The abyss opens: The rise and fall of Keynesianism - John Holloway

This article, in the autonomist Marxist tradition, shows how the capitalist class were only able to implement Keynes's policies in the context of the Russian revolution and World War Two. Then, a mere 20 years later, they were forced to retreat from Keynesianism in the face of the workers' revolts of the 1960s and 1970s. At a time when much of the Left advocates a return to Keynes, this raises the question of whether Keynesianism is practical in the 21st Century.

I

Keynes lounging in an armchair, comfortable, thoughtful and benign, a pile of books and papers beside him, against the background of a chart showing the dramatic decline in unemployment form the 1930s to the 1960s: the cover of a popular book conveys perfectly the popular image of Keynesianism. For much of the post-war period, Keynesianism was presented simply as a beneficial, rational, scientific advance in the management of the economy, as a theoretical development which provided the basis for overcoming the problem of capitalist crisis and creating a just capitalist society. Even in recent years, when Keynesianism has been so much criticised, the image remains of Keynesianism as a possibly misguided, but certainly well-meaning theoretical development. In the midst of such images, it is sometimes hard to remember that the adoption of Keynesian policies was the culmination of a prolonged conflict, of a violence, horror and bloodiness quite unprecedented in the history of the world.

Keynes was of course an economist. 'Keynesianism' refers strictly to the economic theories which he propounded and to the economic policies associated with his name, which gained influence throughout the world during and after the Second World War. These theories and policies should not, however, be seen in isolation: their adoption formed an important part of the establishment of a new pattern of relations between capital and labour and for that reason the term 'Keynesian' is often used to refer more broadly to the pattern of political and economic relations associated with those theories and policies. It is primarily in this broad sense that the term will be used here.

The central feature of Keynesianism was the acknowledgement of the organisational strength of the working class. Keynesianism made, explicit in institutional form the dependence of capital upon labour, the strength of the presence of labour in-and-against capital.

The aim of this chapter is to examine the establishment and the collapse of Keynesianism as a mode of domination, a mode of containing the power of labour.

The power of labour to which Keynesianism responded was most dramatically illustrated in the 'red October' of 1917. The Russian revolution was not an isolated event, but the crest of a wave: the surface of capitalism was broken not only in St Petersburg and Moscow, but, more briefly, in other places too – Berlin, Budapest, Munich, Turin, etc. These revolutionary struggles at the end of the First World War were part of a much broader change: as Woodrow Wilson put it shortly before his death, the Russian revolution was 'the symbol of the discontent of the age' (Schlesinger, 1957, p. 94). The revolutionary movement fed from and fed into a longer-term, less spectacular surge in the power of the working class, expressed in the rise of trade unionism and social democratic parties in all the advanced capitalist countries from the end of the nineteenth century. For all the failings of the organised movement (most notably the collapse of 'socialist internationalism' on the eve of the war), the visible power of the working class had grown enormously in the early years of the century.

Beneath the visible, organised power of labour lay a less visible, more insidious power: the power of the exploited to resist exploitation. The growing organisations derived much of their power from the workers' realisation that, however bad their conditions might be, there were limits to the extent to which they could be exploited. Capital might control their lives, but capital too depended on their work for its survival. Power derived precisely from the condition which defined the working class: labour. This realisation was expressed not only in the withdrawal of labour in strikes, but in the constant, everyday struggle for control of the process of work: the control of how things were done, at what speed. Even the most domineering capitalists were confronted frustratingly with the fact that they did not fully control the work process which was the source of their own profit. As F.W. Taylor recounted of his own experience, 'as was usual then..., the shop was really run by the workmen and not by the bosses. The workmen together had carefully planned just how fast each job should be done' (Braverman, 1974, p. 102). Taylor's life work articulated the frustration of capital and was dedicated to overcoming its source, the power of labour to control the labour process.

The extent of the power of the workers to control their own labour varied according to the area, the industry and, most importantly, the type of work involved. It was particularly the more skilled workers who played an indispensable role in the labour process and who were able to exercise most control over their own process of work. The position of the skilled workers gave a particular complexion to the working class movement at the time, reflected in trade union organisation (based mainly on craft lines) and in the ideology of even the more revolutionary sections of the socialist movement, with their vision of socialism in terms of workers' control of the work process. For capital, the skill of the workers turned from being a necessary condition for industrial development into being an obstacle to capital accumulation (Coriat, 1982, p. 12).

From the beginning of the century, capital was increasingly confronted with its own dependence upon labour. This expressed itself both in apprehension of the organised labour movement and in growing difficulty in raising surplus value production sufficiently to offset the rising costs of investment. The imperialist flight of capital to a new workforce, new raw materials and new markets offset the difficulties but also raised inter-capitalist competition to a new level of inter-imperialist rivalry and war.

The impact of the war was double-edged. On the one hand, it split the international labour movement and led to a weakening of the position of the skilled worker within the factory, as established practices were 'diluted' by bringing in women to help with the war effort; on the other, it stirred up a wave of discontent throughout the world that threatened capital as it had never been threatened before.

Capital's response to this threat was complex. From the end of the war, in all the leading capitalist countries, there were voices calling for reform: politicians and theorists of the bourgeoisie who argued that the old capitalism had been discredited and that a radically new social order was necessary. These calls took many different forms and surfaced on many different occasions through the 1920s.

There were three principal issues in the strategic debates of the 1920s: international relations, the role of the state and the control of money.

The first clash between 'progressives' and 'reactionaries' came immediately after the war, in the negotiation of the Versailles peace treaty. Many of the young reformers who were part of their national delegations resigned in disgust when they realised that their leaders were more interested in the 'evil old conspiracy of naked force'

(Schlesinger, 1957, p. 14) than in creating a new era in world history. Among those who resigned was Keynes, who was present as part of the British delegation. One of the key issues was the attitude of the western powers to the new revolutionary government in Russia. For the progressives, the response to the Soviet threat should be conciliatory. In the pamphlet which he wrote to justify his resignation, 'The Economic Consequences of the Peace', Keynes inveighed against the old-style diplomats who 'behave as if foreign policy was of the same genre as a cheap melodrama' (Keynes, 1971, p. 185), and argued that, rather than excluding Russia and taking revenge on Germany, the policy of the victorious powers should aim at reconstructing Germany and reintegrating Russia into world trade: 'whether or not the form of communism represented by the Soviet government proves permanently suited to the Russian temperament, the revival of trade, of the comforts of life and of ordinary economic motives are not likely to promote the extreme forms of those doctrines of violence and tyranny which are the children of war and of despair' (Keynes, 1971, p. 187; cf. also Negri, 1988, p. 16).

The issue of the new international order was quickly settled against the views of the progressives by the Treaty of Versailles. The second issue, the question of the role of the state, remained alive throughout the 1920s. The war had seen an unprecedented expansion in the role of the state, involving extensive control of production (cf. Clarke, 1988, pp. 193ff ). In the years after the war, the 'progressives' argued that the development of capitalism made it imperative that the state should maintain an active, interventionist role in the economy. The argument took different forms and rested on different justifications, from acknowledged fear of revolution to charitable concern for the poor to the simple pursuit of economic efficiency, but there were a number of threads that ran through the debate in all countries. The most immediate issue was the role of the state in production. Everywhere, the state had taken over, directly or indirectly, important sections of production and transport during the war. The 'progressives' argued that these should not be returned to private ownership, that the modern state should control certain basic industries in the interests of the national welfare (cf. Schlesinger, 1957, pp. 37ff; Clarke, 1988, p. 200). This argument was lost: the industries taken over during the war were on the whole returned to private hands in the years immediately following. But the argument concerning the role of the state continued. It was argued that the state should be more active in providing social welfare provision for the poor, especially in the case of unemployment. It was argued too that the state should play a more active role in encouraging economic efficiency, especially through the promotion of economic 'rationalisation'. All the functions that are usually associated with the post-1945 'Keynesian' state were already being argued for in the 1920s.

This is true also true of the general conception of the state as being responsible for the management of the economy, particularly through the manipulation of demand. Such ideas were to be found not only in Keynes' early writings, but also, for example, in the work of Foster and Catchings in the United States. In their book, The Road to Plenty, published in 1928, they attacked Say's Law, the foundation of orthodox economic theory, which held that total demand for goods must equal total supply, so that the financing of production automatically created enough purchasing power to purchase all the goods produced. Foster and Catchings pointed out that there was no such automatic balance, since the flow of money was constantly interrupted by saving (as indeed Marx had pointed out in Chapter 2 of Capital sixty years before). Hence, the only way to maintain prosperity was for the government to maintain an adequate flow of money income to consumers: its policies should be founded on the principles of 'putting more money into consumers' hands when business is falling off, and less money when inflation is under way' (Schlesinger, 1957, p. 135).

Money was central to any discussion of an expanded role for the state. Plans such as that proposed by Foster and Catchings would involve the government running budget deficits in times of recession, and such an idea was abhorrent to the more orthodox politicians and theorists of the day. The issue of financial orthodoxy during this period crystallised around discussions of the gold standard. The reconstruction of the gold standard, under which national currencies are tied to the price of gold, was seen by many as the key to the reconstruction of the international political system after the First World War and was one of the first tasks undertaken by the new League of Nations (Clarke, 1988, p. 204). The significance (both symbolic and real) of the restoration of the gold standard was that it subordinated national currency, and hence the nation state, to the international movement of money, and thereby anchored the minimal role of the state which the conservatives wished to safeguard. It imposed on governments a financial discipline which popular pressures might otherwise lead them to evade. The restoration and maintenance of the gold standard thus became a symbol for the viability of the old liberal world order, which the 'progressives' claimed was doomed to extinction.

The debates of the 1920s on the international order, the role of the state and money, were conducted among policy makers, advisers and critics: the politicians, civil servants and intellectuals of the bourgeoisie. Behind them, however, stood the unspoken (or at least rarely mentioned) subject of all bourgeois theory: the power of the working class. This is not to say that, for example, the idealists who resigned from their national delegations at Versailles were cynically concerned only with a more effective means of suppressing labour, but that the course of the argument was shaped by 'reality' and that the most important feature of that 'reality' was the growing difficulty experienced in dominating and exploiting labour. At issue in the debates of the 1920s was a clash between two strategic responses to the new power symbolised by the October Revolution of 1917.

The subject of the debates occasionally broke through in explicit terms. Far away from the streets of St Petersburg, Berlin or Munich, the US Attorney General, A. Mitchell Palmer, gave colourful expression to the fears of capital everywhere when he said in 1920:

"Like a prairie-fire, the blaze of revolution was sweeping over every American institution of law and order a year ago. It was eating its way into the homes of the American workman, its sharp tongues of revolutionary heat were licking the altars of the churches, leaping into the belfry of the school bell, crawling into the sacred corners of American homes, seeking to replace marriage vows with libertine laws, burning up the foundations of society" (Schlesinger, 1957, p. 42).

For politicians of the stamp of Palmer, the response was simple: suppression by force of anything remotely resembling a revolutionary threat, withdrawal of the state from the expanded role assumed during the war, exclusion of trade unionists from the policy making process into which they had been coopted during the fighting, restoration of the power of money over the state. In international affairs, this position was matched by a non-conciliatory approach to the Soviet revolution, first military intervention and then diplomatic isolation. In retrospect, this approach has often been portrayed as simpleminded: it was, however, by and large the strategy which was implemented by all the major governments throughout the 1920s. The 1920s were built on the violent suppression of workers' movements, real and imagined, throughout the world.

The other response was more complex. To speak of it as a single 'strategic response' is, of course, a gross simplification. It was made up of a plethora of policies, policy proposals, managerial innovations and theoretical developments in different parts of the world, with different- motivations and different implications. But the common theme everywhere was the assumption of a new role by the state, and the common background everywhere was the wave of discontent symbolised by the Russian revolution. The starting point was an awareness that things had changed. The old balance was broken:

"The idea of the old-world party, that you can, for example, alter the value of money and then leave the consequential adjustments to be brought about by the forces of supply and demand, belongs to the days of fifty or a hundred years ago when trade unions were powerless, and when the economic juggernaut was allowed to crash along the highway of progress without obstruction and even with applause. Half the copybook assumptions of our statesmen is based on assumptions which were at one time true, or partly true, but are now less and less true day by day" (Keynes, 1972, p. 305).

The old equilibrium had been broken by the collective power of labour. The assumption that labour power could simply be treated as any other commodity on the market was no longer valid: 'the trade unions are strong enough to interfere with the free play of the forces of supply and demand' (Keynes, 1972, p. 305). As a result, Say's Law had lost its validity: it could no longer be assumed that market forces alone would ensure the most efficient use of resources:

"In the economic field this means, first of all, that we must find new policies and new instruments to adapt and control the working of economic forces, so that they do not intolerably interfere with contemporary ideas as to what is fit and proper in the interests of social stability and social justice" (Keynes, 1972, p. 306).

Whereas the 'old-world party' did not recognise, or refused to recognise, the changed balance of forces within society, the progressives argued for a new accommodation with labour. This did not mean taking the side of labour ('I can be influenced by what seems to me to be justice and good sense; but the class war will find me on the side of the educated bourgeoisie', as Keynes declared in the same article, 1972, p. 297), but developing a strategy based on the recognition of the new situation, a strategy that would integrate the working class as a force for development within capitalism (cf. Negri, 1988), a strategy that would not openly defeat, but contain and redefine the power of the working class.

It was not only in discussions of state policy but also in the development of management practices that awareness was growing of a new situation. Taylor had been preaching his gospel of 'scientific management' since the turn of the century: an explicit attack on the power of the skilled worker through the detailed study and the fragmentation of skilled tasks into simple and closely controlled operations. The fragmentation of tasks had been developed further by Henry Ford, who had connected it to the electrically driven conveyor belt to create the assembly line, the detailed steps in the production of the Ford cars being performed at different positions along the line. However, Ford's technological development of scientific management was soon confronted by the fact that cars are produced neither by science nor by technology but by people working. The workers, not surprisingly, found the new organisation of work unbearably boring and rarely stayed long. During the year of 1913, for example, in order to maintain a workforce of 15,000, it was necessary to hire 53,000 workers (Coriat, 1982, p. 56). It was in order to control this chaotic flow of labour that Ford introduced his famous 'five dollars a day' wage contract in 1914.

Five dollars was more than double the previous wage at Ford's factory, but it was not given to everybody. In order to receive such a high wage, it was necessary to be a man, over twenty-one, and to have been working at the factory for at least six months. It was also necessary to show oneself morally worthy of such a high wage. As the director of Ford's newly created department of sociology put it:

"It was easy to foresee that in the hands of certain men, five dollars a day could constitute a serious obstacle on the path of rectitude and of a well-ordered life and could make them a menace to society as a whole; that is why it was established from the beginning that no man could receive this increase who did not know how to use it in a discrete and prudent manner" (Lee, 1916, p. 303, quoted by Coriat, 1982, p. 57).

The five-dollar day was extremely successful in reducing the turnover of labour: after 1914 it dropped to less than 0.5% per year (Coriat, 1982, p. 59). This created the basis for a new, more disciplined organisation of production within the factory, an intensification of work which, despite the rise in wage costs, reduced the costs of production of the Model T Ford by about 17% (Beynon, 1973, p. 24; Coriat, 1982, p. 59). In addition, it also created a new group of relatively prosperous workers, who then provided a new market for the mass-produced Model T.

The striking feature of the Ford contract is the trade-off between the acceptance of disciplined, soul-destroying monotony during the day and a relatively comfortable consumption after hours, the rigid separation between the death of alienated labour and the 'life' of consumption. What needs to be emphasised, however, is not simply the oppressive nature of Fordist production, but that the Ford contract was a striking acknowledgement of the dependence of capital upon labour, and the attempt to reformulate the power of labour (ultimately, the power not to labour) as monetary demand for commodities. It was the innovatory acknowledgement-and-redefinition of the power of labour that made Ford an important figure in this period, 'the most influential of all business leaders' (Schlesinger, 1959, p. 173).

It was not just Ford and his followers who were introducing new styles of management. There were other voices of managerial change during the 1920s as management sought to deal with the problems of high turnover and the informal resistance- of the workers: many of the large corporations began to experiment during this period with more 'liberal' ways of organising work and more systematic methods of organising production (Gordon et al., 1982, pp. 172ff). All these methods sought ways of channelling the discontent of the workers into a form that would serve the interests of capital.

The changes at managerial level and the new views on the way that the state should develop were quite uncoordinated, although there were those who argued that what was needed was 'a Taylor ... for the economic system as a whole' (Tugwell, quoted in Schlesinger, 1959, p. 194), and others who saw connections between Taylor and Keynes (Schlesinger, 1959, p. 201).

In the 1920s, however, the changes in management were still only beginning to spread and 'the old-world party' still reigned supreme in politics. In retrospect, the views of the conservatives are generally portrayed as simply reactionary and out of touch with the new reality of the post-war world. It can be argued, however, that the time had not yet come for the new strategy of domination. The old balance was broken, but it is not clear that the conditions yet existed for the establishment of any new equilibrium. In the immediate post-war world, the threat of revolution still loomed large in many parts of the world. It was only after the revolutionary wave of struggles had been violently suppressed that the strategy of reformulating working class power became credible. It was only after the defeat of the General Strike in Great Britain in 1926, for example, that there developed a new institutionalisation of working class struggle, which would later provide the counterpart of Keynesian policy initiatives.

After the working class had been defeated on the streets and the immediate threat of revolution had receded, the conditions were more favourable for the institutional integration of working class power, but the urgency of change was less obvious. Only after the crash of 1929 and the ensuing crisis did the pressure for change gain a new force.

The crash of 1929 was the final crash of the old order, the final breakdown of the established mode of domination. That the crash was a turning point in historical development is generally undisputed, but it is usually presented as an economic event external to the development of class relations. The immediate cause of the crash is generally seen as an overaccumulation of capital in relation to a limited market (cf., e.g., Clarke, 1988, p. 217). The boom in the US economy during the 1920s had been based on the rapid expansion of the new consumer durables industry, but the market was narrow, being limited essentially to the middle class. An expansion of credit allowed accumulation to continue after the market had been exhausted, but this took the form of stock market speculation. The barrier of the limited market finally asserted itself in the stock market collapse of 1929.

The crash was more than that, however: it was the other face of the October Revolution of 1917. On the surface there is no connection between the two events: 'it would seem obvious that the events of 1917 had no bearing on those of 1929', as Negri points out (1988, p. 22). In fact, the two dates mark important aspects of the same crisis. The revolution of 1917 had been the loudest declaration by the working class that the old relation between capital and labour was at breaking point. The crash of 1929 brought home to capital that this was indeed the case, despite all its attempts to recreate the pre-war world.

But then why is the 'inner connection' between 1917 and 1929 not more obvious? If the crash of 1929 was the vindication of the claims made by socialists about the intensity of the contradictions of capital and the immanence of breakdown, why did it come too late, long after the revolutionary tide had already receded? If the crash of 1929 was simply the most dramatic expression of the breakdown of the old pattern of relations between capital and labour, if 'the crisis of 1929 was actually a continuation of the unresolved economic crisis preceding World War 1', as Mattick puts it (1978, p. 116), then why did it not occur when the power of labour was at its greatest'? What wits the connection between the power of the working class, seen at its most dramatic in 1917, and the collapse of capitalism twelve years later? If crisis is the expression of the power of labour in-and-against capital, then why did crisis come when, on the face of it, labour had been decisively beaten?

Credit is the key to understanding the distance between 1917 and 1929, the key to the dislocation of the two faces of the crisis. The power of labour is refracted through the forms of the capital relation, especially through money and credit. As the prevailing pattern of exploitation comes up against its limits, as capital's pursuit of profit is obstructed by the established positions of labour, there is an expansion both in the demand for and in the provision of credit. On the one hand, capitals seek loans to tide them over what they see as temporary difficulties. On the other, capital which finds it difficult to find profits in production seeks to expand through the financial markets. Built into the existence of money as a form distinct from value is the possibility (or inevitability) of a temporal dislocation between the breakdown of the relation between capital and labour and its manifestation in the form of a fall in capitalist profitability.

Credit is always a gamble on the future. In borrowing, capital commits a portion of surplus value not yet produced. If the required surplus value is not produced, the capital will fall. If the conditions of production can be altered sufficiently to expand the production of surplus value by the requisite amount, then the gamble will have succeeded. Credit expansion, by postponing a fall in profitability, makes the restructuring of production relations objectively more urgent than ever. It also makes it more difficult, by maintaining the conditions in which the power of labour has developed.

This is essentially what happened in the 1920s. The restocking boom which was the immediate aftermath of the war was over in Europe by 1921 (Clarke, 1988, p. 197). In the United States, however, the boom continued through the 1920s, sustained at first by the restructuring of production that had taken place during the war (Mattick, 1978, p. 116) and the development of the new automobile and consumer durable industries, and then increasingly through an enormous expansion of credit, both in the form of bank loans and through the creation of fictitious capital on the stock market (Mattick, 1978, p. 119). Productivity rose sharply in the United States during the 1920s, but not sharply enough to produce the surplus value required to sustain profitability. Eventually the gap between the surplus value actually produced and that which was being gambled upon in the stock market manifested itself in the crash of October 1929: 'finally America, too, succumbed to the post-war realities', as Mattick puts it (1978, p. 116).

Even after the crash, however, there was no immediate recognition of the need for a new order, certainly at the political level. In the United States, in Britain and elsewhere, the government response was retrenchment. Pressure on the state to play a more active role in stimulating the economy and in providing welfare relief for the millions thrown out of work was answered by financial orthodoxy. The balanced budget became the symbol of the political defence of a world which no longer existed.

In the sphere of individual capitals change was forced more quickly. The collapse in profitability forced capitals to reorganise their relation with labour in order to survive. The new systems of management that had slowly been making ground in the 1920s soon became a precondition for survival:

"Two effects of the Depression immediately focussed attention on the need for new systems of labour management. First, the collapse of profits itself pressured corporations to consider whatever methods were available which might restore profitability and improve their control over the labour process. Second, the Depression led fairly quickly to worker dissatisfaction – and ultimately, of course, to the emergence of industrial unions. The industrial union movement constituted a new force with which large employers had to contend, directly challenging some of the most important elements of both the drive system and the early explorations of more sophisticated policies" (Gordon et al., 1982, p. 176).

It was this new thrust of the power of labour that at last gave shape to capital's changing form of domination. In the United States, the dissatisfaction of labour, the protest against the power of money symbolised by the balanced budget, had brought the defeat of Hoover in the elections of 1932 and the triumph of Roosevelt with his commitment to a 'new deal'. The original new deal was, however, vague and self-contradictory: it was only under the pressure of the industrial struggles of the 1930s and the rise of the new industrial unionism organised in the CIO that it acquired the shape that we associate with it today.

The new industrial unionism grew out of the new relations at work. The spread of Fordism meant the spread of a new type of mass, unskilled worker working in large factories. The Fordist deal, the trade-off between boredom and pay, had made the wage the focus of struggle more clearly than ever before. When Ford announced his `five dollars a day' in 1915, it had been a unilateral act to stem the flight from intolerable working conditions. But once the wage had been made the focal point of the relation to such an exclusive extent, the workers were unlikely to wait for the fiat of management. Pressure for collective wage bargaining led to the mushrooming of a new industrial unionism in the early 1930s. The demand for recognition of the new unions as the representatives of labour in collective bargaining was accepted by more and more companies throughout the 1930s. This was not without resistance, but there was also recognition by capital that the channelling of discontent into the wage demand was an important component in establishing a more orderly relation with labour. This was dramatically captured by the posters for the recruitment drive of the CIO: 'President Roosevelt wants you to join the union.' As Tronti points out:

"The password 'organise the unorganised' was acceptable to both modern capitalism and the new union. In recent history there are these moments of elective affinity between the two classes when, each in its own camp, [they] find themselves internally divided and must simultaneously resolve problems of strategic location and of organisational restructuring" (1976, p. 117).

It was this drive of labour that led to the labour policies of the Roosevelt administration and the enactment of the Wagner Act of 1935. Under immense social pressure and against often strong resistance from important sections of capital, a new relationship between capital and labour was forged in the United States in the 1930s, focussed on the recognition and attempted integration of the power of labour. The 'New Deal' 'implied the beginning of a fresh game but with the same players' (Mattick, 1978, p. 129). The 'fresh game' was what later became known as Keynesianism: 'Lord Keynes', in Tronti's striking phrase, 'is actually an American economist' (1976, p. 115). In the mid-1930s, however, the fresh game was still far from being established. For one thing, there were alternative, competing models of what the new game should look like. In Germany, the crisis of the old pattern and the drive of labour had met with a different response. Here the violent suppression of the post-war revolutionary currents was not so cleanly separated from the institutional incorporation of the working class movement, so that the new corporatism took a particularly bloody form. In Russia too, the enormous power of' labour's thrust in 1917 had given a very different form to the eventual containment of that power under Stalin.

It was not simply the existence of competing models that prevented the firm establishment of the new game. More crucial was the fact that the conditions had not yet been established for a firm restoration of capitalist profitability. The economic recovery of the early New Deal years proved to be short-lived. At the end of 1937, there was a new slump. Steel production, for example, declined from 80% of capacity to 19%. Despite the subsequent revival, there were still 10 million unemployed in the United States in 1939 and private investments were still one-third below the level of 1929 (Mattick, 1978, pp. 138-9). Although the practices of the New Deal were given a new theoretical coherence by the publication of Keynes' General Theory in 1936, neither theoretical coherence nor government policies were sufficient to achieve the restructuring that was required to re-establish capitalism on a firm footing.

That restructuring was achieved through war. 'Death, the greatest of all the Keynesians, now ruled the world once more' (Mattick, 1978, p. 142). War succeeded where the New Deal, Naziism and Stalinism had shown only possible lines of development. The war achieved a destruction and devaluation of constant capital even greater than that associated with the bankruptcies and depreciations of the Great Depression. At work, the managerial changes introduced after the crash of 1929 were carried further, but in a new atmosphere of discipline: in the United States, for example, 'many employers used the advantage of wartime discipline after 1941 to seek to regain some of the initiative and control they had surrendered to industrial unions at the end of the Depression' (Gordon et al., 1982, p. 182). In this, employers in all the major countries were helped considerably by the trade unions, which preached the subordination of class antagonism to the common goal of winning the war (cf., e.g., Gordon et al., 1982, p. 183; Middleman, 1979, pp. 266ff). The changes in relations at work were accompanied by rapid change in the technology of production as governments poured resources into areas of technological development considered to be strategically important, so that there was rapid progress in areas such as electronics and petrochemicals. Unemployment was solved through the enlisting and killing of millions of people: a massive 'scrapping of labour power' (Bonefeld, 1988, p. 56).

The war was the culmination of the restructuring efforts of the inter-war years. In an article in 1918, John Dewey, already one of the intellectual leaders of American liberalism, had pointed to 'the social possibilities of war' – the use of technology for communal purposes, the subordination of production for profit to production for use, the organisation of the means for public control (Dewey 1918, cited in Schlesinger, 1957, p. 39). The Taylorisation of society which Roosevelt's adviser, Tugwell, had looked for in the New Deal was given a new degree of reality in the war. The expansion of the state which New Dealers and Keynesians had long sought was realised to an unprecedented extent. The balanced budget so fiercely defended by the `old-world party' was forgotten. And with the end of the war and the establishment of one clearly hegemonic power, the United States, state intervention and monetary regulation could attain an international dimension quite impossible in the inter-war period. Now at last, capital could deal again and, over the bodies of twenty million people, a fresh game could start.

For the first time in almost fifty years, the imminent collapse of capitalism, which had for so long been a preoccupation of both socialist and bourgeois thought, was no longer on the immediate agenda. From the turn of the century, the issue of the breakdown of capitalism had been at the centre of Marxist discussion: debate centred around the inevitability or otherwise of the breakdown, but for all concerned the question was one of immediate importance. For bourgeois thought, too, the war, the revolutionary wave, the crash and the Great Depression, fascism, rearmament and renewed war, shock upon shock to any notion of capitalist stability, had made failure, collapse and revolution the dominant preoccupations of thirty years.

The hopes and fears of revolution did not immediately disappear with the ending of the war in 1945. On the contrary, the immediate post-war period was a time of great ferment. But the balance of things had shifted. For the first time in nearly fifty years, capital had a basis on which it could pursue accumulation and exploitation with vigour, a basis on which it could build a new appearance of stability, hiding in a mist of amnesia and poppies the millions who had been slaughtered on the way.

II

The new game was broken up in the late 1960s and early 1970s. It had never been played without interruptions. Even after the turbulence of the immediate post-war period had been contained, even after the clear establishment of 'Marshallism' in Europe and of US domination throughout the world, anti-colonial and revolutionary movements and industrial unrest rumbled throughout the 1950s and early 1960s. However, it was not until the late 1960s that the pattern of relations between capital and labour which had been established after the war began to disintegrate.

The 'crisis of Keynesianism', as it is often referred to, is not simply a crisis of economic theory, or of economic policy making: these are manifestations of a crisis in the relation between capital and labour, a crisis in the particular pattern of the containment of the power of labour. Put like that, it is clear that the crisis can be understood neither in terms of the failure of the objective structures (or the working of the 'objective laws of capital'), nor simply in terms of the subjective drive of labour, nor, even more clearly, in terms of tensions between capitalists, or national capital groups. It was the relationship between capital and labour that broke down: there was a swelling and bursting of the tensions present in the relationship from the beginning. The antagonism contained by Keynesianism could be contained no longer.

The post-war pattern of domination had as its precondition the effective exploitation of labour. Fordist methods of mass production had become widely established not only in the United States but in Europe in the aftermath of the war. These brought a sharp rise in labour productivity, but at a cost. Fordist production rested on an implicit trade-off between a high degree of alienation and boredom at work and rising consumption after hours: dissatisfaction was transformed into demand and regulated through annual pay bargaining. As this became established as the dominant pattern, its contradictions became clearer.

The fundamental contradiction of all capitalist production is that expressed in the category of alienation, the contradiction between the potential of human creativity in the production of use-values and the form imposed on that creativity under capitalism, the creation of value under the control of another: in short, the reduction of concrete work to abstract labour. Under Fordist production methods, with their unprecedented degree of unskilled repetitive labour, this contradiction reached a new level of intensity. Increasingly, it expressed itself not as a struggle against the abstraction of work (and for workers' control) but as a rebellion against labour as such. The deadening boredom of Fordist labour was met by revolts of all sorts which aimed primarily at breaking the deadly repetition of meaningless -tasks: there was a rise in sabotage, absenteeism, short 'wildcat' stoppages, and so on. Rhese began to have a much more serious impact on productivity and profitability than the more widely publicised strikes over pay.

The revolt against labour was all the more effective for being embedded in a peculiarly rigid work organisation. The attack against the power of the skilled worker led by Taylor and subsequently by Ford, directed as it was against the flexibility and judgement of skill, had resulted in a very inflexible organisation of production. The fragmentation of work into minute, finely timed tasks and the subsequent integration of those tasks with the working of machinery dedicated to a specific process, the same rigid fragmentation which initially served to break the power of the skilled worker, became through struggle both a weapon in the revolt against labour and a limit on capital's right to command. The rigidity magnified the effect of any disruption of the flow of the labour process, since the nonperformance of one fragment of the process often made the performance of other fragments impossible: not just within a particular factory or company, but between chains of suppliers and manufacturers. The rigidity also created defined positions which often became positions of power for the workers, from which they could fight to increase wages. Thus, the work-to-rule and the demarcation dispute became common forms of industrial conflict, as workers used or defended the rigidities originally imposed by capital.

In the face of rigidity and revolt, money was the great lubricant. Wage-bargaining became the focus of both managerial change and worker discontent. Raising wages (or granting special bonuses) became the principal means by which management overcame its own rigidities and introduced changes in working practices: 'payment for change' became established as a principle of trade union bargaining, at least in the better organised industries. Wage negotiations also became the principal focus of organised working class protest; the trade unions became increasingly the 'managers of discontent', in C. Wright Mills' phrase, channelling conflict into the form of a monetary demand to be fought over in the ritual process of pay-bargaining.

The monetisation of conflict became more and more problematic as the productive power of labour expressed itself in higher living standards. As the revolt against labour grew, the channelling of discontent became both less effective and more costly. On the one hand, rising real wages were often insufficient incentive to establish effective managerial control over the labour process. Complaints about loss of managerial control over the workplace became more and more common throughout the late 1960s and early 1970s (cf. Holloway, 1987). At the same time, the difficulties in establishing effective control and the power of the resistance to the imposition of new working practices expressed themselves in growing wage demands, often accompanied by threatened or actual strike action to enforce them (cf. Armstrong et al., 1984). Wage control and the curbing of what was seen as trade union power became a dominant preoccupation of the period.

As the revolt against exploitation grew, both in its monetised and non-monetised forms, the extraction of surplus value became more and more difficult for capital. However, it is important not to overstate this. Despite the undoubted effectiveness of working class struggle, the rate of exploitation did not decline: on the contrary, it continued to increase, as the growing mechanisation of the production process made labour more productive, so that the surplus value appropriated by capital continued to grow. What changed was not that the rate of exploitation declined, but that exploitation became more costly for capital: in order to exploit a worker effectively, capital required to invest an ever-increasing amount in machinery and raw materials. This is indicated, for example, by the slowing in the growth of productivity in all the major economies between 1968 and 1973, despite growing investment in mechanisation (Armstrong et al., 1984, p. 249). Thus, the rate of profit (the rate of return on total capital invested) declined in spite of the increasing rate of exploitation.

The key to the decline in the rate of profit (documented, for example, by Glyn and Sutcliffe, 1972 and Armstrong et al., 1984) was thus the fact that exploitation was becoming more and more costly for capital. The rise in the costs of exploitation is what Marx referred to as a rise in the organic composition of capital: as capitalist production develops, there is a tendency for constant capital (the part of capital corresponding to dead labour embodied in machinery and raw materials) to rise in relation to variable capital (the part of capital corresponding to living labour power). Often the emphasis on the organic composition of capital is counterposed to explanations of the crisis in terms of the struggles of the working class (as in the debates between 'Fundamentalists' and 'Neo-Ricardians', for example). However, if the rising organic composition of capital is seen not as an economic law external to class struggle, but as an expression of the rising costs of exploitation, the polarity between class struggle and the laws of capitalist development dissolves.

Why did it become more and more costly for capital to exploit labour effectively? The revolt against labour and the struggles for higher wages had an immediate effect, both in restraining and disrupting exploitation and in raising the costs. They also had a less immediate effect in prompting capital to circumvent the 'refractory hand of labour' by introducing machinery to replace the unruly and unreliable workers. In this sense, the response of capital to the particular impetus of these struggles was simply part of its more general unceasing struggle to consolidate and intensify its domination by appropriating the products of labour and converting them as dead labour into means for intensifying the exploitation of living labour. Capital lives by turning the productive power of labour against itself (cf. Bonefeld, 1990). Although the need to mechanise is imposed on individual capitals in the form of the economic pressure of competition, mechanisation is not an 'economic tendency' separate from class struggle, but part of the unceasing struggle of capital to survive: the rising costs of exploitation express the difficulties of capitalist reproduction.

A historically new feature of the crisis of the rising costs of exploitation in the 1960s was the role played by what might be called the 'indirect costs of exploitation'. The expansion of the state, which was such a central feature of constructing an environment after the war in which capital accumulation could continue, brought with it major new costs for capital. Although changes in taxation form a significant part of the constant struggle by capital to reduce the costs of exploitation, state expenditure is in general paid for by capital, whatever the form of taxation, in the sense that it constitutes a deduction from the surplus value available for accumulation (cf. Bullock and Yaffe, 1975). The development of the Keynesian welfare state after the war contributed much both to the effectiveness and the stability of exploitation, but it did so at a cost.

The costs of creating a stable state environment for accumulation increased as its effectiveness decreased. In the same way as the wage became less and less effective as a means of channelling the revolt against labour, the state became less and less effective as a means of channelling social discontent. The socialisation of capital which was demands of labour: a striking example was the `leaked' revelation by the Confederation of British Industry (CBI) just before the February 1974 election that they favoured a Labour victory. However, as the contradictory position of the trade unions became more evident, the contradictions within social democratic parties also became more intense, with increasingly sharp conflict between 'left' and 'right' wings, and increasing loss of contact with the class which they claimed to represent.

The growing difficulties of accumulation expressed themselves in a growing crisis of the institutional structures of Keynesianism, both at the level of the individual firm and at the level of the state. However, the predominant response of capital, even as the crisis deepened, still did not take the form of an outright attack on the established pattern of social relations. There was increasing emphasis on wage control, restraint on the expansion of public expenditure and repression of non-institutionalised expressions of the power of labour; but the assumptions of Keynesianism were still widely accepted as the framework for economic and political development. The growing contradictions of the whole post-war pattern of domination and struggle were contained through the expansion of money.

The 'old-world party' had of course warned of the dangers of inflation long before the war. When the Roosevelt administration took the United States off the gold standard in 1933, Bernard Baruch, a leading Democrat had protested:

"It can't be defended except as mob rule. Maybe the country doesn't know it yet, but I think we may find that we've been in a revolution more drastic than the French Revolution. The crowd has seized the seat of government and is trying to seize the wealth. Respect for law and order is gone" (quoted in Schlesinger, 1959, p. 202).

There was a sense in which Baruch was right. Roosevelt's decision to abandon the gold standard was a move to unhinge the management of the national economy from the constraints of the world market in order to be able to respond to intense social pressure. But this was not an abandonment of the rule of money. On the contrary, the only way of saving the rule of money from the 'mob' was through financial nationalism, unhinging national currencies from the international flow of value. `Sauve qui pent' became the motto of capital, faced in the different nation states with demands that could not be reconciled with the free operation of the international market. Abandoning the gold standard did not mean relinquishing the rule of money: it meant simply that the rule of money could respond more flexibly to social pressures in each national financial area.

The unhinging of the national currencies was not, of course, total. The international flow of capital continued, in the form both of international finance and of international trade, but less freely than before. Some degree of order was restored through the establishment of different currency areas and the Tripartite Agreement of 1936 between France, Britain and the United States, under which the authorities agreed to intervene to maintain fixed exchange rates between the three major currency areas. However, it was not until after the war that a new international monetary order was established by the Bretton Woods agreement of 1944, which came into effective operation in 1947.

The Bretton Woods system sought to reconcile the rule of international money with the recognition of the power of labour. It did so by establishing a system built around the recognition of the dollar as the key international currency. This was made possible by the overwhelming strength of US capital, clearly established by the end of the war. The dollar and gold were to be used interchangeably as international money, the dollar being convertible into gold at a fixed parity. National currencies were tied to the dollar by fixed exchange rates, which could be altered only in the case of fundamental disequilibrium; the new International Monetary Fund (IMF) was to provide money to overcome short-term imbalances (Burnham, 1990; Bonefeld, 1993a).

One effect of this system was to introduce the inflationary flexibility of the dollar into the international flow of money. As Mandel puts it, `at Bretton Woods the victorious imperialist powers of World War Two established an international monetary system which was designed to provide the basis for an international version of the inflationary credit expansion which had by now gained acceptance on the national scale' (1975, p. 462). The power of the 'mob', which had forced Roosevelt to come off the Gold Standard in 1933, was now integrated into the international flow of capital. The Marshall Plan and other dollar-aid programmes after the war sought to achieve the Keynesian solution at an international level: the transformation of protest into demand through the creation of money (cf. Mandel, 1975, p. 463).

A second element of the Bretton Woods system was the conservation of a degree of protection of national economies from the world market. The force of social pressures in the crisis of the 1930s had forced national governments to insulate their national economies from the destructive power of the world market by abandoning the gold standard and erecting tariff barriers. Some degree of insulation was preserved by the establishment of fixed exchange rates, which protected national currencies from short-term movements of money on the world market. The effect was not to isolate national economies from the international flow of capital, but to create a series of valves designed to regulate that flow and preserve some degree of short-term protection. Just as abandoning the gold standard was an essential part of Roosevelt's New Deal, the preservation of these valves was an essential part of the Keynesian conception of active state intervention.

Both through the role of the dollar and the system of fixed exchange rates, the power of 'the mob' was integrated into the international monetary system, where it reappeared as instability.

At the core of this instability was the expansion of credit, which has been a crucial element in the accumulation of capital since the war. The new international monetary order gave more scope to the expansion of credit at the national level and ensured, through the dual role of the dollar as national and as international currency, that credit inflation in the United States would enter into the international system as an element of instability.

The expansion of credit to maintain demand, forced upon national governments by the intensity of social pressure during the 1930s, had been given theoretical justification by Keynes as a permanent feature of economic policy. In practice, however, the main source of credit creation in the post-war period was not deficit financing by the state but the expansion of bank overdrafts granted by the banks to the private sector: both production credit to companies and consumer credit given to individuals, mainly for the purchase of houses and consumer durables. Mandel points out that in the United States, private indebtedness rose from 73.6% to 140.0% of the annual GNP between the years 1946 and 1974, while the public debt actually fell proportionally (Mandel, 1975, p. 418). In other words, national governments exercised only indirect control over much of the expansion of credit, which was driven forward by the demand for credit both by productive capital and by consumers seeking a better standard of living, and by the supply of loanable capital seeking a more secure return than that which could be obtained from direct investment in production.

The lack of state control over the expansion of credit was greatly exacerbated by the development of a market in dollars outside the United States, the so-called 'Eurodollar' market. This resulted from the position of the dollar as international currency. The recovery of the capitalist economies in other countries after the war gradually led to a relative decline in the superiority of the US economy. The dollars which flooded the world markets, and which were initially used to buy commodities exported from the United States, were increasingly transformed into reserves in European banks (Bonefeld, 1993a). Increasingly, these reserves were then used as a source of credit both for public authorities and for private capital. Beginning in the early 1960s, there was the growth of an international financial market which existed outside all state control, and which existed alongside the national, regulated markets. By 1969, other capitalist countries held $40 billion dollars (as compared with $11 billion in 1964), a figure which far exceeded the gold held in the US reserves (Bonefeld, 1990). Under those circumstances, the convertibility of the dollar into gold began to appear more and more fragile.

The fragility of the international monetary system became more apparent as the growing costs of exploiting labour effectively expressed themselves in falling profits and increasing social tension. The demand for credit increased as states sought to respond to social pressures and to maintain declining demand, and as companies sought loans as a way of tiding them over what they hoped would be temporary difficulties. The supply of credit also increased as capital sought outlets that were more profitable and more secure than productive investment.

An additional source of instability came from the changing position of national currencies, which were related to the dollar through fixed exchange rates under the Bretton Woods system. The fixed exchange rates insulated the national currencies from short-term speculation on the international money markets, but at the cost of possibly chronic balance of payments problems and then intensified speculation as the necessity of a change in the fixed rates became apparent. The link between the world market and the national economy then asserted itself in the form of a sharp currency crisis. This was the fate of sterling, when the decline of the British economy expressed itself in balance of payments problems, speculation and finally the devaluation of the pound in 1967.

The devaluation of the pound, which was still an important currency in international transactions, further increased the fragility of the position of the dollar, already stretched by the expansion of the Eurodollar market and the huge increase in public debt as a result of the vain attempt to quell the revolution in Vietnam. The impossibility of containing social tension, nationally and internationally, other than by the expansion of credit, expressed itself in growing monetary instability. Holders of dollars increasingly sought security by converting their dollars into gold. Faced with the enormous disparity between the number of dollars and the US gold reserve, the Nixon administration announced in August 1971 that the convertibility of the dollar into gold was to be suspended indefinitely. A new system of fixed exchange rates was established by the Smithsonian Agreement of December 1971, but this too was subjected to severe speculative pressure and in March 1973 the principle of fixed exchange rates was abandoned (Bonefeld, 1993a; Armstrong et al., 1984, p. 293).

To the extent that the system of fixed exchange rates had insulated national economies from the short-term speculative movement of capital, the final demise of the Bretton Woods system meant that that insulation no longer existed. State policies were again subordinated directly to the flow of money on the international markets. As Bonefeld (1993b, pp. 58-9) puts it, 'The ultimate sanction for a domestically engineered management of accumulation that was in some way "incompatible" with global accumulation was speculative pressure on its national currency. This pressure restricted national authority over money and credit-expansion and subordinated national policies to the international movement of money'. This was not, however, a return to the gold standard, the realm of seemingly secure power so staunchly defended by the old-world party against Roosevelt and the Keynesians, against the depradations of the 'mob'. International money was no longer represented by gold but by the dollar, and its movement was now much faster and more volatile than it had ever been in the days of the gold standard.

The pressures on the old post-war pattern of social relations were mounting on all sides. Falling profits and mounting social unrest made a mockery of Keynesian claims to reconcile social conflict and ensure the harmonious, crisis-free development of capitalism. The breakdown of the international monetary system removed the insulation from the world market which was an essential element of the Keynesian conception of state intervention. These tensions found expression in the sharp recession of 1974-5: production fell sharply in all the leading countries, inflation and unemployment soared (Mandel, 1978, p. 14) and the flood of 'petrodollars' into the Eurodollar markets increased the volatility of the world monetary system.

From all sides, the death of Keynesianism was proclaimed. In the debates of economists, Keynesianism rapidly lost ground to the newly fashionable monetarist economic theory. Conservative politicians, in Britain, the United States and elsewhere, increasingly attacked the expansion of the state, the position of the trade unions and the 'politics of consensus', and turned to theorists such as Friedmann and Hayek to justify their positions. Even social democratic parties, whose own position in the political system depended upon the recognition of the power of labour, began to denounce Keynesian solutions as no longer realistic. As the British Prime Minister, James Callaghan, put it at the Labour Party Conference in 1976:

"We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists and that so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment at the next step."

The New Deal was over, the game was finished. Or so it seemed. But so far only one of the players had stood up from the table. The social forces that had imposed the recognition of the power of labour upon capital still existed, stronger than ever, and could not be abolished simply by the declarations of politicians. And if the Keynesian game was over, what were the new rules to be? Keynesianism had taken over thirty years of struggle and the deaths of millions of people to establish. After nearly thirty years of relative stability, capitalism was again in chaos. Could a new order be established simply by the will of the politicians, or would it again require the world to pass through destruction and misery? The abyss stood open.

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