Basically, the subjective and objective limitations to Keynesianism we highlighted in the last section were finally reached in the early 1970s. Economic crisis returned with massive unemployment accompanied with high inflation, with the state interventions that for so long kept capitalism healthy making the crisis worse. In other words, a combination of social struggle and a lack of surplus value available to capital resulted in the breakdown of the successful post-war consensus.
The roots and legacy of this breakdown in Keynesianism is informative and worth analysing. The post-war period marked a distinct change for capitalism, with new, higher levels of state intervention. So why the change? Simply put, because capitalism was not a viable system. It had not recovered from the Great Depression and the boom economy during war had obviously contrasted deeply with the stagnation of the 1930s. Plus, of course, a militant working class, which has put up with years of denial in the struggle against fascist-capitalism would not have taken lightly to a return to mass unemployment and poverty. So, politically and economically a change was required. This change was provided by the ideas of Keynes, a change which occurred under working class pressure but in the interests of the ruling class.
The mix of intervention obviously differed from country to country, based upon the needs and ideologies of the ruling parties and social elites. In Europe nationalisation was widespread as inefficient capital was taken over by the state and reinvigorated by state funding and social spending more important as Social Democratic parties attempted to introduce reforms. Chomsky describes the process in the USA:
"Business leaders recognised that social spending could stimulate the economy, but much preferred the military Keynesian alternative - for reasons having to do with privilege and power, not 'economic rationality.' This approach was adopted at once, the Cold War serving as the justification. . . . The Pentagon system was considered ideal for these purposes. It extends well beyond the military establishment, incorporating also the Department of Energy. . . and the space agency NASA, converted by the Kennedy administration to a significant component of the state-directed public subsidy to advanced industry. These arrangements impose on the public a large burden of the costs of industry (research and development, R&D) and provide a guaranteed market for excess production, a useful cushion for management decisions. Furthermore, this form of industrial policy does not have the undesirable side-effects of social spending directed to human needs. Apart from unwelcome redistributive effects, the latter policies tend to interfere with managerial prerogatives; useful production may undercut private gain, while state-subsidised waste production. . . is a gift to the owner and manager, to whom any marketable spin-offs will be promptly delivered. Social spending may also resource public interest and participation, thus enhancing the threat of democracy. . . The defects of social spending do not taint the military Keynesian alternative. For such reasons, Business Week explained, 'there's a tremendous social and economic difference between welfare pump-priming and military pump-priming,' the latter being far preferable." [World Orders, Old and New, pp. 100-101]
Over time, social Keynesianism took increasing hold even in the USA, partly in response to working class struggle, partly due to the need for popular support at elections and partly due to "[p]opular opposition to the Vietnam war [which] prevented Washington from carrying out a national mobilisation. . . which might have made it possible to complete the conquest without harm to the domestic economy. Washington was forced to fight a 'guns-and-butter' was to placate the population, at considerable economic cost." [Noam Chomsky, Op. Cit., pp. 157-8]
Social Keynesianism directs part of the total surplus value to workers and unemployed while military Keynesianism transfers surplus value from the general population to capital and from capital to capital. This allows R&D and capital to be publicly subsidised, as well as essential but unproductive capital to survive. As long as real wages did not exceed a rise in productivity, Keynesianism would continue. However, both functions have objective limits as the transfer of profits from successful capital to essential, but less successful, or long term investment can cause a crisis is there is not enough profit available to the system as a whole. The surplus value producing capital, in this case, would be handicapped due to the transfers and cannot respond to economic problems with freely as before.
This lack of profitable capital was part of the reason for the collapse of the post-war consensus. In their deeply flawed 1966 book, Monopoly Capital, radical economists Baran and Sweezy point out that "[i]f military spending were reduced once again to pre-Second World War proportions the nation's economy would return to a state of profound depression" [p. 153]
In other words, the US economy was still in a state of depression, countermanded by state expenditures which allowed the system to appear successful (for a good, if somewhat economic, critique of Baran and Sweezy see Paul Mattick's "Monopoly Capital" in Anti-Bolshevik Communism).
In addition, the world was becoming economically "tripolar," with a revitalised Europe and a Japan-based Asian region emerging as major economic forces. This placed the USA under increased pressure, as did the Vietnam War. However, the main reason for its breakdown was social struggle by working people. The only limit to the rate of growth required by Keynesianism to function is the degree to which final output consists of consumption goods for the presently employed population instead of investment. And investment is the most basic means by which work, i.e. capitalist domination, is imposed. Capitalism and the state could no longer ensure that working class struggles could be contained within the system.
This pressure on US capitalism had an impact in the world economy and was also accompanied by general social struggle across the world. This struggle was directed against hierarchy in general, with workers, students, women, ethnic groups, anti-war protesters and the unemployed all organising successful struggles against authority. This struggle attacked the hierarchical core of capitalism as well increasing the amount of income going to labour, resulting in a profit squeeze (see section C.7) creating an economic crisis.
In other words, post-war Keynesianism failed simply because it could not, in the long term, stop the subjective and objective pressures which capitalism always faces.