In the first part of this series, I showed something that sounds incredible, but has been documented by scholars at Berkeley, MIT, and New York University: more than half of the stock market boom in the United States after 1989 came not from economic growth, but from redistribution — money that used to go to wages now goes to shareholders.
But one question remained. Why exactly after 1989? What broke in the world then, so that the labor share, which had been stable for decades, suddenly went down?
The answer that more and more economists and historians are giving sounds almost heretical. On November 9, 1989, the Berlin Wall fell. On December 25, 1991, the red flag came down from the Kremlin. And with it went something that Western elites rarely speak of out loud: fear. The fear of revolution, of communist parties at home, of their own workers looking to the East and saying "why not us?". Capitalism behaved decently as long as it had a competitor. Then the competitor went bankrupt.
The lesson of 1917: reforms out of fear
Sounds like a conspiracy? The thesis actually has a solid scientific biography. And to understand it, we must start not from the end of communism, but from its beginning.
Even Bismarck - a conservative to the core - introduced the world's first state insurance for illness, accident and old age in Germany in the 1880s. Not out of philanthropy, but explicitly to "cut the grass under the feet" of the growing socialists, whom he had just banned by law.
But the real shock came in 1917. Two Scandinavian political scientists - Magnus Rasmussen and Carl Henrik Knutsen - explore this moment in labor „Reforming to Survive: The Bolshevik Origins of Social Policies" (Cambridge University Press). Their conclusion: the Bolshevik revolution and the creation of the Comintern led elites around the world to believe that revolution could happen to them too. And they responded swiftly — with concessions: shorter work hours and expanded social benefits. Countries where the threat of revolution was most tangible expanded their social policies significantly more than others — and some of these differences persisted for decades.
It is no coincidence that the 8-hour workday swept across Europe precisely in 1917-1919, nor that the International Labor Organization was created precisely in 1919 — with the explicit motive that unfair working conditions threatened “peace and harmony in the world”. Translated from diplomatic: give workers rights before they take them themselves, on the Russian model.
The Cold War: a race for the hearts of workers
After 1945, fear became institutionalized. The West and the East no longer competed only with missiles, but also with a way of life — who will provide a better fate for the average person.
In 2011, German researchers Herbert Obinger and Karina Schmidt published the study „Guns and Butter?" in the prestigious journal World Politics. Using econometric methods, they tested for the first time systematically whether competition between the two blocs has accelerated the growth of the welfare state. The answer: yes — competition between regimes has stimulated the expansion of the welfare state on both sides of the Iron Curtain. West German pensions, Austrian social security, the Scandinavian model — all of these have grown fastest where communism is closest, literally over the fence.
Even more direct is the study by Brazilian economists André Albuquerque Sant'Anna and Leonardo Weller — „The Threat of Communism during the Cold War: A Constraint to Income Inequality?", published in Comparative Politics (2020). They measure how inequality in OECD countries responds to „communist events" around the world — revolutions and Soviet interventions. The result is clear: the closer and more real the threat, the lower inequality is kept. The threat of communism has led elites and governments to consciously keep inequality low — through deals with workers, reinforced by strong unions and influential communist parties at home.
In an earlier study, Sant'Anna found a persistent negative relationship between the relative military power of the USSR and the share of the richest 1% in the West. To put it bluntly: the more formidable Moscow is, the less the rich can afford. World-renowned inequality expert Branko Milanović commented on these results in an essay with the symptomatic title „Did Socialism Keep Capitalism Equal?" — „Did Socialism Keep Capitalism Equal?".
1991: Taking the reins off
And what happens when fear disappears? The numbers speak for themselves.
In the United States, the top income tax rate, which in 1980 was 70% (and in the 1950s it reached 91%), fell to 28% by the end of the 1980s. After 1991, no serious politician even tried to return it to post-war levels. Corporate taxes are falling around the world in a race to "who will offer less" - the average statutory rate globally has collapsed from about 40% in the early 1980s to below 25% today. Union membership in the United States has plummeted from about 20% of workers in 1983 to about 10% now. And the share of the richest 1% of American income, about 10-11% in the 1970s, is now almost double.
The most brutal illustration, however, is Russia itself. In the study „From Soviets to Oligarchs" Philip Novokmet, Thomas Piketty and Gabriel Zucman document what capital does where no one is looking: the share of the poorest half of Russians collapsed from about 30% of income in 1991 to about 10% in 1996. In just five years. The share of the top 10% doubled over the same period, and the top 1% now holds 20-25% of income - as much or more than in the United States - and has captured almost two-thirds of the country's entire economic growth since 1989.
The great names in economic science are putting together the same puzzle. Thomas Piketty („Capital and Ideology", Harvard UP) argues that the collapse of Soviet communism and the disillusionment with it unleashed an era of „hypercapitalism" and buried the very idea of strong progressive taxation for decades. Branko Milanovic („Capitalism, Alone", Harvard UP) notes: for the first time in history, capitalism is left alone on the field, without any systemic rival. And Stanford historian Walter Scheidel (“The Great Leveler”, Princeton UP) shows, using millennia of material, that inequality has fallen permanently only under the blows of mass wars, revolutions, state collapse, and epidemics. Remove the threat — it grows. Always.
Where the thesis falters — and where it holds up
Honesty requires me to say what this thesis does not prove.
First, the chronology is not perfectly clean. Reagan and Thatcher came to power in 1980-81 — a decade before the fall of the Wall. The neoliberal turn began while the USSR still existed, albeit visibly in decline. The more accurate formulation is therefore different: the end of the USSR did not start the turnaround, but removed the last brake on it and made it global and irreversible. It is no coincidence that it was precisely in 1989 that the notorious “Washington Consensus” was formulated — the recipe for privatization, deregulation and liberalization, which was then exported all over the world, including here.
Secondly, other engines with their own power are also at work: globalization, technology, financialization. And most of all — the entry of China and the former socialist bloc into the global labor market, which at once poured hundreds of millions of new workers into the global economy and crushed the bargaining power of the Western worker. The irony is that this is also a consequence of the same 1989.
Thirdly, “fear” is not measured in a laboratory — history cannot be replayed, without the USSR, as a control group. But that is precisely why the econometric studies cited above are valuable: they do not tell stories, but measure. And they find the effect wherever they look for it — after 1917, during the Cold War, depending on the proximity to Soviet power. The topic, by the way, also reached Bulgarian academic science: in 2026 “Historical Review" of the Bulgarian Academy of Sciences published analysis by Klaus Petersen and Herbert Obinger on how the Cold War shaped social policy in both blocs.
The conclusion is equally inconvenient for everyone. For those nostalgic for socialism — because the most tangible benefit from the existence of the USSR, as it turns out, was felt not so much in itself as in Western factories and Western social systems. For the apologists of capitalism - because "capitalism with a human face" turned out to be not its natural state, but behavior under the gun.
Bismarck understood it 140 years ago: give the worker a piece, lest he take everything from you. The generation of elites after 1991 forgot the lesson — because there was no one to scare them anymore. In the first part, we saw the result written on the stock market board: $34 trillion, most of it transferred from wages to stocks.
The question remains, with which I leave you: what — or who — will remind them of the lesson?
Sources:
- Rasmussen, Knutsen — „Reforming to Survive: The Bolshevik Origins of Social Policies", Cambridge University Press, 2022
- Obinger, Schmitt —