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The start-up Nation’s socialist blip
By MATI WAGNER
12/06/2012
From a quasi-socialist society with a centrally controlled economy and a Histadrut labor federation, Israel has become a center for entrepreneurship, innovation and capitalist spirit.
 
LOOKING BACK over the past 80 years of Israel’s history since The Palestine Post printed its first edition, one cannot help but marvel at the economic miracle that has transformed the Jewish state.

From a quasi-socialist society with a centrally controlled economy and a Histadrut labor federation – that acted not only as a workers’ union, but also as the owner of nationalized industry (Solel Boneh), banks (Bank Hapoalim), and health maintenance (Kupat Holim Clalit) – Israel has become a center for entrepreneurship, innovation and capitalist spirit.

Working under free market conditions, Israeli entrepreneurs have created thousands of start-ups. Today more Israeli companies are traded on the major New York exchanges than any other country in the world, aside from the US, Canada and China – all this with a population of less than eight million.

Google executive chairman Eric Schmidt told Start-up Nation authors Dan Senor and Saul Singer – the latter my predecessor as editorial page editor at The Jerusalem Post – that the US is the No. 1 place in the world for entrepreneurs, “but after the US, Israel is the best.”

How did Israel manage to make this transition so smoothly and in a relatively short time? The most obvious answer is that for a variety of reasons, Jews, including those refugees who wound up in Israel either by choice or by circumstance, have a strong affinity for capitalism and private enterprise.

Even before the modern era, wherever Diaspora Jews were given a chance to compete on a level playing field, they have excelled. With the advent of modern nationalism, which for the first time began to separate religious identity from national identity, Jews were given the opportunity to compete in newly developing free markets. And Jews benefited disproportionately.

Their high levels of literacy made them particularly well-positioned to take advantage of the increasing importance of learned knowledge as a means of making money.

In countries such as Russia, where the reactionary regime continued to tie national identity to religious affiliation, Jews turned to socialism. But this was not so much out of a special Jewish bias toward the socialist ideal, as it was the most effective way of attaining equality.

Indeed, Russian Jewry’s strong ties to socialist thought had a critical impact on the fledgling Jewish state’s economy.

However, the extent to which Israeli society adhered to socialist ideals has been both exaggerated and overrated.

As historian Jerry Z. Muller has pointed out in his book of essays Capitalism and the Jews, “while the pre- and post-independence history of the State of Israel was ideologically stamped by socialist Zionism, the reality was more complex – and more capitalistic.”

Diaspora Jewry as a whole – including the Jewish refugees who arrived in Israel – brought with them a strong predisposition to the capitalist ethos. After all, western and central European Jews who were given the chance did well in free economies. And while the capitalist ethos was discouraged and repressed by leading Labor Zionist ideologues, it remained a strong force within Israeli society.

Acknowledging this fact can help us better understand the remarkable transformation the Israeli economy has made – particularly in the last three decades – from a quasi-socialist, centrally controlled economy, to a vibrant free-market economy driven by private enterprise.

Labor Zionism, which dominated Israeli politics in the pre-state era and for the first decades after the creation of the Jewish state, was openly antagonistic to free trade and commerce – the cornerstones of entrepreneurship and capitalism.

Russian Labor Zionist ideologue A.D. Gordon was strongly influenced by the romance of the peasantry, as articulated by Leo Tolstoy, and believed manual labor – particularly agriculture – bound a people to its soil and to its national culture.

Gordon viewed capitalism as wasteful, unproductive and parasitic, and saw it as the source of Jewish suffering in the Diaspora.

Marxist Ber Borochov, another Labor Zionist ideologue, believed that a productive national existence required the creation of a Jewish working class.

In the debate over competing strategies for building up the Jewish homeland, socialism seemed to win out over capitalism. The view that Zionism was a social revolution, driven by the collective farmers of the kibbutzim and moshavim and that the state should be directly involved in construction, agriculture and industry, was adopted by both Chaim Weizmann and David Ben-Gurion.

However, the extent to which private enterprise contributed to the building of the Yishuv and to the State of Israel was more substantial than is commonly recognized. Private Jewish capital – mostly from abroad – made up 87 percent of all investments in Jewish Palestine between 1932 and 1937. Economic support provided by Jews in the Diaspora, who donated money they had earned through capitalist enterprise, was crucial to the early economic growth of the state.

The pragmatic Ben-Gurion, though ostensibly a socialist in outlook, was careful not to form a government coalition with the Marxist Mapam party, in part out of concern that doing so would scare off private investors. Only after Mapam renounced its ties with the Soviet Union in 1955 in the wake of the Prague trials did Ben-Gurion include it in the coalition.

Mapai apparatchik Pinhas Sapir, who – together with Labor Zionist leader and third prime minister Levi Eshkol – dominated economic policy-making during Israel’s first three decades, understood the importance of private enterprise for economic growth. Sapir, who blocked a plan by the Histadrut’s industrial arm, Solel Boneh, to greatly expand its empire by building a steelworks in Acre, saw the growing power of the Histadrut as a threat to the entrepreneurial spirit.

Sapir was instrumental in recruiting local businesspeople and foreign investors to develop the textile industry, and helped bring private foreign investment by Diaspora Jews to Israel. Though this period was marred by backroom deals and cronyism, it was under Sapir’s guidance that the first generation of Israeli millionaires was born.

Two early waves of immigration – from Poland and from Germany – brought thousands of entrepreneurs and professionals to the Yishuv.

First came Polish Jews, often owners of small businesses escaping the growing anti-Semitism of the early 1920s.

They were followed in the next decade by German Jews fleeing the Nazis.

These immigrants came with the capital and the skills to set up small factories in the cities.

Capitalist sentiments and a rejection of Mapai’s socialism catapulted the General Zionist party – a precursor to Likud that ran on a platform of private enterprise and free markets – from seven to 20 Knesset seats in the 1951 elections with a campaign slogan “Let us live in this land.”

Even before it was joined by the Sephardim and Oriental Communities party and the Yemenite Association, the General Zionist party was the largest after Ben-Gurion’s Mapai.

Herut – the major right-wing political party that challenged Mapai’s political hegemony – rejected Mapai’s socialist romanticization of the working class, valued the role of Jewish entrepreneurship, and argued that the future belonged to the bourgeoisie, not the proletariat. This was the position of Vladmir Jabotinsky, founder of the Revisionist Zionist movement.

True, when the Likud party – an offshoot of Herut and the General Zionists – finally came to power in 1977, ending 29 years of Labor Party rule, then-prime minister Menachem Begin did not immediately usher in a new era of free enterprise. But this was largely because the Likud leadership was overwhelmed by the depth of the economic crisis bequeathed to it by the Labor Party.

Still, it had become painfully clear that the state-directed, quasi-socialist economic model was no longer working.

The era of big infrastructure projects was over. The nationalized and Histadrut-owned companies dominating economic life had become bloated and inefficient.

In the wake of the 1985 Economic Stabilization Plan, which introduced more fiscal discipline, devaluation of the currency and the suspension of cost-of-living allowances, hyperinflation began to fall. The government also undertook a long-term program to sell off state-owned companies, deregulate markets and reduce state spending.

All of these measures, which marked the end of the socialist era of Israel’s economy, set the stage for the period of rapid economic expansion that followed.

The new, liberalized economic environment helped let loose free enterprise, innovation and entrepreneurship that had been stifled over the decades but which had always existed, if only latently, within Israeli society.

Nowhere is this more evident than in the hi-tech field. Israel’s workforce has a large proportion of scientists and engineers. There are 140 scientists and technicians and 135 engineers for every 10,000 people, the highest ratio in the world. But Israel also has a unique mix of entrepreneurs and venture capitalists that are capable of turning new ideas into commercial products.

Kibbutzim that for decades had been run according to purely socialist ideology quickly made the transition to a competitive, capitalist market. The legendary Kibbutz Deganya, home to the Gordons, also came to house businesses such as Toolgal – a producer of blades studded with diamonds that cut concrete and metal.

Though physically located on a kibbutz, Toolgal was run in accordance with the strictest capitalist criteria.

Skilled workers from outside the kibbutz were hired, business decisions were made in according to profit/loss criteria, and the company competed in the international arena.

Entrepreneur par excellence Eli Hurvitz, the legendary CEO of Teva Pharmaceuticals, grew up in a Labor Zionist household and was a member of Kibbutz Tel Katzir before leaving for the world of business.

If the Jews of Israel had lacked the requisite entrepreneurial acumen, privatization of industry, relaxation of government control over capital markets and other reforms alone would never have sufficed to transform Israel into such an innovative economic powerhouse.

While it may be true that socialism was the dominant articulated ethos in the first decades of the State of Israel’s existence, the Jews of Israel – like Jews elsewhere – always had a predisposition to capitalism and free markets.

Before achieving national independence Jews excelled as citizens in their various host countries. Today the Jewish state’s industries – particularly hitech – compete as equals in international markets. In hindsight, the shortlived era of socialism was nothing but an unrepresentative blip.
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