"It’s no exaggeration to say that many developed economies – mired in debt, out-of-control welfare spending and high unemployment – would envy the Israeli economy’s current overall trajectory."
By SAMUEL GREGGmoney(photo credit: REUTERS)
Amid what seems to be a growing onslaught of regional and international challenge and unrest, one rare piece of good news is the Israeli economy. Despite the broader global market turmoil, Israel’s economy has weathered the years since 2008 relatively well – certainly in comparison to most Western European nations.As illustrated in a June report produced by the Kohelet Policy Forum, nominal and real incomes in Israel have continued to grow since 2008, the unemployment rate had fallen to just under six percent, inequality continues to drop and the labor force is expanding. Over the past three years, Israel’s ranking in the Index of Economic Freedom has continued to improve, while America’s has generally declined.Certainly Israel faces some major economic challenges, and the uncertainty which has racked the global marketplace in recent days has not skipped over Israel. The Kohelet report underscored excessive regulation, over-bureaucratization and lower labor productivity compared to the OECD average.But it’s no exaggeration to say that many developed economies – mired in debt, out-of-control welfare spending and high unemployment – would envy the Israeli economy’s current overall trajectory.It’s the economist’s job to try and understand why some economies, like Israel’s, are doing comparatively better than others. Less well-known, however, is that more economists are looking beyond strictly economic explanations to explain economic successes and failures. As it turns out, they are discovering that culture matters.The most advanced work in this area has been by the 2006 Nobel economist Edmund Phelps. For several years, he has been advancing the thesis that while good policy is important, the value commitments prevailing in a given society help explain why economies with very similar structures and institutions can produce quite different economic outcomes.Much of this argument is summarized in Phelp’s 2013 book, Mass Flourishing. Here Phelps draws on a range of data to argue that developed nations which attach higher value to economic security than economic freedom run a higher risk of economic decline in an increasingly competitive global economy.This, Phelps maintains, helps to explain why much of Western Europe is apparently incapable of engaging in substantive economic reform. If most Western Europeans are asked what they value more – liberty or security – you can safely bet they will nominate security. Placing a premium on security has economic consequences and helps explain why Western Europe has such low levels of entrepreneurship and innovation compared to America.Culture’s economic significance, however, goes beyond the liberty/security nexus. It’s not a coincidence that the word “culture” is derived from the word “cult.” This reflects the fact that a society’s dominant cult – i.e., religion – is always central to its culture. That suggests that more attention should be paid to religion’s role in shaping economic outcomes. Is it the case that a society like Israel – the Jewish homeland for the Jewish people, with a majority of Jewish citizens (with obviously varying levels of religious commitment) – is more likely to emphasize certain values which, in turn, will have particular economic consequences? This isn’t a new discussion. 110 years ago, Max Weber famously raised the issue in his Protestant Ethic and the Spirit of Capitalism. While many scholars (including myself) have taken issue with Weber’s particular claim that certain forms of Protestant Christianity helped to facilitate capitalism’s emergence, few dispute that religious belief has some type of impact upon an economy’s character.Take, for instance, Judaism. As the theologian Michael Novak underscores in his seminal text, The Spirit of Democratic Capitalism, some of Judaism’s most sacred texts, such as the Book of Genesis, stress that humans aren’t meant to be passive. Instead they are commanded to work and be creative. Over the centuries, this helped generate a respect for economic liberty and commerce among Jews that was largely absent from the surrounding pagan cultures. The worlds of Greece and Rome, for instance, generally disdained commercial activity in favor of cultures that valued military valor.Judaism also articulates a linear understanding of history and holds that human freedom has a role in unfolding it. By contrast, Greco-Roman culture not only embodied circular conceptions of time, but their religions portrayed the gods as rather frivolous creatures who treated human beings as mere playthings. In other words, Judaism holds that neither the world nor the human beings who inhabit it are ultimately meaningless.This is likely to facilitate very different perspectives on the significance of human choice and action, including in the economy.Christianity was fortune enough to inherit Judaism’s emphasis upon these things. Indeed, scholars such as the sociologist Rodney Stark have produced compelling arguments to suggest that it was precisely because Judaism and Christianity prevailed over the Greco-Roman pagan religions that capitalism first developed and eventually flourished in Western Europe.That doesn’t mean the process was somehow automatic. Other factors, particularly the development of specific property arrangements and the rule of law, played major roles in capitalism’s rise in the West and its ongoing embrace by cultures in which Jews and Christians are distinct minorities.That said, we need more research on the ways in which religion and culture shape economic life. That’s especially important for a country like Israel in which Judaism is central to the nation’s self-understanding. Israel is certainly more committed to economic freedom than it was, say, 20 years ago. But exploring the links between Judaism and the development of market economies contains significant potential to shift the cultural balance more toward economic liberty and subsequently wider prosperity for all – an analysis which becomes all that much more critical in these days of uncertainty and economic turmoil.The author is a research director at the Acton Institute, which is co-sponsoring a conference with the Jerusalem Institute for Market Studies on September 9 in Jerusalem on the topic ‘Judaism, Christianity, and the West: Building and Preserving the Institutions of Freedom.’
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