The crisis of liberal capitalism culminated with the First World War and the social unrest that preceded and followed it, including revolutionary attempts. Two conflicting demands occupied the political scene. On the one hand, the ruling class was trying to prevent or at least neutralize “popular governments” and their dreaded reforms.
In the Twenties, the attempts to restore the institutional framework of liberal capitalism, gold (exchange) standard included, were also used for this purpose (Polanyi 2001) – as well as, nowadays, the euro area constraints. On the other hand, the need to adjust and politically direct the economic system – already experienced during the war – seemed definitively established. American institutional thinking developed in that period from its late nineteenth century roots, such as the vision of Edward Bellamy of a “cooperative commonwealth” capable of achieving a “moral economy”, and Thorstein Veblen’s analysis of the transformation of production techniques, market structure, and business enterprises’ organization.
Neoclassical economic theories and market efficiency were questioned, since the very dynamics of the market or capitalist system had made the competitive model definitely unreal, even as a horizon to head for. The idea was spreading that society should be protected from the market – that is, from large corporations and financial trusts dominating it – and that only conscious intervention could warrant a stable and fair economy. This tendency, and some suggestions by John Maynard Keynes, found in the New Deal a limited and contrasted achievement.
In Europe, the crisis of liberal capitalism gave rise to various projects of socialism, later on put out of contention by the Soviet hegemony and, in the first place, by the reaction of the ruling class, including the spreading of fascism.
In Karl Polanyi’s view, the Great Depression made a “great transformation” inevitable. The market capitalist society reproduced itself through a new institutional setup. European politics was generally marked by an impairment of democracy, even where fascist regimes were avoided.