By the early 1970s, the levers of state economic management had stopped working and the world economy entered a long period of stagnation

The Great Boom came to an abrupt end in the autumn of 1973. Problems had emerged in parts of the world economy in the late 60s, slowing the rate of growth, but the sudden lurch into global recession came as a shock.

Crisis was supposed to be a thing of the past. Capitalism’s defenders, from social-democrats to right-wing conservatives, argued that the boom-slump cycle had been abolished and the system now guaranteed steady growth, full employment, and rising living standards.

But in the recession of 1974-1976, unemployment doubled. Then, having failed to recover in the interim, it doubled again in a second recession in 1980-1982. High levels of unemployment continued thereafter, and growth rates during the 1980s were only half what they had been during the 1960s.

The crisis was never as severe as it had been during the 1930s, but it was chronic – a sustained period of stagnation and slow growth perhaps best described as ‘the Long Recession’.

The levers of state economic management operated during the Great Boom no longer worked. Government spending to offset downturns by injecting demand into the economy now appeared to have little effect except to stoke inflation.

Politicians moved rapidly to the right. ‘We used to think you could just spend your way out of recession by cutting taxes and boosting government borrowing,’ Prime Minister James Callaghan told the British Labour Party Conference in September 1976. ‘I tell you in all candour that that option no longer exists; and in so far as it ever did exist, it worked by injecting inflation into the economy. And each time that has happened, the average level of unemployment has risen.’

In fact, unemployment went up whatever governments did. The contradictions of capitalism – the irrationalities of an economic system based on competition and profit – were again defying the managerial powers of its political representatives. What had gone wrong.

The Great Boom – considered at the time to be the new normal – was actually an anomaly in the history of the system. The only comparable period of sustained growth was that from 1848 to 1873.

Since the onset of the Long Depression in 1873, crisis of one sort or another had been the norm. Capitalism had become a highly pathological system sustained only by its addiction to arms spending, imperialism, and war.

What prevented a return to slump after 1945 was a variant of this addiction: unprecedented levels of peacetime government spending on arms, infrastructure, and public services.

This was driven by three factors: the requirements of post-war reconstruction; the pressure for social reform from a radicalised working class; and the militarisation of international relations during the Cold War.

The Great Boom, in short, was engineered by ‘state capitalist’ economic intervention. This was obviously true in fully state-capitalist economies like Russia, but it was also true in ostensibly free-market economies like the US.

At the height of the Second World War, government military expenditure had accounted for about 50% of US economic output. But ten years later, it was still around 15%. The effect of such massive levels of arms expenditure was to sustain and stabilise the boom.

But if capitalism had become an arms junkie, it was only a temporary fix. The Great Boom was undermined by three intractable problems. These became more acute as the global economy expanded during the 50s and 60s.

First, economies with high levels of arms expenditure were able to sustain the boom only by sacrificing their own competitiveness. Arms expenditure is waste expenditure. Unlike expenditure on labour-saving machinery, it contributes nothing to raising the productivity of labour, cutting unit costs, and thereby enhancing the competitiveness of industry.

That is why the losers in the Second World War – Germany and Japan – became powerhouses of post-war economic development.

Post-war West Germany spent 3 or 4% of GDP on arms, a substantially lower proportion than Britain, a much lower proportion than the US. Japan spent even less, just 1%.

Both economies, in consequence, were able to invest heavily in new technology and achieve exceptionally high levels of growth from the early 1950s onwards. West German and Japanese growth rates were roughly treble those of the US over the following two decades.

A gap opened between sluggish arms-based economies and dynamic export-led ones. West Germany’s share of the combined output of the advanced economies doubled and Japan’s more than quadrupled during the Great Boom. The US share fell from more than two-thirds to less than half.

The arms burden had to be reduced. The proportion of US output devoted to arms halved between the early 1950s and the mid 1970s. As Chris Harman puts it, ‘The dynamic of market competition was relentlessly undercutting the dynamic of military competition.’ But the effect was to reduce the pump-priming and stabilising effects of arms expenditure on the global economy.

A second problem was less tractable. The US and the Soviet Union pursued a policy of ‘detente’ so as to reduce their respective arms burdens. But getting the agreement of the domestic working class to wage and welfare cuts – also considered necessary – proved harder.

Unemployment is a necessary part of capitalism. What Marx called ‘the reserve army of labour’ reduces the price of labour-power by forcing workers to accept lower wages through fear of unemployment.

But the Great Boom meant virtually full employment for an entire generation. Labour was in short supply, employers were competing for staff, fear of unemployment largely disappeared, and workers were able to build powerful workplace union organisation to demand a better deal.

Governments were also under pressure to provide affordable homes, new hospitals, better schools, and improved welfare provision. The ‘social wage’ increased in line with personal wages. In Britain, the working class share of national wealth seems to have increased from about half to about two-thirds during the Great Boom.

Rising wages and government spending created demand and helped sustain the boom. But they also meant that capitalists faced increased costs, reduced competitiveness, and a squeeze on profits. This was a particular problem where the labour movement was strong. British capitalists, for example, lost ground to West German and Japanese capitalists for this reason.

The third problem was a consequence of the continuing long-term tendency for capital to become more centralised and concentrated – that is, for the world economy to become increasingly dominated by ever smaller numbers of giant corporations.

The rise of the multinationals during the Great Boom meant the rise of an economic power largely beyond the control of governments and therefore outside the framework of state-managed capitalism.

In Britain, the top 100 firms accounted for 21% of manufacturing output in 1949. By 1970, they accounted for 46%.

Cutting-edge enterprise in key industries like armaments, cars, pharmaceuticals, and electronics depended increasingly on globalised access to finance, technology, raw materials, production facilities, and markets.

The multinationals came to dwarf in size most national economies. Globalised operations enabled them to avoid regulation, dodge taxes, evade capital controls, and secure subsidies and other concessions. To gain access to technology, investment, and markets, nation-states were forced to offer increasingly generous terms to private business.

Competitive capital accumulation was breaking through the boundaries of national economies and making redundant the mechanisms of the previous phase of capitalist development.

By the mid 1970s, not only was the Great Boom over, but the state-managed capitalism that had made it possible was breaking down amid crisis and conflict. What emerged to replace it was a new form of globalised corporate ‘neoliberal’ capitalism.