If state control of credit does not cause the business cycle, does that mean Keynesianism capitalism can work? Keynesian economics, as opposed to free market capitalism, maintains that the state can and should intervene in the economy in order to stop economic crises from occurring. The post-war boom presents compelling evidence that it can be effect the business cycle for the better by reducing its impact from developing into a full depression.

The period of social Keynesianism after the war was marked by reduced inequality, increased rights for working people, less unemployment, a welfare state you could actually use and so on. Compared to present-day capitalism, it had much going for it. However, Keynesian capitalism is still capitalism and so is still based upon oppression and exploitation. It was, in fact, a more refined form of capitalism, within which the state intervention was used to protect capitalism from itself while trying to ensure that working class struggle against it was directed, via productivity deals, into keeping the system going. For the population at large, the general idea was that the welfare state (especially in Europe) was a way for society to get a grip on capitalism by putting some humanity into it. In a confused way, the welfare state was supported as an attempt to create a society in which the economy existed for people, not people for the economy.

While the state has always had a share in the total surplus value produced by the working class, only under Keynesianism is this share increased and used actively to manage the economy. Traditionally, placing checks on state appropriation of surplus value had been one of the aims of classical capitalist thought (simply put, cheap government means more surplus value available for capitalists to compete for). But as capital has accumulated, so has the state increased and its share in social surplus (for control over the domestic enemy has to be expanded and society protected from the destruction caused by free market capitalism).

Indeed, such state intervention was not totally new for "[f]rom its origins, the United States had relied heavily on state intervention and protection for the development of industry and agriculture, from the textile industry in the early nineteenth century, through the steel industry at the end of the century, to computers, electronics, and biotechnology today. Furthermore, the same has been true of every other successful industrial society." [World Orders, Old and New, p. 101]

The roots of the new policy of higher levels and different forms of state intervention lie in the Great Depression of the 1930s and the realisation that attempts to enforce widespread reductions in money wages and costs (the traditional means to overcome depression) were impossible because the social and economic costs would have been too expensive. A militant strike wave involving a half million workers occurred in 1934, with factory occupations and other forms of militant direct action commonplace.

Instead of attempting the usual class war (which may have had revolutionary results), sections of the capitalist class thought a new approach was required. This involved using the state to manipulate credit in order to increase the funds available for capital and to increase demand by state orders. As Paul Mattick points out:

"The additional production made possible by deficit financing does appear as additional demand, but as demand unaccompanied by a corresponding increase in total profits. . . [this] functions immediately as an increase in demand that stimulates the economy as a whole and can become the point for a new prosperity" if objective conditions allow it. [Economic Crisis and Crisis Theory, p. 143]

State intervention can, in the short term, postpone crises by stimulating production. This can be seen from the in 1930s New Deal period under Roosevelt when the economy grew five years out of seven compared to it shrinking every year under the pro-laissez-faire Republican President Herbert Hoover (under Hoover, the GNP shrank an average of -8.4 percent a year, under Roosevelt it grew by 6.4 percent). The 1938 slump after 3 years of growth under Roosevelt was due to a decrease in state intervention:

"The forces of recovery operating within the depression, as well as the decrease in unemployment via public expenditures, increased production up to the output level of 1929. This was sufficient for the Roosevelt administration to drastically reduce public works. . . in a new effort to balance the budget in response to the demands of the business world. . . The recovery proved to be short-lived. At the end of 1937 the Business Index fell from 110 to 85, bring the economy back to the state in which it had found itself in 1935. . . Millions of workers lost their jobs once again." [Paul Mattick, Economics, Politics and the Age of Inflation, p. 138]

With the success of state intervention during the second world war, Keynesianism was seen as a way of ensuring capitalist survival. The resulting boom is well known, with state intervention being seen as the way of ensuring prosperity for all sections of society. Before the Second World War, the USA (for example) suffered eight depressions, since the war there has been none (although there has been periods of recession). There is no denying that for a considerable time, capitalism has been able to prevent the rise of depressions which so plagued the pre-war world and that this was accomplished by government interventions.

This is because Keynesianism can serve to initiate a new prosperity and postpone crisis by the extension of credit. This can mitigate the conditions of crisis, since one of its short-term effects is that it offers private capital a wider range of action and an improved basis for its own efforts to escape the shortage of profits for accumulation. In addition, Keynesianism can fund Research and Development in new technologies and working methods (such as automation), guarantee markets for goods as well as transferring wealth from the working class to capital via taxation and inflation.

In the long run, however, Keynesian "management of the economy by means of monetary and credit policies and by means of state-induced production must eventually find its end in the contradictions of the accumulation process." [Paul Mattick, Op. Cit., p. 18]

So, these interventions did not actually set aside the underlying causes of economic and social crisis. The modifications of the capitalist system could not totally countermand the subjective and objective limitations of a system based upon wage slavery and social hierarchy. This can be seen when the rosy picture of post-war prosperity changed drastically in the 1970s when economic crisis returned with a vengeance, with high unemployment occurring along with high inflation. This soon lead to a return to a more "free market" capitalism with, in Chomsky's words, "state protection and public subsidy for the rich, market discipline for the poor." This process, and its effects, are discussed in the next section.