What Can the Morass of the 1970s Tell Us About the Current Economic Crisis?

A capitalist economy is like a very complex machine. It involves millions of individuals and capitalist firms, all making decisions that are not deliberately coordinated beforehand. The many gears of this machine do not automatically mesh. When some people decide to save part of their incomes, it does not automatically mean that they will find others who want to borrow and invest. When some people decide to invest, it does not automatically mean that they will find buyers for the goods produced as a result. Whether the gears of a capitalist economy mesh or not depends on the institutional framework in which capitalist companies operate. If the institutional framework does not work, and the gears do not mesh, the result is a crisis.

Radical political economists in the United States have termed the whole set of conditions and institutions that shape the process of capitalist profit-making, in a particular society at a particular time, a “social structure of accumulation.” Capital accumulation, the process of capitalist companies making profits and re-investing them to expand their operations, is essential to capitalist economies. Capitalist firms that cannot turn a profit will not have an incentive to invest. If capitalist companies do not invest, factories will be shuttered and workers unemployed. Capitalist economies always go through boom-and-bust cycles, with recessions interrupting the process of capital accumulation and economic growth. Most of the time, these crises are shallow enough that “normal” economic growth resumes without major changes in framework institutions. However, severe crises, exposing serious defects in the existing “social structure of accumulation,” may result in the overturning of the old framework and the establishment of a new one.

The most severe crises may actually threaten not only the established framework, but even the continued existence of the capitalist system itself. In the last century, there have been three periods of profound crisis in the framework institutions of U.S. capitalism: the Great Depression of the 1930s, the crisis of the 1970s, and the current crisis. Of these three, the Depression was the most profound, though it did not come close to threatening the capitalist system in the United States (it came much closer in other capitalist countries). Both the Depression and the crisis of the 1970s, however, resulted in major changes in the framework institutions of U.S. capitalism. The Depression ushered in an era in which the framework included a relatively large government role and powerful unions in the most important industries. This is sometimes known as the period of “regulated capitalism.” The crisis of the 1970s ended this era and ushered in another, characterized by a new framework in which the government role diminished and unions were gravely weakened. This is sometimes known as the era of “neoliberal capitalism.”

A retrospective look at the crisis of the 1970s—as a pivot between two different eras in the history of U.S. capitalism—is not just an exercise in nostalgia. Rather, it is an opportunity to try to extract lessons from the history of U.S. capitalism, including this and other crises, to apply to the current crisis and its possible outcomes.

The “Golden Age” of U.S. Capitalism

Mainstream (“neoclassical”) economists often act as if capitalist economies operate according to unchanging universal laws, and that any violation of these “laws of the market” (such as government macroeconomic intervention, industrial regulation, social welfare spending, unions, etc.) inevitably spells disaster. The performance of the U.S. economy during the so-called “Golden Age,” from the late 1940s to the early 1970s, belies this view.