huge incentive never to expand output, since this only
meant having to produce more in the future, since future
targets would be “ratcheted up.” Underachievement was
always the best way to meet targets and get the bonus. The
fact that bonuses were paid monthly also kept everyone
focused on the present, while innovation is about making
sacrifices today in order to have more tomorrow.
Even when bonuses and incentives were effective in
changing behavior, they often created other problems.
Central planning was just not good at replacing what the
great eighteenth-century economist Adam Smith called the
“invisible hand” of the market. When the plan was
formulated in tons of steel sheet, the sheet was made too
heavy. When it was formulated in terms of area of steel
sheet, the sheet was made too thin. When the plan for
chandeliers was made in tons, they were so heavy, they
could hardly hang from ceilings.
By the 1940s, the leaders of the Soviet Union, even if not
their admirers in the West, were well aware of these
perverse incentives. The Soviet leaders acted as if they
were due to technical problems, which could be fixed. For
example, they moved away from paying bonuses based on
output targets to allowing firms to set aside portions of
profits to pay bonuses. But a “profit motive” was no more
encouraging to innovation than one based on output
targets. The system of prices used to calculate profits was
almost completely unconnected to the value of new
innovations or technology. Unlike in a market economy,
prices in the Soviet Union were set by the government, and
thus bore little relation to value. To more specifically create
incentives for innovation, the Soviet Union introduced
explicit innovation bonuses in 1946. As early as 1918, the
principle had been recognized that an innovator should
receive monetary rewards for his innovation, but the
rewards set were small and unrelated to the value of the
new technology. This changed only in 1956, when it was
stipulated that the bonus should be proportional to the
productivity of the innovation. However, since productivity
was calculated in terms of economic benefits measured
using the existing system of prices, this was again not
much of an incentive to innovate. One could fill many pages
with examples of the perverse incentives these schemes