident that the analysis of the valuations provides a very simple criterion as to whether any given plan is optimal or not, ic. by comparing Conclusions 4 and 5 we obtain: THE RULE. To decide whether a given plan is optimal, it is necessary to look for such valuations of production in which the condition of profitability would be fulfilled for the given plan. Then: (a) should such valuations be obtained the plan would be optimal— no other plan with that particular allocation would give a higher volume of production; (6) should it prove impossible to arrive at such valuations (contradictory conditions are found for them) then the plan is not optimal—there exists one giving a higher output of each article.16 ‘THE EST USE OF ECONOMIC RESOURCES “Methods for Finding an Optimal Plan ‘and 0.D. Valuationst ‘Fo find an optimal plan in the case of two artieles the method we used above 18 suficently simple and convenient. However, in the ccase of a greater number of products and also for the task which we shall encounter further no similar method is available. In this case it fs necessary to use some special methods based on the relationship ‘between the optimal plan and the 0.4, valuations corresponding to it. Although these examples worked out above are comparatively simple they have distinct peculianties which merit some considera- tion, This is all the more useful as understanding the calculation makes it possible to penetrate more deeply into the meaning of the concept of the od. valuations. Therefore, without touching ‘upon complicated cases, we shall give here the basic methods of ccaleulation. ‘Although in the case of two products, mentioned above, the solution was obtamed by the previous method, it is better to use the ‘simpler case as an example. A solution of s more complicated ‘example of that nature is given in Section 2.5 1, Choice of Valuations, As shown above, for each type of factory 1 corresponding valuation of labour mput (cost) 1s obtained for the ‘manufacture of article No. 2 as compared with article No. 1, namely (Gee Table 1): 67 for A; 2 for B; 8 for C; 4 for D; 24 for E. ‘Which of these valuations 1s the most appropriate one? Let us consider the valuations 2-4. Comparing the valuations of the production of the enterprises, we find the figures shown in Table 8, From this table is may be seen that following the principle of profitability factories of types A, C, and D should be tured to the production of article No. 1, those of type B to the production of article No. 2 and those of type E to one or the other desired, upon which will also depend the quantity of each article that will be obtained. But even in the most favourable case when both factories of type E are put to the production of article 4 This part (pp 16-24) may be omitted at the fist reading. A more geveral discussion of the computational methods of finding 4 ‘optimal plan and od valuations 1s given in Apperdsx T,PRODUCTION PROGRAMMING AND THE VALUATIONS 17 No. 2, 1,100,000 articles will be obtained as compared with 3,100,000 articles of No, 1, i.e. it is impossible to meet the necessary assortment ratio.} It is therefore necessary to increase the valuation for article TABLE 8. CALCULATIONS OF NET PRODUCTION AND OF POSSIBLE OUTPUT OF TWO ARTICLES USING VALUATIONS 1 AND 2:4 Net production in | Number of articles in th 1: Type of | Number of ie manufacture of | the profitability plan factory | factories Article Article No.1 No. 2 No. 1 No, 2 A 5 100,000 36,000 500,000 ~— B 3 400,000 | 480,000 _ 600,000 Cc 40 20,000 6,000 800,000 — D 9 200,000 | 120,000 | 1,800,000 _ E 2 600,000 | 600,000 | (1,200,000); (500,000) Total Minimum 3,100,000 600,000 Maximum 4,300,000 | 1,100,000 No. 2. Taking valuation 4, we obtain Table 5 instead of Table 8; then as was seen it was possible to satisfy the assortment ratio (2:1) and we arrive at the optimal plan (Table 4). 2, Another Method of Assigning a Valuation. The difference con- sists in that a valuation is chosen starting not from special values but from arbitrary ones. A first approximation for the valuations can be found as follows. Let us calculate the aggregate production of the factories when they all produce article No. 1 only or article No. 2 only. We shall obtain 5,500,000 and 1,725,000 respectively, i.e. three times more of article No. 1. This shows that labour consumption in the manufacture of article No. 2 is on the average approximately three times higher than that for article No. 1. For this reason we shall, for example, take valuations 1 and 3 and shall set out a table as above; in this case we + Thus, the plan that can be obtained is “profitable”—it is set up in accor- dance with the principle of profitability starting from some system of valuations —yet it does not satisfy the assortment ratio and for this reason it is not an optimal plan.18 “TE BEST USE OF ECONOMIC RESOURCTS, szlect not only figures corresponding to the maximum valuation, but iso those which approach them (Table 9). In the latter case, as a Fesult of the analysis, one article may be chosen as well as the other. ‘Therefore, the number of articles in this case is put for both variants, (Corresponding figures are in brackets.) ‘Tanuz 9 CALCULATION OF NET FRODUCTION AND THE reste OUTPUT oF GatICLIS, UsTWG VALUATIONS 1 AND 3 RISPECTIELY > ~~ Valuation of production | Namber of aricias “Type of Namter of} TONER tastes | arate Wo, [Are No? ‘We shall now try to fulfil the prescribed assortment. First of al, production of article No. 2 would have to be carried out by those factones for which the aggregate production valuations of this article are much higher than for article No. 1, but none exist. In that case, those factories for which the aggregate production valuations of article No. 2 are only slightly higher—those are factories of type B and E. The volume of production for article No. 2 will amount in these to 1,100,000, which 1s sufficient (there will be 3,100,000 units of aructe No. 1). Therefore, factories of type D have to be used in part for which the total production valuation of atticle No. 2, although less, snear the total production valuation for article No. 1. “Thus a plan is obtained as given in Table 4. Since factories of type D are used for the production of both articles, when we compare their profitability we obtain valuations 1 and 4. With the aid of these valuations, we establish (on the basis of Conclusion 5) that the plan fiven in Table 4 1s optimal. 3. Method of Successive Adjustment (Improvement) of the Plas. ‘We start from some plan which gives an approximately correct allocation, We then determine whether it is optimal. Hf it is not optimal, we can see how it can be changed to produce mote of both articles, When checking the profitability of the plan, a comparison of the valuations for the methods used or otherwise leads to contra-PRODUCTION PROGRAMMING AND THE VALUATIONS 19 dictory inequalities. Considering several possible methods of provid- ing the output, the comparison of which led to contradictory valuations, we see how to improve the plan by incorporating some method hitherto not used while maintaining strictly the prescribed ratio of the allocation of production. This change is carried on until the method being excluded ceases to be applied or until the method being increasingly utilized is used to its maximum. Thus we arrive at a new plan with an output of the required assortment at a higher volume. For this plan we shall repeat the check and should it not prove optimal, we can improve it further. Thus we reach an optimal plan and at the same time obtain the o.d. valuations. We shall illustrate this method by taking the plan of Table 3. We have already improved it and obtained the plan in Table 7. We check it to see if it is optimal. We shall assume that the valua- tions for articles No. 1 and No. 2 will be m and n. Since article No. 2 was put into production at type A factories, it should be profitable —we should have: 100,000 m < 15,000 n, or n=6:7 m. As article No. 1 was put into production at the B type of factory, we should obtain 400,000 m:=200,000 n, or nS2m. These condi- tions are contradictory: in the first instance, one article No. 2 is preferred to 6-7 articles No. 1, in the second case, two articles No. 1 are preferred to one article No. 2. This points to the way of improv- ing the plan. It is necessary to turn type A factories to the production of article No. 1 and in order to preserve approximately the assort- ment one factory of type B to the production of article No. 2. The corresponding plan is given in Table 10. TABLE 10. PLAN OF CHANGING THE PRODUCTION OF FACTORIES TO OTHER ARTICLES, MAINTAINING THE ASSORTMENT Article No. 1 Article No. 2 Type of |——____—— Number of factory | Number of lumber 0! factories | O%PYt | “factories | cutput A 5 500,000 - — B 2 800,000 1 200,000 Cc 40 800,000 - — dp; = — 9 450,000 E — — 2 500,000 Total 2,100,000 1,150,00020 “THe BIST USE OF ECONOMIC RESOURCES We check again whether the plan is optimal, Since type B factories are used in the plan for articles No. 1 and No. 2, both should be equally profitable: 400,000 m= 200,000 2; n= 2meg.m = Landn = 2. Using these valuations, we check the profitability ofthe other types of factories-the principle is violated for type D factories, We readjust the plan and change type B factory to the production of article No. 2. ‘This increases the output of article No. 2 by 200,000 and reduces article No. 1 by 400,000, but turning three factories of type D from the production of article No. 2 to the production of article No. 1, the output of this article is increased by 600,000 and that of No. 2 is reduced by 150,000. Asa result, the number of the two articles is increased by 200,000 and $0,000 respectively, while at the same time the assortment is m: tained. If we transfer two instead of one factory of type B to the production of article No. 2 and af production can be changed in six factories of type D, the effect is twice as great, AS a result we arrive at the plan shown tn Table 4, [As the factories of type D are used for the production of both articles, the valuations will be I and 4; having checked that according to these valuations the most profitable article was manufactured by the remaining types of works, we see that the plan is optimal. ‘The process of improvement has been completed. 4. Graphic Methods. Tastead of computational methods, simple raphe methods may be used in checking whether a given plan is ‘optimal and also 1n finding the optimal plan and the o.d. valuations. Although these methods can in practice only be used fortwo or three 4 ‘Mot ee 6 ee a 6 se Fao. types of product, we quote them as graphs to make the problem and the properties of the valuations clearer. To explain the opumum of a plan we start from the followingPRODUCTION PROGRAMMING AND THE VALUATIONS 21 considerations. The question as to whether it will be more profitable for a given factory to produce article No. 1 or article No. 2 will depend upon the valuations of these articles, Taking as a valuation of article No. 1 m=1, a solution will be found with valuation » for article No. 2. Thus, for type A factories, if 100,000> 15,000 n, that is when n<6-7, the output of article No. 1 is more profitable, and when n>6-7—that of article No. 2 is more profitable. This is also the case for the remaining types of factory. Thus, marking the corresponding figures on the drawing, the range of the values of n Fic. 2 that are favourable to article No. 1 and article No. 2 can be shown. In Fig. 1 this range is shown for all the types of factory (on the left of the dividing point the range is advantageous to produce article No. 1, on the right article No. 2). Let us now consider some plan (for instance, that of Table 4). The choice of a given article for manufacture at a factory of a given type means that 7 must lie in the range favourable to this article. Let us mark for each type of factory the range corresponding to the article by hatching the production which is used by the factory of the type envisaged in the plan (Fig. 2).f If the given plan is optimal (and only in such a case), there must exist a valuation on the basis of which all choices of production utilized are profitable. In Fig, 2 which corresponds to the plan of Table 4 a point common to the whole range (1=4) exists (the dotted line corresponds to it); consequently the plan is optimal. In Fig. 3 drawn in accordance with the plan of Table 3, it is not possible to draw such a line—the plan is not optimal. + For instance, for type A factories engaged in the manufacture of article No. 1 the range is shown to the left of the dividing point where n=6-7. In the case of type D factories utilized in the manufacture of both types of articles, the dividing point is only noted since their production as shown is only economic when n=4,2 [THE BIST USE OF ECONOMIC RESOURCES Tn order to find the optimal plan, the following calculation may be made, repeating the original catculation by which this plan was found (p. 4). First of all (Fis. 4), for each type of factory the eater range of articles No. | and No, 2 is matked (the limits are already shown in Fig. 1). At first, all the factories are put to the production of article No. 2, and 1,725,000 of these articles are &, a monta, Fra, 3 manufactured, ‘The corresponding point (I) is marked on Fig. 5. ‘The highest corresponding valuation of article No. 2 is obtained (Gee Fig. 4) for the factories of type C. Therefore, if any No. 1 articles are required, factories C should be first to change their production. In transferring them to the production of article No, 1 4 new position 1s obtained (II); continuing in this manner, points I, 11, 11, TY, V, VI are constructed. The coordinates of these points correspond to the volumes of productions, shown in Table 11. Be oo At o 226 40 67 60 Fig, 4 ‘Then a curve 1s drawn connecting all these points. Each section of the curve 1s divided into equal parts in accordance with the number of factories of a ven type (except for the frst section in which one division corresponds to four factories of type C). Now, whatever the assortment ratio for total output, the optimal plan reay be found atonce. Thus, inthe case of the ratio 2:1 (ia which the production of article No. 1 is twce that of article No. 2), drawing a straight line corresponding to this ratio, the point of intersection is obtained and corresponds to the optimal plan. In Fig. 5 it is apparent that the output of article No. | amounts to 2,500,000 and of article No. 2 to 1,250,000, Factories of types C and A and six factories of type D should produce article No. 1; the rest should produce No. 2. ‘Thus the plan of Table 4 is obtained. Let us note that the slope (the* PRODUCTION PROGRAMMING AND THE VALUATIONS 23 absolute magnitude of the tangent) of the segment IIJ-IV equals 1:4 = 0-25, and furnishes the value of the ratio of the o.d. valuations for articles No. 1 and No. 2. E ~ 400,000 Nol Fic. 5 The line I-JI-III-IV-V--VI together with the axes forms a polygon in the plane. This is the polygon of feasible plans since the output under each plan achieved in the given conditions (for instance, the plans given in Tables 2 and 3) will be represented by some point of this polygon and conversely, each point of this figure corresponds to the output under some feasible plan. This graphic solution may be arrived at in another way by using a linear instead of a plane projection. Namely, for points I-VI, instead of absolute production magnitudes for each article, we shall find their relative shares (Table 11). TABLE 11. PRODUCTION UNDER SUCCESSIVE RATIONAL TRANSFERS OF WORKS TO THE MANUFACTURE OF ARTICLE No. 1 Articles as % of their total number No. 1 No. 2 I 0 | 1,725,000 I 800,000 | 1,625,000 IIT | 1,300,000 | 1,550,000 IV} 3,100,600 | 1,100,000 V_ | 4,300,000 | 600,000 VI | 5,500,000 024 "THE BIST USE OF ECONOMIC RESOURCES Let s mark point I-VI on Fig. 6 starting with the peroentage found for article No. 1. If we have to determine now the optimat plan for some assortment zatio, for instance 2:1, this relationship on ArtMI——~ rey aA GK D 21 7KE BIB On ay % ae mx 100% Art. No on Fao. 6 marked on the drawing (67 and 33 per cent—point a) and it may be seen at once that in the optimal plan factories C, A and a part of D (in Fig. 6 on the left of point 2) should be used for article No. i, ie. the plan of Table 4. Properties of the O.D. Valuations Let usshow some of the important properties ofthe o.d. valuations con which their application is based and which reveal their meaning and value. Fust of all, 0.¢. valuations are specificmthey are deter- mined by specific conditions and are dependent upon all the condi- tions of the problem: the prescribed assortment of output, tenumber of factories of each type, the planned production expacity of each article. A change in any of these conditions may lead toa change in the od. valuations. Let us, for instance, observe the change in the o.d, valuations as a result of a change in the assortment condition. Let us consider this exampfe when I-S times more is required of article No. 2 than of article No. 1, that isa ratio of 2:3, instead of 2:1. Ja this ease, t0 arrive at the optimal plan, it is necessary to transfer the remaining factories of type D to the production of article No. 25 however, this is insufficient. Therefore two factories of type A must be added. ‘Then the production of article No. 1 will amount to 1,100,000 and of article No. 2 1,580,000, ic. the requisite ratio of 2:3 is almost attamed (see also Fig. 5). Further, since in this ease type A factories are used for the manu- facture of both articles, the o.d. valuations are determined on the ‘basis of equal profitability for this typ¢ of factory on the two articl, and prove to be equal, n=6-7 (keeping m= 1), that is they are deter-PRODUCTION PROGRAMMING AND THE VALUATIONS 25 mined on the basis of the ratio of expenditure at factories of type A. We see thus that the o.d. valuation has increased. This is natural: as the requirements of article No. 2 increased it became necessary to use for its manufacture factories less suited to the production of this article; consequently the relative cost of this article increased. Assume now that the assortment ratio is set at 4:1, that is the requirements of article No. 2 are reduced. In this case, it is necessary to change to the production of article No. 1 all factories of type D and also one of the factories of type E. In the plan obtained (which is optimal for the given ratio) the output of article No. 1 will amount to 3,700,000 and of article No. 2 to 850,000. O.d. valuations are determined on the basis of equal profitability (for both articles) for E-type factories where n=2-4 (m=1). The reduction in the o.d. valuation is again natural as the production of article No. 2 was maintained only at factories best suited to it and where the relative labour input for its manufacture was lower. The results thus obtained can be formulated as follows. CONCLUSION 6. Objectively determined valuations are concrete and dynamic; they are defined by all the conditions: the required assortment of products, the number of factories of each type, the planned output capacity; and they change when these conditions change. In particular, following an alteration in the assortment ratio, any increase in the requirements of some article entails a corres- ponding increase in costs and consequently in its o.d. valuation; a decrease in the requirements entails a reduction in its o.d.valuation.t It should be noted that this proposition was, in fact, taken into consideration in various economic measures by the party and government on several occasions. Thus, in 1963, in connection with the tasks set for the further development of light industries it became necessary to increase the output of cotton. To achieve this, the price of cotton was raised sharply. In consequence, many areas which previously produced cereals found it more advantageous to grow cotton. This had a favourable effect on the increase of the area under cotton cultivation. Other similar examples could be quoted. However, it should be pointed out that such changes by individual bodies were far from + It should be pointed out that this latter statement is correct for the simplified problem considered. In real conditions, owing to a whole series of circum- stances which we have not taken into account it does not always apply.26 ‘Tle BEST USE OF ECONOMIC RESOURCES being carried out in every case where it would have been advisabtes ‘even the magnitude of the requisite change was determined to some neste. aC BI9G) Ke ETRY Stability of O.D. Valuations Let us introduce some slight change in the prescribed condition, for instance, changing the ratio 2:1 to 4:3, In this ease, as may be easily seen, the optimal plan is obtained by changing smother three of the six factones of type D to the production of article No, 2, ‘The production of article No. 1 amounts to 1,900,000 and of articte ‘No. 2to 1,400,000, thus the required ratio is almost exactly obtained. As both articles are again produced at type D factories, the od, ‘Valuations remain the same (I and 4). It can be shown that slight changes in other conditions (the number of factories, production capacity) either do not affect the vatue of the 0.4. valuations or else change them only a Little. tshould be mentioned that if a more realistic example were chosen in which the number of types of factories is greater or in wi the ratios of productive capacities for the articles are different for the same type of factory as well, then the number of possible values for. valuations n would be much more than 5 (assuming m= 1) (as above: 8; 67; 4; 2-4; 2), Tn such a case (and alsa if productive capscities change) and with slight changes in other conditions, the valuations might change, but not greatly. Thus we obtain an important. property of the o.d. valuations which shall be called the stability prover. Concusion 7, O.d, valuations possess a certain stability; with slight changes in the conditions of the task (assortment quota, number of factories, production capacities), the ratio of od. valuations, as a rule, remains either unchanged or changes merely alittle. ‘This feature is extremely useful, particularly in the following two cases. First of all, it makes it possible, in finding an optimal plan and 0.4, valuations, to confine the task initially to the more important and most representative types of factory, and by way of solving it to determine the values of the o.d. valuations. Then the question of ‘utilizing the remaining factories may be solved on the basis of valuations already found, since the calculation for these factories_ PRODUCTION PROGRAMMING AND THE VALUATIONS 27 cannot substantially change them. Thus, we shall arrive at an optimal plan or one only slightly different. Secondly, when ascer- taining changes connected with the operation of any individual factory (for example, increase in its capacity, temporary stoppage, etc.), calculations may be carried out starting from existing o.d. valuations, disregarding those changes in them which may take place as a result of accounting for the transformations at the given factory. It is appropriate in this connection to draw attention to the resolutions of the June 1958 Plenum of the Central Committee of the Russian Communist Party and the report by N. S. Khrushchev On the abolition of compulsory deliveries and payments in kind for work by the machine and tractor stations, on the new order, prices and condi- tions of state purchases of agricultural products which emphasize the importance of a scientifically established system of prices that reflects the dynamic changes in operating conditions and costs, while ensuring at the same time the necessary stability of prices. The Realistic Nature of O.D. Valuations In our example, the ratio of valuations of the work in the manu- facture of articles No. 1 and No. 2 was 1:4. This ratio is not fictitious and can actually be realized, i.e. instead of four units of article No. 1, one unit of article No. 2 may be manufactured and vice versa. In fact, only one factory of type D need be transferred from the production of article No. 1 to article No. 2 and instead of 200,000 articles No. 1, 50,000 articles No. 2 are obtained. In this manner with a transfer in the reverse direction, instead of article No. 2 we shall obtain the corresponding number of article No. 1 in the proportion (1:4).f Each of these transformations will change our optimal plan to another optimal plan, corresponding to a slightly different assortment quota. Thus we have: CONCLUSION 8. The ratio of o.d. valuations is realistic, that is, on the basis of the equivalence determined by these valuations, some units of one type of product can be replaced by a corresponding number of units of another type of product and vice versa. More + This realism in the ratios of the optimal o.d. valuations once more shows that they correctly reflect the ratio of costs in the manufacture of articles under the given conditions.28 ‘THE BEST USE OF ECONOMIC RESOURCES exactly, i for two articles the ratio of 0.0, valuations of the work ia their manufacture is m:n, then broadly speaking it is possible to carry out such changes in the programme that the quantity of the first article will be reduced by some number of ra units and the quantity of the other article will be increased by rm units. With such changes the programme remains optimal (for the changed assort. ment requirements). ‘This property of the 0.4. valuations is useful as it makes clear ‘what sort of changes can be made in the plan. It should be pointed ‘out that our usual prices are far from always having this property, If it was planned to acquire 1000 roubles'-worth of timber, itis certainly not always possible to exchange this for cement worth the ‘same amount of money. In particular, rigid control of expenditure by commodities reflects the Iack of realism about relative prices—the impossibility of exchanging certain materials and services for others at such prices, “The difieulty arises not only from such exchange not being permitted or because it is impossible for lack of the necessary ‘materials but because of a certain belief that the two products are not ‘equivalent as regards theit national economic significance and the real magnitude of costs necessary for their production. ‘Such an impossibility of establishing valid price relationships ‘makes the calculations based on them frequently appear unreal and ‘the results derived from them in practice incorrect or else impossible to attain, Application of O.D. Valuations (CHANGES IN THE PROGRAMME. As a result of their properties and their conncetion with the optimal plan o.d. valuations may be used with success 1n solving various problems of economic planning. Let us assume that the previous programme (article No. I— 2,500,000 ums, article No. 21,250,000 units) is changed and a new task is set, namely: article No. 13,000,000 units, article No. 2— 1,000,000 units, Can this programme be fulfilled ? “As the change is {An undssputed proof of such a situation the (planned) losses of certain factones, in particular inthe heavy indusiey, which persisted fora lon tine. Apparently i 1s thought justified for a factory manufacturme 1900 roubles ‘worth of iron or steel to incur an expeadsture of 1500 roubles (of otker kind).PRODUCTION PROGRAMMING AND THE VALUATIONS 29 slight, we shall use the previous valuations (1 and 4). Evaluating the previous task, we obtain: 2,500,000 x 1 + 1,250,000 x 4= 7,500,000. The new target: 3,000,000 x 1 + 1,000,000 x 4= 7,000,000. From the calculation it is apparent that the target is not merely fulfilled, but may also be exceeded by (7,500,000 — 7,000,000): 7,000,000 = 7 per cent. And in fact, transferring three factories of type D from the produc- tion of article No. 2 to the production of article No. 1, we obtain 3,100,000 of article No. 1 and 1,100,000 of article No. 2—a surplus over and above the set task. Second example. Three factories of type A are taken off the production of the given articles. It is necessary to assess to what extent this will affect the fulfilment of the programme with the other previous conditions remaining the same, in particular as regards the assortment ratio. As the type A factories in the plan of Table 4 were used for the manufacture of article No. 1, the output of the three factories which went out of production is as follows: 3 x 100,000 x 1=300,000. At an aggregate production valued at 7,500,000, it is apparent that the total output is reduced by 4 per cent—the number of article No. 1 must be reduced by 100,000 (4 per cent of 2,500,000), and the number of article No. 2 by 50,000. As a result of three factories having been removed from production, the number of article No. 1 is diminished by 300,000. To restore the allocation, one factory of type D is transferred from the production of article No. 2 to the production of article No. 1. We then obtain a plan (again optimal) in which the output of article No. 1 will amount to 2,400,000, and that of article No. 2 to 1,200,000—a 4 per cent reduction in production. CONCLUSION 9. O.d. valuations may be used in the calculation of the possible fulfilment of a programme asa result of any small changes in the plan target or in the productive capacity. To arrive at a solution of the problem, it is necessary to evaluate the target or productive capacity using the existing magnitudes of the o.d. valuations, which satisfy the optimal plan.30 ‘THE BEST USE OF ECONOMIC RESOURCES Comparison of Methods of Organizing Produetion (0.4. valuations may also be used in the solution of another important problem, namely in the choice of one of several possible methods of organizing production, which should supply a varied output. Let us consider some examples. (1) To the given group of factories a new type of factory F is added. If tt is used for the production of article No. 1, it wil supply 450,000 of them, and if for article No. 2, 150,000. Which is preferable? Let us compare the net production of both kinds on the basis of ‘the 0.4. valuations, We obtain 450,000 x I= 450,000 and 150,000 x4 +==600,000. Therefore, it is more advantageous to produce article ‘No. 2 at this factory. As there will be an increase of 150,000, one Detype factory 8 changed from the production of article No. 2to thet of article No. | in order not to disturb the allocation ratio. We then obtain: 2,500,000-+-200,000-=2,700,000 of No. 1 and 1,250,000 + 150,000 — 50,000 = 1,350,000 of No. 2. The plan obtained 1s again optimal as it fulfils the prescribed ratio 21) and the principle of profitability is observed (at valuations Jand ‘@) At one of the type E factories a new method of organizing production 1s proposed whereby the production of both articles is combined. The planned output is: 55,000 of No. 1 and 150,000 of No. 2, Is this method advantageous? ‘The net production of the enterprise, as previously used, was (for article No. 2) 250,000 x 4 1,000,000; by the proposed method it is 550,000 x 1+ 150,000 x 4= 1,150,000. "Thus, the comparison based ‘on od. valuations shows that the proposed method is preferable. Having recourse to this method it is not difficult to construct a plan in which the output of the group of factories of both types of artices suill be higher than the onginal one. @) It is proposed that A- and B-type factories co-operate so that ‘the aggregate output shall amount to 250,000 of article No. 2. Isthis advantageous?_PRODUCTION PROGRAMMING AND THE VALUATIONS 31 Evaluating production, we obtain: for the factories as previously utilized: 100,000 x 1 + 200,000 x 4= 900,000; as proposed: 250,000 x 4 = 1,000,000. Co-operation is advantageous. That the conclusion arrived at is correct is confirmed by the programme given in Table 12 in which such co-operation for the three pairs of factories A and B leads to an - increase in the output of both articles. TABLE 12. Co-OPERATION OF FACTORIES A AND B Type of | Number of Production of . factory | factories | Article No. 1| Article No, 2 A 2 200,000 _ A+B 343 _ 750,000 c 40 800,000 _ D 831 1,600,060 50,000 E 2 _ 500,000 Total 2,600,000 1,300,000 It is interesting to see what we might obtain if we tried to solve these problems starting from a priori valuations (or prices) differing from the objectively determined ones. Let us, for instance, take valuations 20 and 35. Then, evaluating (in the first instance) the production of type F factory in the manufacture of article No. 1, we obtain 450,000 x 20 = 9,000,000 roubles, and in the manufacture of article No. 2 150,000 x 35 = 5,250,000 roubles. We reach the conclusion that article No. 1 should be put into production, contrary to the results obtained above. The conclusion is certainly incorrect. If we followed this conclusion, we should deliberately obtain a non- optimal plan. In the second instance, the use of these a priori valuations leads accidentally to a correct conclusion (the same as with o.d. valuations). 3 BUER.32 {THE DEST USE OF ECONOWIC RESOURCES In Example 3, comparing the aggregate production of factories A and B, the following actual and planned production is obtained respectively: 100,000 x 20 +200,000 x 35=9,000,000 roubles, and 250,000 x 358,750,000 roubles, therefore the proposed method results in the lowering of the output and should be rejected. The conclusion 1s certainly incorrect as clearly shown 1n Table 12, as the use of co-operation gives an increase the volume of the programme by 4 per cent. The incorrect guidance resulting from a priors valuations is due to the fact that, in distinction to the o.d. valuations, they are not concrete, they do not take account of all the circumstances (for instance, a sharp rise in the demand for a given article) + ‘Even a comparison of the cost of production at a given factory with its average values does not, in many instances, make it possible to arrive at a correct conclusion on similar problems. Conctusion 10. Od, valuations make it possible to compare two methods of orgamzing manufacture of different products, and in particular to solve the problem as to whether some newly proposed production methods will result, under the given conditions, in increased output. For the purpose of such comparison it is necessary to use the o.d, ‘valuations m order to calculate the resultant (net) production in both methods of production, and to choose the method for which the otal valuation of output 1s higher (principle of profitability). The use of a priori valuations (or of prices) in the solution of such problems, as distinct from the objectively determined valuations, may lead to a. wrong decision. Of course, this conclusion should not be understood to mean that ‘the existing methods of economic analysis rust not be applied in such problems, but only that the method of o.d. valuations enables one to reach a closer approximation to an optimal solution under given conditions. The usual methods furnish results which are the better ‘the more closely the valuations used in them (Price, cost) approach The dependence of the oud valvauons upon production reqemens, refed in the equste allocation, denves om the niece of the alston conditions on the objectively determined allocation Gf costs to articles the production of which is interdependent,PRODUCTION PROGRAMMING AND THE VALUATIONS 33 o.d. valuations. However, in so far as in the application of o.d. valuations only their relative values are of importance (the result of comparison will not differ if they are all changed in proportion), then a priori valuations may lead to correct results even if they do not coincide with the'o.d. valuations, but are only proportional to them. Let us note further that with the aid of o.d. valuations the problem of a reallocation of the task may be solved. Let us assume that in each of two different groups of factories the task is allocated in the best possible manner to individual factories. Then, if the ratios of o.d. valuations for both groups should differ, such as ratios of 1:4 and 1:3, this shows that it would be advantageous to carry out a reallocation of the task, that is, to transfer part of the output target of article No. 2 from the first group to the second, and of article No. 1 in the reverse direction. As a result of this, the total output at both groups will increase for each article. More Complex Cases The example considered was particularly easy to solve as the problem was to allocate the programme for two articles only. It should be pointed out that with the more complicated task of allocat- ing a programme for several articles, the method in which we first found the optimal plan is not applicable. However, all the conclusions concerning o.d. valuations, and also other methods of arriving at an optimal plan based on them, retain their full validity with not only two but more articles as well. A suitable example based on several types of production is given in the following section, in which the problem is essentially the same although formulated somewhat differently. A systematic exposition of the computational methods of arriving at an optimal plan is given in Appendix IT. Section 2. Allocation and Choice of Means for Work Performance Statement of the Problem Let us now consider the question of constructing an optimal plan of allocating means for performing a total amount of work by using the same methods. In order to show the essence of the problem we consider it once again schematically.4 “Tue Brst USE OF ECONOMIC RESOURCES Let us assume that it is necessary to complete some total quantity of work simultaneously (agricultural, excavation, work connected with transport), These projects may be split into several types according to their character and conditions (agricultural work into tillage, harrowing, sowmg, harvesting the crop: excavation into planning of the plot, siaking of pits, ditches, culverts; teansport into transportation of various kinds of load over various distances, etc), ‘Various means can be used 1n carrying out these operations (several types of tractors, combines, harvesting machines for agricultural work; excavators, graders, serapers, spades for excavation; motor lornes, tipping lorries, conveyors, narrow-gauge railways, wheel- ‘barrows for transport) The majonty of the meaus of production and transport may be used for several types of Work and there exist standatd indices of their eficiency im vatious operations. For each type of work one of ‘the means will be the most effective (resulting ia the lowest cost and a correspondingly high productivity). However, such means are not always available in the necessary quantities. In many cases, when fone wishes to accelerate the work but is restricted to a certain set of machines, t becomes nevessary to utilize fully all avaitable means ceven if they ate hardly suitable. Yet one must ensure that the given total amount of work 1s completed in the shortest possible time, So one has to abandon the sdea of using each means exclusively on ‘operations to which 1 is best suited. ‘We shall also deal with the question of allocation of means under prescribed conditions, Let us consider a practical numerical example ‘of several types of operations and means (machines). ExaMM. The daly standard output of each machine (means of production) on each type of operation for which it can be used is shown in Table 13. This gives the volume of operations {expressed in units of measure corresponding to the given type of work: hectare, cubic metre, ton-kilometres). Ik is necessary to mducate the optimal allocation of means, ie an apportioning which would enable one to complete the given amount of work with the shortest tims. This example does not essentially differ from the example of Section 1, as the sndividual machines here take the place of factories, and the volume of work for each type corresponds to the number of articles.PRODUCTION PROGRAMMING AND THE VALUATIONS 35 Taste 13. STANDARD OUTPUT Type I Tr Ii Machine | Operation — Volume} 5000 ) 10,000 | 10,000 Type Number Standard daily output A 20 4 10 ii B 50 0-4 _ 10 Cc 30 _ 4 6 D 100 0-4 25 25 SoLuTion. When the number of operations exceeds two, the first method cannot be used to establish an optimal plan, and it is necessary to apply the method based upon finding o.d. valuations. Let us use the second method (p. 17 and further). In the first place, it is necessary to determine these valuations if only roughly. For this purpose, we calculate the total daily output of all the machines on each type of operation. We obtain: For type I 20 x 44+50%0-4+ 100 x 0-4= 140 For type II 20 x 10 +30 x 44 100 x 2:5=570 For type IIL 20x 11450 10+30%6+100x2-5=1150. Since labour inputs in the operations are inversely proportional to the output and since the aggregate outputs are in an approximate relationship of 1:4:8, it is natural to adopt as rough approximations in the corresponding valuations of Jabour input the inverse ratios, ie. 1:4: or 8:2:1. Using these conventional valuations, we can calculate the daily production of each machine for each type of operation (Table 14). TaBLe 14. DAILY PRODUCTION OF TABLE 15. DAILY PRODUCTION OF MACHINES ON EACH OPERATION MACHINES ON EACH OPERATION (ACCORDING TO VALUATIONS (ON THE BASIS OF VALUATIONS 8:2:1) 25:4:1) Operation Operation Machines Machines I a8 Wi A A 100 40 Ii B B 10 _ 10 c Cc — 16 6 D D 10 10 2536 “THE BEST USE OF ECONOMIC RESOURCES Let us also calculate the aggregate volume of operations and the total capacity of the machines according to these valuations. For the aggregate volume of operations ne obtain 15000 x8 + 10,000 x2+ 10,000 x 1 =70,000 conventional units, {nso faras the daily output of the machines on the various operations differs, we calculate it roughly, assuming that each machine is used jn the best possible manner, ie. the highest number is chosen in each series. Then, for the aggregate dally ovtput we find 20% 32-+.50 x 10+30x B+ 100% 5= 1880. From this we may arrive tentatively at the time (an underestimate ‘compared with time actually required) for the accomplishment ofthe total of operauons as 70,000/1880=37 days. We now determine tte means for the completion of each operation. For operation I we shall use mostly machme A because this operation is the most profitable for maclune A (see Table 14; maximum outputs accordiag to the given valuations are in bold type). However, the total output ‘of these machines for @ given operation in the course of 37 days will amount to only 20x37%4=2960 as against the necessary S000. Consequently, t 38 necessary to put into operation I an additional machine, namely machine D provided that the output for operation I 1s near the maximum (32 0s against 5). The production from ‘machines of type D on operation I will amount to: 100 x 37x0 4= 1480, Bort this, too, 1s msufficent. It will, therefore, be necessary to utilize fon the given operation some machines of type B as well. For operation Hl the most suitable are machines C and D of which there seems to be a sufficient number; and for operation III the B machines ‘of which there also is a surplus. In Table 14 in each line the bold figures show which of the machines we intend to utilize in the ‘optimal plan on the corresponding type of operations. From thisit is easy to determine the 0.¢. valuations. Let us adopt, as we did ‘before, for type I operations the valuation m=8. As we intended to Utilize machine D both for operations of type and I, the valuation of operation IT should be such that an equal vatuation of production is obtained (equal profitability) for both operations, i. (see Table 13)PRODUCTION PROGRAMMING AND THE VALUATIONS 37 we should have 0-4 m=2:5 n; 0-4x8=2:5 n, or n=1-28. Further, if it is intended to use machine B for operations I and II, the r valuations for operation III will follow from the condition 0-4x 8=10x7; from which r=0-32. We thus obtain for the valuations of operations the relationship 8:1:28:0-32 or 25:4:1. We repeat the same calculations as above, starting from these new valuations. The valuation of production (with new conventional units) is given in Table 15. 5000 x 25+ 10,000 x 4+ 10,000 x 1 =175,000 conv. units. For the daily output of all the machines: 20 x 100+ 50 x 10430 x 16+ 100 x 10=3980 conv. units. Hence the time necessary for the completion of the operations is determined as 175,000/3980 = 44 days. Let us verify if in fact all the operations could be completed within that number of days. It is more convenient to start from operation III. It should be completed by machines of type B for which 1000 machine- days will be required or 1000/44=23 machines. The remaining machines must be used in operation I. On operation II, machines C will produce 30 x 44 x 4=5280 units in 44 days. The remaining 4720 units must be provided by machines D which requires 4720/44x2-5=43 machines. The remaining 57 machines of type D must be used on operation I. Then, for operation I, 20 A-machines, 27 B-machines and 57 D-machines will produce 44 x (20 x 4+27x0-4+57 x 0-4)=4998, i.e. indeed in the course of 44 days the whole set of operations will be completed. The corresponding plan is shown in Table 16. That it is optimal and the valuations objectively determined can be easily proved by verifying the following two circumstances: first of all, the completion of the ratio required by the plan. This is directly evident from Table 16. Secondly, it is apparent from Table 15 that in the given plan the machines are utilized in the most profitable manner (they furnish the maximum output if the operations are valued in the proportions