The Director's Column
By Dr. Alvin Rabushka
Director, Division for Economic Policy Research
Heart of the Matter
From time to
time, it's useful to remind readers of the Quarterly
Report and other IASPS publications why we do what we do.
We have one
main purpose: endowing Israelis with the same freedom enjoyed by Americans. For
the better part of the last century, every prime minister and government of
Israel have concentrated on strengthening the State at the expense of
individuals and families.
I deliberately use an upper-case letter for State and lower-case letters
for individuals and families. The establishment, or restoration, of a Jewish
nation in the traditional land of the Jewish people in the twentieth century has
evolved into a social, economic, and political system that denies fundamental
freedoms to its residents. Their loss of freedom grows daily, as is evident in
the articles posted on the Institute's website.
Private to Public
The system is
socialism. Socialism means primacy of the State. The State consists of elected
and appointed officials, aided and abetted by intellectuals, the media, managers
of state-owned enterprises, owners of state-sanctioned monopolies and cartels,
and an oppressive national labor union that shuts down vital public institutions
at the drop of a hat. These are Israel's version of the nomenklatura, the
reviled Communist leadership that ran the Soviet Union for decades.
know Israel's early twentieth century economic history, and what little they
know reflects its socialist roots. But the facts are unambiguous.
advent of independence in 1948, Israel was largely a free-enterprise economy.
Most capital investments in Israel were made by private entrepreneurs with their
own funds. The
major source of investment in construction, manufacturing, and even in citrus
orchards was private. Kibbutzim may have been the pronounced symbols of the new
socialist spirit, but they were inconsequential in the country's development.
Indeed, private individuals bought most of the land. Data published in the 1938-1939
Statistical Abstract of Jewish Palestine document that the overwhelming
preponderance of investment in Israel during the British Mandatory period was
private. Between 1918 and 1929, 73 percent of all investment was private. During
1930-1937, 84 percent was private. Investment slowed during World War II.
private capital, two other sources of capital, national capital and public
capital, made much smaller contributions to Israel's pre-State
capital consisted of funds collected by different organs of the World Zionist
Organization (WZO), gifts to Hadassah hospitals, or money used to finance the
settlement of German Jews.
included funds of the American Jewish Joint Distribution Committee (AJJDC), the
Palestine Jewish Colonization Association (PJCA), and money contributed to
mainly socialist political parties. The PJCA was established by Baron Rothschild
in 1924 to support his colonization efforts; in 1948, the company transferred
its assets to the State of Israel and to Keren Kayemet, an organ of the
non-private funds supplied only a fifth of the capital in the development of
Israel during the British Mandate. But these funds were crucial to the leaders
of Histadrut and the socialist parties, giving them resources to build their own
these funds to buy land and support education, health care, social work, and
general administration, laying the foundation for what later became Israel's
full-blown welfare state. When the State was founded in 1948, a dramatic
turnaround occurred. The change was so profound that private capital investments
in Israel contracted to no more than 15 percent of the total between 1948 and
In what must
rank as one of the great ironies in economic history, German reparations
financed the transformation of Israel from a private-investment, private-enterprise,
free-market economy to a socialist system that fulfilled the vision of Jewish
leftists. On September 10, 1952, the government of Israel signed a reparations
agreement with the Federal Republic of Germany.
The German government gave $850 million, a huge sum at the time, to the
government of Israel as collective compensation for the millions of Jews who
died at the hands of the Nazi regime and had their property stolen.
David Ben-Gurion hired an economic consultant to prepare a plan for the use of
German reparations. The consultant, a man named Mr. Trone, recognized that
Israel's infrastructure required substantial investment. Investing reparation
payments in genuine public goods for the benefit of all the people, such as
roads, telecommunications, utilities, and manpower training, would enhance the
efficiency of existing private capital, as well as encourage new private
rejected his plan outright. Instead, his government established a special state-owned
enterprise to administer the funds. Ben-Gurion appointed the chief executive
officer of a large Histadrut enterprise as its manager. This former Histadrut
manager allocated a large share of the funds to various Histadrut enterprises
and financed the establishment and growth of state-owned enterprises. Private
industry was given no access to these funds.
Civil servants supported increasing state control as it enhanced their
power. Then, as
well as now, retiring civil servants were given high positions in state-owned
firms. Boards of directors and managers of State and Histadrut firms were
selected by political parties, creating an incestuous relationship between
government and the business sector. It is important to point out that the
Central Bureau of Statistics describes business activity in Israel under the
rubric of the business sector, not the private sector. The business sector in
Israel is not really private in the meaningful sense of the word.
reparations thus begat socialism. Socialism strengthened the State, while it
weakened individuals and families. Socialism continues to shrink the nation,
while depriving the people of freedom.
Power to the State is the unspoken Israeli motto, in stark contrast to
the "People Power" movements that toppled governments in Asia, the Balkans, and
Latin America in recent years.
And so it was
for 70 years in the former Soviet Union, until the communist system came
tumbling down. To the extent that the Russian people today have some measure of
freedom, it is because the West did not give Mikhail Gorbachev $50 billion in
aid to prop up the Soviet economy, which would have helped to keep the
nomenklatura in power for many more years.
Why do we do
what we do? The work of IASPS is to strengthen the nation by strengthening
individuals and families.
The goal is
freedom in general, and economic freedom in particular. Freedom requires
replacing socialism with private markets. But private markets and freedom are a
poor match for socialism, when foreigners give billions of dollars each year to
remains a high calling, and so we persist.
Back to the