The dynamic of market competition was relentlessly undercutting the dynamic of military competition. What some people called the "crisis of hegemony"41 of the system in the 1 970s was, in fact, the offspring of something else-the inherent instability of a world of state capitalisms engaged in two quite different dimensions of competition, economic and military, with each other.
One of the paradoxes of capitalism, we saw in Chapter Three, is that, although a rising organic composition of capital reduces average profit rates, it raises the profits of the first capitalist to introduce new machinery. So the Japanese and West Germans, by engaging in capital intensive forms of investment, cut world profit rates, while raising their own national share of world profits.42 Their increased competitiveness in export markets forced other capitalisms to pay, with falling rates of profit, for the increased Japanese and German organic compositions of capital. But this, in turn, put pressure on these other capitalists to increase their competitiveness by raising their own organic compositions. The falling profit rates of the 1 970s were the result. By 1973 the rates were so low that the upsurge in raw material and food prices caused by the boom of the previous two years was sufficient to push the advanced Western economies into recession.
Suddenly there was no guarantee for the major capitalist concerns that new investments on the scale they needed to keep up with international competition would be profitable. Investment began to fall sharply and firms tried to protect their profits by cutting back on employment and labour costs. Declining markets then led to further falls in profits and investment.
The old pattern of boom turning into slump had returned after its 30-year break. When governments reacted by trying to boost demand with budgetary deficits, firms did not immediately respond, as the mainstream Keynesians held that they should, by increasing investment and output. Instead they increased prices to try to recoup their profits, to which workers who still had a degree of confidence from long years of full employment responded by fighting for wage increases. Governments and central banks were then faced with a choice. They could allow the money supply to expand so as to allow firms to further raise prices and protect profits. Or they could try to restrict the money supply with high short-term interest rates, relying on firms then being forced to resist workers' demands. Typically they turned from the first approach in the mid-1970s to the second in the late 1970s. But the success in restoring investment and creating a new period of growth did not last long even when governments had succeeded in subduing working class resistance. The rate of profit could not be raised above the pre-crisis level of 1973, and in 1980-82 a second "oil shock" was sufficient to push the world into a second serious recession, proving that monetarism could no more restore conditions to those of the long boom than could Keynesianism.
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Capitalism in the 20th Century