Why did the "social democratic project" start to peter out in the 70s?
- Not so much working/class middle class divide.
- Instead: Internalization of "managerial" outlook on capitalist economy by party leadership, combined with failure to meet the economic crisis.
The alternative response, proposed by left-wing factions within many of the European social-democratic/labor parties, would be for the state to take a much more active role in investment decisions, in effect to attempt to plan their way out of economic stagnation, or at least to meet social goals such a improvement of living standards. However, this would almost certainly have brought about an intense backlash from business, up to and including a capital strike. Recognizing this, and realizing that their organizations (the parties themselves but also the unions) were no longer oriented towards the kind of mass mobilization that would be needed to overcome such a counter-attack (and probably themselves disinclined to that sort of strategy just by virtue of their successful integration through long-term electoral success into the management of the economy), the leadership of the parties rejected this alternative, in some cases throwing the left wing factions out of the parties.
This contrasts with a more common explanation of the loss of ground of the social democratic parties, which centers on the shift in the employment structure away from blue-collar industrial labor and towards services, etc. This portrays social democratic decline as an inevitable consequence of long-term social trends. Instead, the hypothesis above insists on the role of organizations as a mediating factor between social groups (classes) and politics; it is, indeed, the "balance of class forces" mediated through political organizations (including parties and unions) that determined the "the political space." The "inevitablist" view tends to make too much of the contrast between white-collar and blue-collar workers; they are from a class perspective both labor, even if it is historically the case that industrial blue-collar workers have been better organized by the labor movement and thus integrated into the social democratic parties. This, however, is a question of strategy, not fundamental class interests. Another way to put this is, what is the necessary cause of the loss of ground by the social democratic parties? Would it have happened because of the changing employment structure even if there hadn't been the economic crisis of the 1970s? Or, would the crisis have forced the same choice (with the same probable response, all else equal), even if the total share of blue collar industrial workers in the workforce had not been declining?
This is not to say that there weren't deep processes leading to both the crisis of the 70s and the response of the parties. In the first place, capitalism is crisis-prone; at some point there will always be a period of depressed profits, and thus anemic investment and employment growth. In the second, the loss of mobilizing capacity--and the marginalization of militants--in the labor movement was not an accident, but a direct result of the institutionalization (as part of, and in effect participants in, the capitalist economy) and bureaucratization of the unions and the social democratic parties, making any other decision by the party/union leadership in the 70s difficult to imagine.
If an alternative was possible--or will be possible in the future--it will be a function of having built (or, in the future, building) a different kind of organization that did not encourage, or even require, the gradual decay of moblizing potential and structural bias against militancy. In principle, this is a question of political strategy, but no one knows, as of now, what kind of strategy and what kind of organization could fulfill that role.
To put it a bit more strongly: The left lost out not because it was "outmaneuvered" by the right, or because its natural base was eroded by economic trends, but because the organizations it had built in its period of growth were incapable of responding radically to economic crisis.