Profitability


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Profitability

 

(Russian rentabel’nost’ from German Rentabel), an important indicator of the economic efficiency of production at enterprises and associations, as well as in economic sectors and the national economy as a whole. Profitability comprehensively reflects the degree of use of material, labor, monetary, and natural resources.

Socialist profitability differs fundamentally in meaning and in economic role from capitalist profitability, which takes shape under the influence of the spontaneously operating law of the average rate of profit and, in the context of state-monopoly capitalism, under the influence of the law of maximum profit. By contrast, in socialist society profitability expresses the relations among people free from exploitation, and it is regulated by the state in conformity with a plan. Under socialism, the achievement of high profitability in the national economy creates conditions that ensure high rates of economic growth and a more comprehensive satisfaction of the increasing requirements of the working people. During all stages of the development of a socialist economy, the CPSU and the Soviet government have concentrated on ensuring the profitable operation of enterprises and economic sectors. This is emphasized in the Program of the CPSU: “The achievement of maximum results in the interests of society with minimum expenditures is an inexorable law of economic construction…. It is essential to take every possible measure to strengthen economic accountability, to observe the strictest economies and thrift, to reduce losses and costs, and to increase the profitability of production” (1974, pp. 86, 90). In a developed socialist society the decisive conditions for increasing the efficiency of social production are the acceleration of scientific and technological progress, increased labor productivity in all sectors of the national economy, increased returns from invested funds, and a decisive struggle against mismanagement, waste, and excesses. A socialist socialized economy is characterized by economic profitability on a nationwide scale and by the profitability of economically accountable enterprises and associations. These indicators are integrally connected.

National economic profitability is ensured by the planned, crisis-free development of the economy, the socialist organization of production and labor, and the direct association of labor power and the means of production in expanded socialist reproduction. Because national economic profitability expresses the interests of the entire society, its generalizing indicator is the relationship between national income and the resources expended on its production. National economic profitability is ensured and increased by the continuous growth of socialist production, by the improvement of its structure, and by the introduction of scientific and technological achievements in production, as well as by drawing new natural resources into circulation in the national economy. To a large degree, national economic profitability depends on the rational location of the productive forces, on the development of progressive sectors, and on deepening production concentration, specialization, and cooperation. At the present stage, the chief method of economic development in the USSR is the intensification of production, which provides the foundation for greater profitability of the economy as a whole. Under developed socialism, an important factor for the growth of profitability is socialist economic integration, which promotes the formation of a very efficient national economic structure in the socialist countries; extended, stable ties in the basic economic sectors, science, and technology; the development of the world socialist market; and the improvement of commodity-money relations in the socialist countries.

The profitability of the national economy characterizes the efficiency of the economy over a relatively protracted period. This is one of the distinguishing features of profitability. In planning and accounting, the level of profitability of the national economy is defined as the ratio of the total net income to the sum of the value of the fixed production assets and the material circulating capital.

National economic profitability is based on the profitability of economically accountable enterprises, associations, and sectors. The level of their profitability (the rate of profitability) is calculated in two ways. It may be defined as the ratio of the profit to the sum of the fixed production assets and the normative circulating capital (that is, the ratio of the profit to all the long-term resources advanced). Under the new conditions of management, the level of profitability, as calculated in relation to the production assets, has been accepted as the indicator of profitability. This indicator encourages enterprises to improve production efficiency and make better use of resources, and it plays an important role in the system of norms for profit-and-loss incentives for enterprises (associations). The rate of profitability is also calculated as the ratio of the profit to the prime cost, which expresses the efficiency of current expenditures. This indicator is used in price formation and in planning and analyzing profitability for entire enterprises and for particular goods. As the ratio of profit to production assets, the indicator of profitability is set by directives and approved for enterprises (associations) in the form of overall and adjusted profitability.

Overall profitability, which is expressed in percentages, is the ratio of the balance-sheet (overall) profit to the sum of the average annual value of the fixed production assets and the normative circulating capital. By indicating the profit from a quantity of production assets, the overall profitability shows the economic return on invested (advanced) capital. Planning the overall profitability establishes the necessary level of production efficiency for the forthcoming period and controls the actual use of assets. For industry as a whole, the level of overall profitability is determined on the basis of the total profit and the total net income—that is, the total money accumulations (profit, turnover tax, and other accrued moneys).

Adjusted profitability is calculated as the ratio of the adjusted profit (that is, the profit minus the sum designated for special purposes, capital charges, fixed payments, and interest on bank credit) to the average annual value of the production assets for which charges are collected. The indicator of adjusted profitability, which is used to evaluate the economic and financial activities of the enterprises (associations), is an element of the unified economic incentive system.

Under developed socialism the necessary preconditions have been created for raising profitability on the basis of intensive economic growth factors. The level of profitability in Soviet industry is indicated by the data in Tables la and 1b.

Table 1a. Level of profitability of industry in the USSR
 1965197019721973
Total money accumulations (net income; billion rubles)60.393.099.7105.2
Profit (billion rubles).........22.556.059.460.0

In 1971–72 there was some decline in the level of profitability in industry, owing chiefly to the increase in procurement prices for agricultural raw materials. Between 1965 and 1973 the level of profitability of construction contracting organizations rose from 6.1 percent to 14.2 percent, and the level of profitability of state trade, from 15.6 percent to 27.8 percent (in terms of distribution costs).

Table 1b. Level of profitability considered as ratio1
 1965197019721973
1Ratio to the sum of the average annual value of fixed production assets and material circulating capital
Total money accumulations (percent)34.835.832.631.7
Profits (percent) .............13.021.519.318.0

In a socialist economy the basic factors for increasing profitability are greater efficiency in the use of labor resources, acceleration of the growth rate of labor productivity, better use of production assets, reduced consumption of raw and processed materials, improved product quality, and the elimination of unproductive losses.

REFERENCES

Marx, K. “Teorii pribavochnoi stoimosti,” part 2 (vol. 4 of Kapital). In K. Marx and F. Engels, Soch., 2nd ed., vol. 26, part 2, ch. 18.
Lenin, V. I. “Ob edinom khoziaistvennom plane.” Poln. sobr. soch., 5th ed., vol. 42.
Lenin, V. I. “G. Ia. Sokol’nikovu, 1 fevralia 1922.” Ibid., vol. 54.
Lenin, V. I. Ocherednye zadachi Sovetskoi vlasti. Ibid., vol. 36.
Materialy XXIV s”ezda KPSS. Moscow, 1971.
Karagedov, R. G. Pribyl’ v sisteme ekonomicheskikh kategorii sotsializma. Moscow, 1964.
Sitarian, S. A. Chistyi dokhod i biudzhet. Moscow, 1964.
Pribyl’ i rentabel’nost’ v usloviiakh khoziaistvennoi reformy (Materialy nauchnoi konferentsii). Moscow, 1968.
Garetovskii, N. V. Finansovye metody stimulirovaniia intensifikatsii proizvodstva. Moscow, 1972.
Butakov, D. D. Finansovye problemy khoziaistvennykh reform v stranakh-chlenakh SEV. Moscow, 1973.
Aleksandrov, A. M., and E. A. Voznesenskii. Finansy sotsializma. Moscow, 1974.
Bazarova, G. V. Pribyl’ i khozraschet v usloviiakh nauchno-tekhnicheskogo progressa. Moscow, 1974.
Konstantinova, Iu. N. Finansy i faktory ekonomicheskogo rosta. Moscow, 1974.
Moliakov, D. S. Planirovanie i ispol’zovanie pribyli. Moscow, 1974.

R. D. VINOKUR

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