This report assesses the Soviet effort to improve economic performance by improving the quality of machine-building products. The author contends that the modernization program addresses only the symptoms of economic inefficiency, not the root cause. The senior Soviet leadership does not yet have an understanding that the goals set for the modernization program depend on fundamental reform of Soviet economic institutions. The Soviet enterprise is not the equivalent of the Western firm — the Soviet enterprise manager is subject to more uncertainty, retains less control, and faces less well specified performance criteria. Emphasis on the adoption of new machinery may impose a net cost on the economy rather than a benefit — and with disappointing results. The success of an effort to modernize Soviet industry depends upon efficient use of information, requiring more substantial reform of the economic system. True modernization is possible only with an adequate system for setting prices, sufficient competition, removal of ministerial authority, and reform of the way the average Soviet enterprise is organized.