LETTER TO MR. DAN H. FENN, JR. FROM ALLEN W. DULLES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01676R003500080014-3
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 34
• Document Creation Date: December 12, 2016
• Document Release Date: April 8, 2002
• Sequence Number: 14
• Publication Date: July 23, 1961
• Content Type: LETTER

Approved For Release 2002/07/29 : CIA-RDP80B01676R0035dJ80014-3
Ms '' is Ee ' J r. , lae3#~;ear
Hit j wt Bus rise. School Asaeo"
Alumni" 3ter, hold1er i+-ielcl
in the text were omitted be se of the times element.
I had a number Iof re sts iisr e:apies of the speech
and it is this nammseript that I-distrithetsd to quite a few people.
It differs only in minor respects from the texU actually de-
Itve*ed, particularly-in opt paragraphs where I took
wormi libertine with the text bai rei % be. Also Is speaking, I
did a little ".dlibbingi' here w4*"* and one or two paragraphs
address.
Harvard Busi i-as School, ' ,1`une 1961#, 1 erV~clo?se herewith a
mth*ee gra.p copy of the mau-uscripe:rich I prepared for that
cldress at the '1'Id'rty-r`trst A I National sineess Coz tteresce?
63. , is tea ua tts
ER. 61 - 5737/a
Z3 July 1961
p
a t to~i
Referring tau your letter of duly 15 wlt t`er s
To avoidhaving two texts in public atrculation.
r that you as. the enclosed text.
enjoyed my visit to the rd e e e c .
I want you and your coil se to know bow much I
Enclo sure
AVWD'ii
I - DCI
s - DDC
I - ER
1 - SJGrogan
Ilirecto r
Approved For.Release ZGDZ07129 r CIA-RQPXI
Allan W. Dulles.
STAT
 ? j
Approved For Release 2002/07/29 : CIA-RDP80B011676R003500080014-3
a ift-m/a
jo,/ata~l1 t y
.
3jwmAm: Ofta -AM
rsa re i
jot
1-
Approved. For Release 2002107/29 : CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
MEMORANDUM FOR: THE RECORD
Pursuant to the Director's instructions, I
advised Mr. Dan H. Fenn on 2 August 1961
that there was no objection to his using the man-
uscript enclosed with his letter of 14 July 1961
for publication,in the August issue of the
HBS Bulletin and for the McGraw-Hill book
based on the conference.
JSE
2Aug61
I FORM
US10-101
MAY FORM
AUGN 54 101 WHICH REPLACES
ED.
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
HARVARD BUSINESS SCHOOL ASSOCIATION
ALUMNI CENTER, SOLDIERS FIELD, BOSTON 63, MASSACHUSETTS
ELIOT I. SNIDER, '43, Vice President
Massachusetts Lumber Company
400 Portland Street
Cambridge 41, Massachusetts
S. ALFRED HALGREN, AMP 25, Vice President
Carnation Company
5034 Wilshire Boulevard
Los Angeles, California
JOHN H. BRINKER, '47, Vice President
Cherry-Burrell Corporation
Cedar Rapids, Iowa
ALEXANDER T. DAIGNAULT, '39, President DONALD M. WRIGHT, Secretary-Treasurer
W. It. Grace & Company Director of Alumni Relations
7 Hanover Square
New York 5, New York
JOHN L. HENNINGER, '47
Assistant Director of Alumni Relations
DAN H. FENN, JR., Editor
Harvard Business School Bulletin
Harvard Business School
Boston 63, Massachusetts
WILLIAM S. EDGERLY, '55
Assistant Secretary-Treasurer
Cabot Corporation
125 High Street
Boston 10, Massachusetts
July 14, 1961
Mr. Allen W. Dulles, Director
Central Intelligence Agency
Washington, D.C.
May we have your approval of the enclosed manuscript of your address,
"Incentives in the Soviet Union" (presented at the 31st Annual National
Business Conference, Harvard Business School, June 9, 1961), as prepared
for publication in the August issue of the HBS Bulletin and for the
McGraw-Hill book based on the conference?
I would appreciate it if you could correct any errors which may have
crept into the article in the course of our editing and return the
corrected copy to us as soon as possible.
Thank you.
Very truly yours,
Dan H. Fenn, Jr.
Editor
HBS Bulletin
JUL -'
DHF/nbc
encl : 2 Ins.
HP Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 _, ,.1?t~lles #e1?61geV ~oriRelease 2002/07/29 :CIA-RDP80B01676R003500080014-3
Incentive, t : dictionaries tell v'*'-is, tllsat which incites to -da dnation
and action, that which moves the mind V? the passions. js-Iio have all
seen,r the forces, which motivate man are imparted from without or engendered
from ' ,the individual.
Thus, real situations provide incentive. A great crisis stirs am to
action; a war inspires us to deeds of courage and exhibitions Of fbstitude,
Similarly, leaders of men, in free societies, in government or in.private
life oan,gain influence over men's minds and become the driving force that
leads th :'to action. Dictators* too, can do this on a massive scale.
And then there are the incentives which come from within us -- ambt6 fte
religious foxy the urge to reach for fame or fortune, to create, or to
build. ft: way be an . edifice, a work of art, a piece of literati, an invention,
a business ' iterpriss, career.
One of the print factors distinguishing a free from, a totalitarian state
is the relative importance given to internal as ppposed to extermt incentiv"...
In an open society, in a government of the people, aced for the.poople, it is
from the individual that the major incentives spring. Ina closed society,
the individual is forced to look primarily to the dictator, to the lead, or
to the State.
Not many years ago we saw the strange and sad phenoms~n of a> reat country
and a great people aiesed by a mad dictator, Hitler, who took hold of the
minds of the population and molded a controlling group into blind obedience to
the State? Individual incentive was lost in the image of the Reich, and
Mein Ka was the bible.
In the Soviet Union the major incentives, toot are derived from the dictates
of the State. It is true that, as contracted with the old Stalin days, there
has been some relaxation under Khnushchev. The framework is more ample. But
the State still serves an the primary source and control of incentives.
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Du'tlee article - p.2
,.., ` Approved For Release 2002/07/29: CIA-RDP8,O301 676R003500080014-3
An eminent nt of Soviet i s , ; ~ 'ggelt3,lt
April 1961 isms ' .. i 1~`t~ p is it this ways
*The picture of a Soviet
writi~Ag 'in the
1sb ydo1~ I s. ' police co nt a and t-apr` open to all
kinds iv!es selling up from. below
but one
that 6A -J hardly stand the. i + of 434A days.
"
HovereAr, w e e h lose sight off' they fact that S is a
a
i8 botO, tuthorits4$ there is a place for individual incentive
t 4 in
1mitiati d to vi Vie, wotl4 in totally black mWWjVULU.
t, all aocf s tend too be mixture., with an ai11-impos t difference in
is and in goa r H , a them apart one from the other,
Bets are s sole dsgires of pragmatitlga,.ttd flexibility alb,
have rec " `~ the "need for individual incentive
.
A of I7senko,." the notorious geneticist, whose th.c?i.$ have , . ba sn
r ulsd brae Weste : scientists, :and even bar some of his 4 ovlet os ssgues
Ilhrushchl $d this to say, of, hiss
a narrow, authoritarian, seotariae iric2
wished to i1106600'_--his scientific, doctrine on. even ybo4 h r sending
all ? free who don't 'agree wi him to Siberia. Nt t impossible
person, However., Z. prefer a bad character who can groin wheat - ,
good. chars + "cam'.t.
10 true, of oa rim 'that. v lle thi s ieaatist hs free to a cpoued the
laws of g4ence, he is not free in,cshart3 the ,course of his conduct, There
iU tt be a. oonf r trlirh#_ nWWWe oi'; t ~r:. ate w. tbin awe very
Wuhch r has recognized that polities can not dictate the
taxi limitb,
findings of -the scientist .
Similarly, in order to mold the Soviet people , and tp supply , then with
incent;*V" which will contribute. to the growth of the Soviet Union, there are
Approved For Release 2002/07/29 CIA-.RDP80Bp1076R003500080014-3
~As chosen, or been driven
 Dulles Rt& F r3Release 2002/07/29: CIA-RDP8'0B01676R003500080014-3
the supre r of the Communist way,* . Communism they po a the
"not physically, "tit by evidencing the superiority of our=ey-etem, and the
to industrial andd 'scientific progress; that it is moving at a faster
rate 'k it its great industrial rival, the United States;:' d that in-the course
production. Meanwhile, the Soviets claim leadorship'in spaoe,rllistic
of a decR;?C, so it will surpass us in the actual value of it s AAft tr34
.es of incentive?creatng
Oriftchev in particular, to,
The fiat,, and possibly the most important, is the doctrine 't}ie
Second,` bchev declares that Communist society has"to >..1 keys
loam, so communism will. take over rrom capszailem.
And finally, to maintain dpmmuniet growths Xhruebahowt enjoins each ate`
missles.# and in certain other fields of industrial endeavor4
every Soviet-citisen to play his part in the manner and form dictat " the
toil. He must help to overfulfill the goals of the "nomie plan,
State. He must devote to. the State the products of his mind; the fruits of his
the course of it, 1hrushchev called on the chairman of the Dnepropetrovsk
debate with one of his hosts at a luncheon, The issue/argued over who`'rad
come from the humblest beginnings to the highest place i x life. and society. In
administered huge metallurgical plants and chemical factorise. A third of the
ore mined in the Soviet Union comes from. his region; no one in the United States
Economic Council to rise and take a bow. He pointed Out that this official
controlled so much wealth, he said.. Khrushchev' wed:- ooze->to say that the chairman
himself possessed nothing except the pants he wore. All the rest belongs to the
people, he told his audience.
App'roved For Release 2002/0lIC IA-RDP80B01676R003500080.014-3
Khrushchev kited Los! Angeles in September 1Q0.," ht- erngaged in t; br3,sk
When
 Dulles sApAkeed FookRelease 2002/07/29: CIA-RDP80BO1676R003500080014-3
The fact is, however, that Soviet `official, possess great poMef~; #ts well. as
pants, and power is a tremendous- i ,ire to the ambitious Sovi ,t,s,r
While this-.,is: true in; erica as well, the ,Soviet n*na : has much more reprn.
sibility for his workers than does his Amerioan oo terpart. He controls
schools, housing, rest ho aes;j and part of the food supply for all the workers
in his Plash has, 3uetifiablys ;a strong sense of paternal power and
achieving this position is areal i' tive for his, yurthermore, there are
systM
other.incentives built into the Co em niet .
The, Soviets were the first to develop the `idea of the five-year glans with
indication of how much should be produced each year.. This scheme makes each
industrial worker a kind of participant in a race to see that each year*s gobl'
and the total is over-fulfilled. J n effect, every Soviet worker is taught te
feel that he is an integral part of' this great industrial marathon between the
TJ.S, and the Soviet Union. Travelers to ?the SovietUnion-report that the slogan
"Beat America" is inscribed on cowbarns in various parts of the USSR,
By contrast, * a free society does not attempt to gear its, industrial pro-
duction to that of any other country. Ratherr it responds to the demands of the
market place; it is provided with both its dynamics and its leadeeehip by what
the people may want to. acquire to advance-_their standards of living.
What I have been describing is an over-all popular incentive to help realize
national goals, In addition, there are managerial incentives which are applicable
to industry, and the nature of these incentives has been a matter of unpreceo
dented concern in the USSR over the past two year*
It is quite clear that Soviet political leadershp`hassucceeded in devising
incentives which bring capable managers to positions of key responsibility.
But in the Soviet Unio the politicians do not trust the business managers.
To help rule them they have established elaborate controls and checks, under
the supervision of local Comunist arty types, on the heads of enterprises.
Approved For Release 2002/07/29($hDP80B01676R003500080014-3
 Du11e* article - p.5
Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
thew include the letting of detailed tion targets, the silocsrretion Of' 1, 01
raw and seam-processed materials, the co orner manpower, there cation of
The Party il.sa '.to it that the managerial class is very well paid by
,,Sovj et standards
wed the differential between the atIrage worker's wage
and the ' a -nagor's total, income is probably wider in tji4 USSR than it is in the
U.B. Thy .tact, of course, is not advertised and much of *at : successful
manager receives as.. -Ow fringe benefits -- an apartment,,country house, the
use an automobile, :travel and expense accountssand the like.
Until quite recently, the major criterion for the corppensation of business
Ire to be a ' -dache for Mr. lthrnshobs- and the statistics
. ;: d a price for it ?
Soviet systn of eoUeotivisatiof and the Soviets have paid
awn Will work contentedly on the production line and accept his pay 1 W1
compensation for his labor'; a former. who tills the-- lit , which belongs to a
State cooperative finds little. incentive to increase. or o" ise in produatiant.
COMM that the Soviet leaders have offered a sped! inti'e's to Women In
the professions, Three-quarters of Soviet doctors and physicians are xc~sf,
conclude that YAM and Lonift bavs not helped, auCh in the. field of ;agric u turn.
Turning briefly to the professions, the incentive differ, very largely
between different branchres. Soviet medical and lit prafessi on. sAJoy aeithsX'
the social status nor the income advantages of tbeiae counterparts in the O.S.
But as a later, I regret to have to add that this is beoauSs thee. professions
are considered "non?-productiV$" pursuits in the $or et Onion. It is no ooin-
( )
Approved. For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
 Dulles gftlpEq)6eqj Fcr (ease 2002/07/29 CIA-RDP80B01676R003500080014-3
compared with 3usx % in this Co
in the Soviet - Union are women, tm`'this
01da. the fact remuit ' b ~t extensive use '4fv-enen in-t
I Willingly grant,that hav!e apeoial skill amd talents in. theso
UMPO
in the more highly pa!W teacning proiese l.unV
work in ty Soviet defense and heavy industries,
Some refo in the so-called non eas ive profes&:'tons are in pros
I understand that a new wage scale will give them somewhat more. i `?during
tr-. soaring year?
that, prevsi, .in Soviet economic life, these are perhaps flees important
;; p4.tee. of what might seem to be serious defects in the i ti entive system
Soviet leaders seem 1.9 have acquired a keen sense of-t is important fOr
the. cause of Communism both in the Soviet Union and throughout, ` world, The
these and for is than their overriding incentive or goal ti,- r ae: advance
of strong industrial and military power and they baTa induced them -4 citizens
these purpo Bess They have long neglected the. creature oomforts of: 00ir
citisens in order to pour their resources into the oesentiol ands casings
to accept this decision. We should clearly recognis they extant of their
iteaccess. Whatever the excesses of their propaganda, they. can rightfutlclaim
truly remarkable industrial and scientific accomplishments,
We do not accept their view that ss-' is the Lwave of the future,
However, this is Upir, convicti pn,1, this is their i centive for action; this
is the basis for their domestic and foreign.pollcies; and this is the nature of
the threat and 'the: challenge, which- they zeeenti.
I wonder if we are to clear -in air owntt.aindesab4 t ter ii entives as they
are about theirs? The free world does not have &-, nolithic unity. We do not
gear our industrial machine to compete in a statistical race with the Communist
world,, We do not try to impose our petit cal ` system on others. Each of us has
Approved For Release 2002/07/24 lRDP80B01676R003500080014-3.
 t Dulles icle - p, 12
Approved For. Release 2002/07/29: CIA-RDP80BO1676R003500080014-3
~w~rs pN= convictions about the ids t, freedom, democratic inetitutiOnas
i d tl~idignity of the individual ~ v, 4~ ~zs f ~l very $or-~w'M,a~ .rpm tl~wse o no- ~g~bor,
little to the `advancement of ths;? geat principiSi, In November of 1959
Christian Herter,,.who waa than Secretary of State, bade an eloquent address
time, we seem dediosted too much to ' creature comforts, too
hays, of late, been too absorbed, I feel, in, the more enjoyment
i '~Ohe Foreign Trade Council, pointing .o Ahe stakes, the inaen6i es, and the
must realize instead that the fateful ceepetition rtjth Communism has
of a pa'oepirdus We behind O ntv curtain of. nuclear. power. We
aced' a first claim on the energy and iterests of us all. That,
approved For Rel,6ase 2002/07/2 )RDP80BO1676R003500080014-3
:interest, It alsommeans using our economy lose fort the things which:
do not really, cutter, and more for -the things which do -- for the uses
-`#dtich would train and inform our minds,, promote'- the health of our
meatisrsubordinating our private interests to the paramount public
society and keep our. , country free."
More recently, the President told the American moiety of Newspaper Editors:
in Asia and Latin America , these Araeagee are all the same The
complacent, the self-indulgent, the soft societies are. about to be
Swept away With the debris of history. Only tau strong, only the
industrious, only the determined, only the courageous, only the
visionary who determine the real nature of our struggle can possibly
survive
The business manager: knows perhaps better than aug'oue else the state of our
economy, the proportion of cur effort as divided between our national security
reexamine what our true incentives should be in these critical day's*
and our own comforts, and it is for him as it is for all of us -- to
 is j p,W, difpa.aelease 2002/07/29: CIA-RDP80BO1676R003500080014-3
{
c~roica].ly, but ther"We going to Use
o j
o carry oust: their, political, acono~oi
t
the of, so-celhed Ooex
W lane and thus endeavor to expand, their powear atul to
and subvr p
their prest e in the world, Rven if the7 do rake more conc*satsts3 to the
Consumers., the major thrust of the econoadc develop ?ent remains i rected
and national power goals. The major
rd : apaoialised wuatrial, military,
*A ny'&1u tion of consumer goods and
this adds ltttle muscle to our national security.
Co parisons ~2s t' ',,.en. gross national products. or
d*. ion are not the important consideration. thur concerts musts be With the
uses - to which in trial strength ,, is I
The tri* ;;measure of our, re34tive power positions in the final analysis
depends on what we ? do' to defend 'our national security and, to advance the cause.
of freedom here and throughout the lMrld,
Approved For Release 2002/07/29 : CIA-RDP80B01676R00350008001'4-3
 Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
SUMMARY OF REMARKS
by
ALLEN W. DULLES
DIRECTOR OF CENT AL INTELLIGENCE
at
Thirty-First Annual National Business Conference
HARVARD BUSINESS SCHOOL
Boston, Massachusetts
9 June 1961, 7130 P.M. (EDT)
"INCENTIVES IN THE SOVIET UNION"
I was honored to receive your invitation to participate in the 1961
National Business Conference and to visit again the Harvard Business School.
I can testify from personal knowledge to direct and specific benefits which
we in government have received both from you in business and you in the
academy,
The Agency which I represent has been improved by clone association
with the Harvard Business School. Members of your faculty have visited
our Agency, and we see to it that our senior executives seize their oppor-
tunities to enroll as students in the school. You have added to our incentive
to improve management in a type of work which defies the ordinary rules of
organization.
Incentive, the dictionaries tell us, is that which incites to de+,.ermdna-
tion and action, that which moos the mind or stirs the passions.
Incentives spring from two main sources. They are either imparted from
without or engendered from within the individual.
External forces give incentive. A great crisis stirs men to action.
A war incites us to deeds of courage and exhibitions of fortitude. Leaders
of men, in free societies, in Government or in private life can also gain
dominion over men's minds and become the incentive force that leads to
Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
action. Dictators can also do this on a massive scale.
And than there are the incentives which come from within us - ambition,
religious fervor, the urge to reach for fame or fortune, to create, or to
build. It may be an edifice, a work of art, a piece of literature, an
invention, a business enterprise, a career.
In an open, free society, in a government of the people, and for the
people, it is from the individual that the major incentives spring.
In a closed society, the individual is forced to look primarily to the
dictator, to the leader, or to the State. But even here individual initiative,
though restricted and often canalized by Government,, may play a role.
Not many years ago we saw the strange and sad phenomenon of a great
country and a great people where a mad dictator, Hitler, took hold of the
people's minds and molded a controlling group into blind obedience to the
state. Individual incentive was lost in the image of the stab. Their
bible was Mein Kampf because a written charter can help to serve as the
instrument for inspiring and controlling incentive.
In the Soviet Union the major incentives are derived from the dictates
of the state.
True, as contrasted with the old Stalin days, there has been some
relaxation under Khrushchev. The framework is more ample. But it is still
the state which is the major element in providing and controlling the
people's incentives. Here, too, they have their doctrinal literature,
starting with the works of Marx and Lenin and, until his degradation, the
teachings of Stalin.
Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIARDP80B01676R003500080014-3
An eminent student of Soviet affairs, Philip B. Mosely, writing in
the April issue of For Affairs, puts it this way:
"The picture of a Soviet system that has chosen, or been
driven -- to abandon its police controls and to leave the way
open to all kinds of initiatives welling up from below is a most
appealing one, but one that can hardly stand the light of Soviet
day."
But, the Soviets are-showing some degree of pragmatism and flexibility.
Take the case of Lysenko, the notorious geneticist, whose theories have long
been ridiculed by Western scientists and even by some of his Soviet
colleagues. Khrushchev had this to say of him:
"Lysenko is a narrow, authoritarian, sectarian individual
who wishes to impose his scientific doctrine on everybody by
sending all those who don't agree'with him to Siberia. He's an
impossible person. However, I prefer a bad character who can
grow wheat to a good character who can't."
Khrushchev has recognized that politics can not dictate the findings
of the scientist. But while the scientist may be free to expound the laws
of science, he is not free in charting the course of his conduct, There
must be a conformity with the needs of the state.
In order to mold the Soviet people and to supply them the incentives
to contribute to the growth of the Soviet Union, there are a series of
incentive-creating principles which the Soviet leaders, and Khrushchev in
particular, teach.
The first, and possibly the most important, is the doctrine they
preach, of the supremacy of the communist way of life. Communism they
-3-
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
portray as the wave of the future. We will bury you, Khrushchev says to
the rest of us, but not physically -- merely by evidencing the superiority
of our system, the decadence of yours. As capitalism took over from
feudalism, so communism will take over from capitalism, he preaches.
Second, Khrushchev preaches that communist society has found the keys
to industrial and scientific progress; that it is moving ahead at a faster
rate than its great industrial rival, the United States; and that in the
course of a decade or so it will surpass us in the actual value of its
industrial production. Meanwhile, the Soviets claim leadership in space,
in ballistic missiles, and in certain other fields of industrial endeavor.
And finally, to maintain communist growth, Khrushchev enjoins each and
every Soviet citizen to play his part in the manner and form dictated by
the state. He must devote to the state the product of his mind; the fruits
of his toil. He must help to overfulfill the economic plan goals.
When Khrushchev visited Los Angeles in September 1959, he engaged in
a brisk debate with one of his hosts at a luncheon. The issue was as to
who had come from the humblest beginnings to the highest place in life and
society. In the course of it, Khrushchev called on the Chairman of the
Dnepropetrovsk Economic Council to rise and take a bow. He pointed out that
this official administered huge metallurgical plants and chemical factories.
A third of the ore mined in the Soviet Union comes from his region. No one
in the United States controlled so much wealth, he said.
Khrushchev went on to say that this official possesses nothing except
the pants he wears. All the rest belongs to the people. However, Soviet
officials do possess great power as well as pants, and power is a tremendous
incentive to the ambitious Soviet citizen.
d4-
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
There are other built-in incentives to the Communist scheme of things.
The Soviets were the first to develop the idea of the five-year plan
with an indication of how much should be produced each year. This makes
each industrial worker a kind of participant in the race to see that each
year's goal and the total is over-fulfilled.
In effect, every Soviet worker is taught to feel that he is an integral
part of this great industrial marathon between the U.S. and the Soviet Union.
Travelers to the Soviet Union report that on cowbarns in various parts of
the USSR the slogan "Beat America" is inscribed.
In a free society, we do not attempt to gear our industrial production
to that of any other country. It is largely a response to the demands of
the market place; what the people may desire to acquire to advance their
standards of living.
In addition to what I have been describing as the overall popular
incentive to help realise national goals, there are managerial incentives
applicable to industry. The nature of these incentives has been a matter
of unprecedented concern in the USSR over the past two years.
It is quite clear that Soviet political leadership has succeeded in
devising incentives which bring capable managers to positions of key
responsibility even though, in the Soviet Union, the politicians do not
trust the business managers. To help control them they have established
elaborate controls and checks on enterprise heads which are under the
supervision of local Communist party types. These includes the setting
of detailed production targets; the allocation of raw and semi-processed
materials; the control over manpower; the allocation of investment funds;
the control over prices; and the monitoring of performance.
-5"
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
The Party sees to it also that the managerial class is very well paid
by Soviet standards. Indeed the differential between the average worker's
wage and the manager's total income is probably wider in the USSR than in
the U.S. This is not, of course, advertised and much of what the successful
manager receives are the fringe benefits in the form of an apartment, a
country house, the use of an automobile, travel and expense accounts and
the like.
Until quite recently, the major criterion for the compensation of
business managers in the USSR had been the fulfillment of physical output
goals, assigned to the plant by central authorities. This has meant, and
it has been one of the difficulties of their business organization, that
costs of production have, for too long, been relatively unimportant to
Soviet managers. They have operated under conditions of a perpetual seller's
market with emphasis on physical volume of production.
In the Soviet Union there is no question of price competition since
the Soviet government is the sole purchaser for the vast majority of the
Soviet production. Quality has, until recently, been too much neglected.
For example, the output of shoes by Soviet factories has not been in
a quality competition with shoes produced by any other factory. Speaking
of shoes, in October 1959 a letter to a Moscow newspaper signed "Soviet
citizen" said that the writer was more interested in new shoes than he was
in Sputniks or TU-111 airliners. He said that as far as transportation was
concerned, he was perfectly happy to ride the streetcar. However, he pointed
out that his only pair of shoes was four years old and that they wouldn't
have lasted that long except they were a Western brand. The Moscow news-
paper printed this letter calling the writer a slug and an earthworm, who
Approved For Release 2002/07/296 CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
was incapable of understanding the higher flights of the Communist way of
As a matter of fact, one of the difficulties the Soviets have been
running into in connection with some of their foreign aid programs is the
fact that the goods delivered under these programs -- I am not speaking now
of military equipment -- have in many cases not been up to standard.
What I have said here applies chiefly to the consumer goods area of
their production and light industry. Their ablest managers and skilled
workmen are largely reserved for their heavy industry, particularly in their
defense programs.
I wish now to turn briefly to the political environment in which the
Soviet manager finds himself.
In the final analysis, there is only one industrial corporation in the
USSR -- the Soviet State. This monolith, through the hierarchy of administra-
tive organs, is an industrial giant whose employees number one-fifth more
than the total number of workers in all manufacturing plants in the United
States.
The chairman and members of the board of directors are the chairmen
and various deputy chairmen of the Council of Ministers. In effect, the
stockholders of the corporation are members of the Communist Party of the
It is no more coincidence that Mr. Khrushchev is both chairman of the
board and majority stockholder, in his dual role as Chairman of the Council
of Ministers and First Secretary of the Communist Party. Furthermore, at
the highest levels, a duality of individual roles in party-state positions
is the rule rather than the exception.
-7-
Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80B01676R003500084014-3
In spite of recent gains in living standards, the ordinary Soviet
citizen still finds himself essentially the residual claimant on output
allowed him by the Party leaders.
The highly advertised "Communist Man" one who gives according to
his abilities and receives according to his needs -- has yet to appear on
the Soviet scene. Until he does, it is the principle of material gain that
is applied as the primary motivating force for the Soviet managerial class.
Salary scales are fixed by the USSR's State Committee on Labor and Wages
in consultation with -- believe it or not -- the All-Union Central Council
of Trade Unions.
Salaries are set first of all on the basis of importance of a particular
industry to State. This means the major financial rewards are in managing
heavy industry and military facilities, not consumer goods plants. Thus,
salaries are much higher in coal, metallurgy and machinebuilding industries
than in food and textile plants.
Pursuing higher income and prestige, the Russian plant director, like
the American manager, will strive to move from a small plant to a larger
one, from a low-priority industry to one of higher priority.
Or the plant director, being a member of the Communist Party, could
seek advancement in industry through Party channel advancement. He might,
for example, be appointed to the strategic position of Secretary in one of
of the regional Party Committees.
Besides earning his salary,. bonuses, expense account, car and
preferential housing to which I have referred -- the Soviet manager has
other concerns which affect his advancement,,,
Approved For Release. 2002/07/29 : CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
The Soviet manager has much more responsibility for his workers than
does his American counterpart. He controls schools, housing, rest homes,
and part of the food supply of all the workers in his plant. He has,
justifiably, a strong sense of paternal power.
In addition to many."carrots," the Russian system of incentives for
its managers also includes a number of "sticks." If a manager fails to
perform as. expected, not only. does he lose his home, but also he can be
fired, demoted, or reassigned to a job in a less important plant.
If failures involve violations of the law, and they are,quite likely
to, he can be fined or imprisoned. He can also be expelled from Party
membership, which would mean the end of his career as a manager.
Khrushchev made this plain at a major party meeting this January.
Responding to a question on what to do with Soviet executives who concoct
inflated figures and fake statistics, he said,
"Out of the Party with them. These people are not
Communists, they are hangers-on .... and should be punished.
... If we don't restore order, the plans will be statistically
filled but there won't be enough products. As is known, you
cannot make pancakes out of statistics."
Although an unsuccessful Soviet manager is not likely to be sent off
to Siberian forced labor camp these days, penalties for failure under the
Soviet system are more severe than they are under ours.
Yet plant managers do occasionally manipulate output and inventory
data even at the risk of stiff jail terms and the ruin of their careers.
There is plenty of evidence on this practice printed in the Soviet press
almost daily. Why do Soviet managers take such chances?
Approved For Release 2002/07/29 CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
Basic reasons,ares
(1)
centrally determined plant production goals
are set very high, ands
(2)
a director's beat efforts to meet goals are
often frustrated by the failure of suppliers to deliver necessary materials.
He takes a chance with a hope of being able to "catch up" in the next
accounting period.
As long as a production enterprise is functioning reasonably well, the
great variety of political "watchdogs," which are always stationed right
in the factory, look the other way. If a director needs to "borrow" a few
per cent of next month's expected output to meet this month's plan goal,
they allow him legal elbow room. But borrowing must be made up. If a
director continues to fall behind, compounding shortages, one or another of
the enterprise watchdogs will denounce him to higher authorities and receive
credit for uncovering unsavory scandal.
The key question for a Soviet manager is, how much did you turn out
last month, not how much profit did you show?
Impelling as it was towards maximization of output in the USSR, still
a major goal, this incentive system had some built-in die-incentives. To
earn bonuses, managerial actions taken were not always in the beat interests
of the State.
About two years ago the Central Committee of the Communist Party took
up the whole question of efficiency in industry, and last July they decided
upon a number of specific reforms. which are now being introduced. They
includes
1. Bonus arrangements for plant managers are now tied to
reducing production costs, and in some cases to quality of
product. Bonuses previously paid solely for fulfilling physical
10 ?
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
production plans are being discontinued.
2. To stimulate research and development on new high per-
formance equipment, all experimental costs on such machines, up
to the stage where they go into series production, are no longer
paid for by the enterprise doing the development work. All these
costs are now paid for out of a special fund, administered from
the center at Moscow. This should have the effect of reducing
prices on new equipment, as well as stimulating its development
and production.
3. Large bonuses are now available to reward plant personnel
who are directly connected with what is called "creation and
introduction" of new technology. The size of the bonuses is com--',
puted by a complicated measurement of cost reduction achieved
through introduction of new technology. Savings are computed
not only in the plant making the innovation, but also allowance
is made for savings elsewhere*in other facilities where the
innovation can be adopted.
4. Bonuses are now paid quarterly instead of monthly to
reduce end-of-month pressures and borrowing from future production.
5, At least 20 per cent of what is called "enterprise
fund," which essentially is a plant's retained earnings, must
now be spent for the introduction of new technology, modernization
?of .equipment, etc.
These incentives to promote greater technological advances and
managerial efficiencies, important as they are, are not the end of
changes. We can expect that there will be other measures introduced next
Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
year and in years to come, as the Soviets strive for increased efficiency
to promote a high rate of economic growth.
While it is always hazardous to forecast, it appears that the Soviets
are on the right track in the major overhaul of methods of managerial
compensation.
The incentives in industry, which have worked reasonably well and
which if corrected as contemplated will work even better, are not reflected
in the field of agriculture. Agriculture has been the "ugly duckling" in
the Soviet economic drive. There is an affinity between the farmer and his
farm; the satisfaction of outright ownership which has not been reflected at
all in the Soviet system of collectivization. A man will contentedly work
on the production line and accept his pay as full compensation for his work.
A farmer who tills the soil which belongs to a State cooperative finds
little incentive to increase or economize in production. In any event, the
farm continues to be a headache for Mr. Khrushchev and the statistics indicate
a breakdown in the incentive system.
For example, the Soviet Union employs about seven time as many workers
on the farms as we do in the U.S. and produces one-third less in terms of
value than do we.
In any event, we must conclude that Marx was not much of a farmer and
the principles of Marx and Lenin have not helped much in the field of
agriculture.
Turning briefly to the professions, the incentives differ very largely
between different branches. Soviet medical and legal professions enjoy
neither the social status nor the income advantages of-their counterparts
in the U.S. But as a lawyer, I regret to have to add that this is because
-12 -
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
in the Soviet Union these professions are considered non-productive pur-
suits in the Soviet terminology.
The Soviet leaders have offered a special incentive to women in the
professions. Three-quarters of Soviet doctors and physicians are women.
This compares with just over five percent in this country.
About one-third of the lawyers in the Soviet Union are women. In this'
country it is less than five percent.
I willingly grant that women have special skills and talents in these
fields. But the fact remains that the extensive use of women in these
professions and in the more highly paid teaching profession, does free men
for work in priority Soviet defense and heavy industries.
Some reforms in the so-called non-productive professions are in prospect.
I understand that a new wage scale will give them some more income during
the coming year.
In spite of what might seem to be serious defects in the incentive
system that prevails in Soviet economic life, these are perhaps less
important to them and for us than their overriding incentive or goal to
produce to advance the cause of communism both in the Soviet Union and
throughout the world.
The Soviet leaders seem to have acquired a keen sense of what is
important for these purposes. They have long neglected the creature com-
forts of their citizens in order to pour their resources into the essential
underpinnings of strong industrial and military power and they have
induced their citizens to accept this.
The extent of their success should be clearly recognized by us.
Whatever the excesses of their propaganda, they can rightfully claim truly
_]3
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
remarkable industrial and scientific accomplishments.
We do not accept their view that communism is the wave of the future.
However, this is their conviction; this is their incentive for action; this
is the basis for their domestic and foreign policies; and this is the
nature of the threat and the challenge which they present.
I wonder if we are as clear in our own minds about our incentives as
they are about theirs? The free world does not have a monolithic unity.
We do not gear our industrial machine to compete in a statistical race with
the communist world. We do not try to impose our political system on others.
Each of us has some sense of conviction about the ideals of freedom, demo-
cratic institutions, and the dignity of the individual.
At the same time, we seem dedicated too much to our creature comforts,-
too little to the advancement of the great principles. In November of
1959 your former Governor Christian Herter, who was then Secretary of State,
made an eloquent address to the Foreign Trade Council, pointing out the
stakes, the incentives, and the challenge. He said:
"We have, of late, been too absorbed, I feel, in the were
enjoyment of a prosperous life behind our defense curtain of
nuclear power. We must realize instead that the fateful com-
petition with communism has placed a first claim on the energy
and interests of us all. That means subordinating our private
interests to the paramount public interest. It also means
using our econonor less for the things which do not really matter,
and more for the things which do -- for the uses which would
train and inform our minds, promote the health of our society
and keep our country free."
14 -
Approved For Release 2002/07/29 : CIA-RDP80B01676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
More recently, the President told the American Society of Newspaper
"The message of Cuba, Laos, of the rising din of communist
voices in Asia and Latin America -*- these messages are aU the
same,. The complacent, the self-indulgent, the soft societies
are about to be swept away with the debris of history. Only the
strong, only the industrious, only the determined, only the
courageous, only the visionary who determine the real nature of
our struggle can possibly survive."
You here tonight know perhaps better than anyone else the state of
our economy, the proportion of our effort as divided between our national
security and our own comforts, and it is for you -- as it is for all of
us --,to reexamine what our true incentives should be in these critical days.
Let us make no mistake about communist intentions and capabilities.
They are not about to inherit the earth economically, but they are going
to use the period of so-called coexistence to carry out their political,
economic and subversive plans and thus endeavor to expand their power and
also to advance their prestige in the world. Even if they do make more
concessions to the consumers, the major thrust of their economic develop-
ment remains directed toward specialized industrial, military, and national
power goals. The major thrust of our economy is still directed to production
of consumer goods and this adds little strength to our national security.
Comparisons between gross national products or indices of industrial
production are not the important consideration. Our concern must be with
the uses to which industrial strength is put.
-1$-
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
The time measure of our relative power positions in the final analysis
depends on what we do to defend our national security and to advance the
cause of freedom here and throughout the world.
_ 16 .
Approved For Release 2002/07/29 : CIA-RDP80BO1676R003500080014-3
 ppr
a ?/@O:Art3Ii4R?PM6 0
UNCLASSIFIED CONFIDENTIAL SECRET
CENTRAL INTELLIGENCE AGENCY
OFFICIAL ROUTING SLIP
TO
NAME AND ADDRESS
INITIALS
DATE
Col. Clrngan
RECD
2
3
4
STAT
5
6
ACTION
DIRECT REPLY
PREPARE REPLY
APPROVAL
DISPATCH
RECOMMENDATION
COMMENT
FILE
RETURN
CONCURRENCE
INFORMATION
SIGNATURE
Remarks :
For your information and necessary action.
Walt:
I think you should handle this.
,~mxxej U.
Assistant to the Direct
18 July 1961 ST
FOLD HERE TO RETURN TO SENDER
ESS AND PHONE NO.
DATE
~.:sst. to the DCI
7/18/61
ppr
vexNESA~ 2 02/ Q9NIcW JRU B0 016
6
FORM NO. !/13 Replaces Form 30-4 (40)
1 APR55 `v7 which may be used. U. S. GOVERNMENT PRINTING OFFICE: 1955-0-342531