In the previous instalment, the scene was set for the golden age of social democracy. Now we discuss the bourgeois economics of this period, the internal contradictions of social democracy and the ideological developments of this period.

Reconstruction and Keynesianism

As previously discussed, the need to combat proletarian movements in the inter-war period resulted in the states of Western Europe creating large-scale welfare states. Through taxation and redistribution of colonial super-profits public healthcare, housing, and education became universally available. After the Second World War, the welfare states were further expanded with Marshall aid, spreading across Europe into Germany and Italy.

The economic thinking which informed and justified this process was formulated largely by John Maynard Keynes, a pioneer of the demand-side economics to which he lent his name: Keynesianism.

Previously, liberal economics had been focused on the supply-side: Economic prosperity came from improvements in the efficiency of industrial production. Policy was be directed towards securing cheap labour and natural resources to exploit, and international competition was suppressed. Developed nations were export-focused, with wars being fought to open foreign markets for cheap industrial products.

From the 1920s onwards, the emphasis of liberal economic theory shifted towards consumption-based economics. The poor were considered to have a higher propensity to spend, so providing them with a reasonable income would drive demand and spur economic growth.

The poor, therefore, were made able to afford more than basic necessities. Every luxury which was available to the public was to be made affordable, and therefore contribute to the overall economic health of the country. It was the era of the proliferation of radios, televisions, cars, and other luxury consumer goods.

The natural periodic crises inherent to capitalism would be ameliorated by well-timed injections of state spending. When the markets crash, money would be made distributed by the government through state building projects to restore profitability and investor confidence. Conversely, during a boom the government would tax the wealthy, reducing reckless speculative investment and disincentivising excessive wealth accumulation.

This method worked – there was no major crises for three decades between 1945 and 1975, the longest period in the history of capitalism without economic depression. Furthermore, the welfare state isolated the majority of the population from the worst effects of market crises. The benefits system protected families from the worst effects of unemployment and social housing virtually eliminated homelessness.

The logic of consumption-based economics was facilitated by the GDP metric, which was invented during the second world war. GDP measures total spending in an economy, rather than output, productivity, or standard of living. As the importance of the GDP grew, the emphasis of policy naturally turned towards consumption-based economics.

This was not just an idealistic philosophical development – never before had Keynesianism been possible or necessary. Production-side economics had developed the capital needed for consumption-based economies. The older model of export-focused economics was no longer feasible in Western Europe as there was new competition from the US and Japan.  Simultaneously, large sections of the world economy were closed off to capitalism, as the USSR and China started protecting planned economies across the globe. The rise of nationalism in the third world also made traditional imperialism economically unfeasible, being replaced by (mainly) American neo-imperialism.

Internal Contradictions of Social Democracy

Despite the most stable period of capitalist growth in history, Keynesianism has significant contradictions which necessarily led to its self-destruction.

The primary flaw of Keynesianism stems from its failure to combat one of the fundamental contradictions of the market – the tendency for the rate of profit to fall (TRPF). Put simply, with the absence of market expansion the rate of profit across any market will fall over time. Adam Smith observed this trend empirically and explained it as a simple result of competition. Marx expanded this explanation, relating the rate of profit to the organic composition of capital and the rate of exploitation.

According to Marx, the rate of profit   r = s/(c+v)   where c is the cost of constant capital (raw materials, machinery, etc.) and v is the cost of variable capital (wages). New value in a market is created by labour, and profit is the surplus value created. A capitalist aims to maximise profit mass, rather than rate of profit, so will try to lower costs to absorb their competitors’ market share. This results in investment in labour-shedding technology, so c rises over time relative to v. Combining these effects it can be predicted (and it has been empirically observed) that if c/v rises faster than s/v, then r will fall.

Keynesian economics increases the value of labour. With guaranteed housing and basic income, labour became able to demand higher wages, incentivising greater investment in labour-shedding technology and accelerating the declining rate of profit. 

The natural cycles of capitalism would somewhat counteract the TRPF, as during the boom there is generally major market expansion from speculation, and during the recession the value of labour is depressed and c/v decreases. However with the stability of Keynesianism these cycles did not take place.

The TRPF can also be offset by market expansion. As an external entity (new population, new technology, or new industry) is consumed by a market, capitalists' profits increase without absorbing each other’s market shares. In a social democracy, sections of the economy are closed off to the market, further accelerating the TRPF. This sets up a fundamental opposition between the market and the state, whereby the markets are subject to an outward pressure to expand into and consume state industries.

A second flaw of Keynesianism is its dependence on taxation of the bourgeoisie. The welfare state still had the majority of industry run by capitalists, from whom funding was expropriated to fund state services. Besides the extreme vulnerability to capital strikes this created, the declining rate of profit became disastrous for the state. Progressive austerity measures became inevitable. Capital flight was also a grave issue, as the bourgeoisie avoided taxation by moving profits to tax havens, and lobbying for lower taxes and bigger loopholes.

In the end, social democracy was destroyed by a profitability crisis in the mid-to-late 1970s, with a supply-shock from high oil prices combined with widespread strike action causing a major recession across the western world. Capital flight and gradual lowering of taxes sapped the government's ability to spend, so quantitative easing and government debt was used to fund Keynesian spending. This eroded faith in various currencies, resulting in stagflation and the ultimate failure of Keynesian stimuli to revive profitability.

Ideological Ramifications of Social Democracy

As conditions improved under social democratic governments, the proletarian struggle receded into the background. Communist parties ceased to pose a meaningful threat in Western Europe, the radical left turned away from revolutionary activism to trade unionism and left-liberalism. 'Socialism' became a struggle for concessions from the existing bourgeoisie, rather than government by the workers. In this context even the radical left adopted a market logic, where all gains would be predicated on economic viability (profitability).

Furthermore, the economies of Western Europe became dominated by the tertiary sector - by services rather than industrial production. Despite being objectively proletarian, the aesthetics of service work are sanitised in comparison to industrial labour, and the relationship between labour and value is more obscure. The new service stratum no longer identified with the physical labour of the 'old proletariat', due to the aesthetic similarity of the conditions of service work to those of the petit-bourgeoisie. This was despite their essentially proletarian relationship to their labour and their exploitation by the bourgeoisie. The higher cultural and social status of the urban 'elite' made bilateral solidarity with the old proletariat extremely difficult, with snobbery on both sides propagated by bourgeois media.

As such, the 'left' was split into socially and economically conservative trade unions, which could only preserve the status quo, and socially progressive liberal intelligentsia representing a growing urban 'middle class'.

As the goals and strategies of the left changed, so did its vocabulary and character. ‘Social democracy’ ceased to mean a radically new workers’ government, and instead was understood as 'capitalism with a human face' - a humane dictatorship of the bourgeoisie. Communism was widely understood as an obsolete and arbitrarily oppressive system akin to medieval monarchism or fascistic terror, and anarchism was a childish game - a commodity for bourgeois idealists rather than a meaningful political movement.

As the material symptoms of class oppression became less obvious, the dialogue of exploitation evolved. The new intersectional activism was oriented around abstract cultural and social identities rather than objective material relationships, focusing on the universalisation of liberalism. Even 'working class' itself changed meaning, becoming more associated with accent and consumptive habits rather than material conditions. Civil rights for racial minorities, gay rights, and feminism became the characteristic progressive causes of the period, with the overall objective being universal participation in the market - the equal right to exploit and be exploited.

The proliferation of consumer goods like televisions enabled more powerful forms of bourgeois cultural hegemony, with ever-more immersive entertainment propagating subtle bourgeois ideology through the population. This laid the ground for scaremongering over cultural issues and subversion of proletarian class consciousness.

The ultimate result of these ideological developments was a society divided along non-class boundaries. The conditions of the population made the class struggle appear irrelevant, and the changing aesthetics of labour proliferated generational and regional divisions in the working class. Furthermore, increasing immigration, various intersectional rights movements, and bourgeois scaremongering led people to identify more strongly with class, race, gender, and sexuality, sewing further class division.

The Next Synthesis

Overall, social democracy was uplifting on many levels, with Keynesian economics facilitating an era of stable prosperity. However, social democracy eroded class consciousness and fostered other forms of consciousness without the same material power or objective interests. The proliferation of consumer media strengthened bourgeois hegemony and further damaged class solidarity.

When the internal contradictions of Keynesianism inevitably led to economic collapse, social democracy had set the stage for bourgeois politicians to exploit divisions in the labour movement. The unions were crushed and state industries were sold off: The birth of neoliberalism.

In the next instalment we will discuss the basic principles of neoliberalism, and how neoliberal economics differs from bourgeois economics.