Israel is still very socialist - Friedberg Economics Institute Fellows Seminar - Fall 2014

My trip to Israel was sponsored by The Friedberg Economics Institute (HT: Bob Borens). I was participating in the second fellows seminar. Simply stated the Institute, like the partner organization the Jerusalem Institute for Market Studies (HT: Corrine Sauer and Robert Sauer), is dedicated to promoting an appreciation of the importance of economic freedoms and the market process in the hope that such an appreciation may lead to movement toward greater economic freedom in Israel. Here is the official statement.

The Friedberg Economics Institute was founded in Israel in 2014 as a non-profit organization with a mission to advance, in Israel, appreciation for the principles of economic freedom and the potential for improving growth and prosperity through application of these principles.

The Friedberg Economics Institute sponsors seminars, bringing the world’s best economists and economic policy makers to Israel to teach ideas of free-market oriented economic thinking and principles of economic freedom.

The Institute’s initial target audience is Israeli university students. Over time we hope to broaden our audience to include thought leaders in government, business, and the press.

My two lectures were concentrated on describing what might be called ‘an alternative economics’ – alternative to the standard technical fare that is taught in all but a few economics departments and business schools around the world. I pitched my content at both economics students and intelligent non-economists (of which there were a few). The first was specifically on the “closing of the economist’s mind” starting with Ricardo, but more especially since WWII as economics became more “scientific” aka scientistic. The vision of Adam Smith inquiring into the nature and causes of the wealth of nations was lost. Why and what are the consequences?

In my second lecture I talked about methodology, epistemology, ethics and political economy. More specifically I focused on how popular presumptions and mindsets determine where the burden of proof is put in any policy action.  I used Hayek’s views on knowledge and complex phenomena to explore a few themes relating to policy design and implementation that I have been working on.

There was also a discussion panel with the four lecturers, Deepak Lal, Leszek Balcerowicz, Michael Sarel, and me, as well as lots and lots of informal discussions.

I think my remarks were well received although they were regarded as very controversial and provocative in the extreme. This did not surprise me much. It is well-known that the fundamental principles underlying popular perceptions of society and how it works and ought to work are socialist in nature. Israel was born out of a blending of Eastern European socialist ideology with Jewish national aspirations. These principles run deep and span all classes of society. Even where they are opposed, as from the religious right, there is no well-articulated alternative. But, what I was surprised to find, was the extent to which formal economics teaching in all of the universities – as far as I could tell – reinforces this. Economics teachers have abandoned any attempt to foster an appreciation of that system of natural liberty to which Adam Smith referred. Hayek is never mentioned and disequilibrium is banished with a wave of the hand. Not much either about public-choice. It is standard technical fare. It seems that anyone not hewing to the party-line would not be able to get tenure or last very long in any institution of higher learning. The objective is to produce quantitative virtuosos. Any resemblance between the economics of the class room and real-world economies is purely coincidental.

I found this quite alarming. While the Israeli economy has moved significantly away from its all-pervasive socialist structure (though not nearly far enough as these still permeate most of it) to become a highly innovative, high-growth economy, the mindset has hardly changed at all. In truth, the entrepreneurial sector encompasses a minority of the population and for the rest it is socialist business as usual. The aim is to get Israelis to begin preaching what their most successful entrepreneurs practice. Perhaps with this seminar we made a small beginning and more will be done with similar events in the future.  See also here.

Jerusalem 2014

Touchdown Tel Aviv. It’s always a bit emotional for me. So many memories from important periods and events in my life. So much recent misplaced vitriol and the frustration of not knowing how to deal with it.

While I was growing up and into my early adulthood, Israel was the darling of the world’s intellectuals across the political spectrum. This beleaguered nation built by ghetto refugees of Eastern Europe, further propelled by survivors out of the ashes of the holocaust, defying the odds to become a viable democracy and home for Jews from every corner of the globe, including 800,000 from North Africa who had been expelled from their homes. It was a heroic, romantic story of hope and achievement in the post WWII period when people were looking for a brighter future.

All this changed after the 1967 war. Suddenly, Israel’s very success in defending itself, and every success thereafter, became a cause for condemnation and vilification – not to mention wholesale historical revisionism.

I arrive soon after the latest military confrontation with Hamas – a polarizing media and maven event, but, one in which at least Israel’s public persona was clear, unapologetic and persuasive to many, though clearly not to all or even perhaps most. The disproportionate media attention, the misconceptions, the distortions, and the motivationally suspect have left a bad smell with me. What will I find this time – how will I feel?

On my second day I go on an unusual tour of Jerusalem, a tour seen from the position, first, of the security – the lives – of the people living there, and, second, from the point of view of the accurate history of the city. The tour is organized by a highly partisan  organization and the tour guide (an ex-South African who hails from my childhood city of Johannesburg) glosses over some uncomfortable details about the 1949 war and violence against the Arab population in various places. Though much of this history is still highly disputed, there seems to be little doubt that the Israeli forces were guilty of bad things. Both sides were. So he distorts this by saying that all of the Arab refugees of that period left in response to exhortations from Arab state leaders. Many did, but many were brutally driven out. That is disappointing, to say the least.

But, overall the picture he presents is undeniable and highly relevant to the debate over Jerusalem. The world media has quite simply been duped into thinking that Jerusalem was once an Arab city, important to Islam, that the Israelis appropriated, and that the moral thing to do would be to return it to its rightful owners. Not only is this false on the national level (something which Libertarians would find irrelevant and obnoxious even to say) but it is false on the individual level as well. There simply was no large Arab population that was displaced from Jerusalem. And, importantly, Arab and Israeli neighborhoods are so intricately intertwined now that it would be impossible to separate the city into Arab and Jewish sections. Here are some important facts:

Jews have been living in Jerusalem continuously for nearly two millennia. They have constituted the largest single group of inhabitants there since the 1840's. Today, the total population of Jerusalem is approximately 800,000. 

It is a popular misconception that East Jerusalem has historically been populated only by Arabs. In the mid- 1800's, the entire population of Jerusalem lived behind the Old City walls (what today would be considered part of the eastern part of the city). Later, the city began to expand beyond the walls because of population growth, and both Jews and Arabs began to build in new areas of the city. By the time of partition, a thriving Jewish community was living in the eastern part of Jerusalem, an area that included the Jewish Quarter of the Old City. This area of the city also contains many sites of importance to the Jewish religion, including the City of David, the Temple Mount and the Western Wall. In addition, major institutions such as Hebrew University and the original Hadassah Hospital are on Mount Scopus — in eastern Jerusalem. 

The only time that the eastern part of Jerusalem was exclusively Arab was between 1949 and 1967, and that was because Jordan occupied the area and forcibly expelled all the Jews.

(http://keepjerusalem.org/View_all_e.php)

So, to treat Jerusalem as part of the so-called “settlements” is just wrong in so many ways. The city is a modern city with a vibrant Arab and Jewish population, and some Christians, including a successful high-tech area. The attempt to make Jerusalem part of any overall settlement is a strategic ploy designed as a first step in the dismantling of the state of Israel. It is the “heart” of Israel. Destroy Jerusalem and you destroy Israel. “East Jerusalem” is not east Jerusalem – it is a ring of territory surrounding what used to be the city within the city wall. As both Arab and Jewish populations have grown the supply of housing has become an increasingly binding constraint to the point that rental prices now rival those of Manhattan.  Achieving some sort of normality in the housing market – with transparent titles and security – would lead naturally to an ordered expansion available to both Arabs and Jews – but the absence of a unifying legal structure – and some places with no structure – has meant that the situation is highly precarious and dysfunctional. The interests of the Palestinian Authority quite clearly do not match the interests of the Arabs who live in Jerusalem – Israeli citizens and, increasingly, non-citizen residents. They come to Jerusalem in large numbers for a better life under Israeli authority and they would opt to live under Israel if given the choice. Many have for generations now.

This tour saddens me but adds to my previous impressions. I try to remain optimistic and to marvel at the beauty and resilience of the city – to the seamless mixing ancient and modern in an open and vibrant market system. I am here to try to explain to Israelis the importance of economic freedom, a topic I will turn to in my next blog. 

From the Friedberg Economics Institute Fellows Program, 2014 - 2

Peter Lewin

October 20 at 5:31am

Today I had the pleasure and privilege of hearing Leszek Balcerowicz talk about economic freedom, both as a concept and as a strategic objective in real-world situations. He is a rare individual who combines theoretical knowledge and knowledge and vision of how to implement the theory's implications. He is a passionate and optimistic believer in freedom.
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Leszek Balcerowicz is a Professor of Economics and Head of the Department of International Comparative Studies at the Warsaw School of Economics. He is considered the architect of Poland's economic reforms initiated in 1989 - he designed and executed the radical stabilization and transformation of Polish economy since the fall of communism in Poland. In September 1989 Leszek Balcerowicz was appointed Deputy Prime Minister of Poland and Minister of Finance in the first non-communist government in Poland after the Second World War. He retained his positions in the government until December 1991. From April 1995 to December 2000 he was the President of the Freedom Union, a free market - oriented party and from October 1997 to June 2000 he was Deputy Prime Minister, Minister of Finance In 2001-2007 he was the governor of the Central Bank of Poland.

A recipient of numerous awards and honors, including the 2014 Milton Friedman Prize for Advancing Liberty and Poland's highest decoration - Order of the White Eagle - for his contribution to the systemic transformation, he is active, as a Chairman and Founder, with the Civil Development Forum Foundation, a think tank based in Warsaw.

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From the Friedberg Economics Institute Fellows Program, 2014 - 1

Peter Lewin at Neve Ilan Hotel

October 19 at 1:54pm ·

Michael Eisenberg, seen here at tonight's gala dinner, gave the keynote to kick off the event. Guess what he talked about? The SHARING ECONOMY. Look at his bio below. He is an investor in Airbnb among other companies. His rushed away to catch a flight to NY where he will be for two days.

In his talk he unintentionally channeled my thinking about the significance of the sharing economy, except perhaps more articulately and emphatically. I said in

a post and elsewhere that I thought it was the most significant development towards free markets in a hundred years. He thinks it is the basis of a revolution that is just getting started that is as big as the Industrial Revolution. No need to quibble about who is right, it is an important transformative phenomenon.

He then went on to explain, as I have, the tremendous resistance to it and how it could be derailed through expanding government regulation protecting vested interests - the taxis, hotels, freight shippers, etc. But he added significantly that, since this is a global phenomenon, it cannot be blocked worldwide and those economies that do not make their peace with it will be left behind and will pay a higher ultimate price for the transition.

He believes that the transition will come and will be painful - that the sharing economy revolution will leave no industry untouched and that many people will be rendered economically obsolete - many more than the expanding companies can absorb. He called for corporate philanthropy and individual outreach to promote retraining, etc.

This is where I would venture to disagree. There is no way he can know this - though his hyperactive, charismatic, personality might make him think he should and does. My own suspicion is that, with minimal intrusion, the market process would adjust much more quickly and rapidly than we might expect. I intend to address this in my two lectures, touching on Hayek, spontaneous order and the propensity to innovate in crises.

One of his conclusions I do believe we cannot escape - all change is painful for some and large changes are painful, sometimes devastating, for many. There will be pain. The only question is when and how much - if we try to regulate it away it will come later and it will be more.

This is what makes the case for free markets in the face of this phenomenon so difficult to sell. That is why I am here.
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Michael Eisenberg is a Partner at Aleph, a $140MM early stage venture capital fund, which he co-founded with Eden Shochat in 2013. Michael joined Benchmark Capital as a general partner in July 2005 and continues as the partner responsible for Benchmark’s Israeli portfolio. Michael joined Benchmark from Israel Seed Partners where he was a general partner from 1997. Eisenberg began his career at Jerusalem Global where he started and led the firm’s successful investment banking group and partnership with Montgomery Securities. Michael has focused on Internet investments since 1995 and has invested in and sat on the board of Israel’s leading companies and start ups, such as Shopping.com (Nasdaq SHOP, acquired by EBAY), Conduit, SeekingAlpha, Gigya, WeWork, Wix,Answers.com (Nasdaq ANSW), Tradeum (acquired: VERT), and Picturevison (acquired: EK).

Free markets are difficult to sell

First, distinguish between correct and salable. Free market economics may be (is) correct but may not be salable. Put another way, free market economists as a group, or on average, get paid less than interventionist economists - who, maybe because of this are in the large majority. In a nutshell scientism leads to statism (HT: Pete Boettke). The kind of quantitative closed end economics that most economists do feeds nicely into the aspirations of politicians who have promised their constituents utopia. Free market economics is definitely a harder sell. 

The absolutely crucial point to make here is that it is precisely because free markets do not rely on the good intentions of individuals to achieve social benefits that they are superior to government policies designed to do what markets do automatically, and that, government policy being, by definition coercive, the presumption should be against them. The natural inclination of most people is to think that since free markets are peopled with individuals who intend only their own good, the government is needed as a corrective to these bad or indifferent intentions. But, this is to misunderstand in two ways 1. for free markets the right intentions are neither necessary nor sufficient to produce the "right" results - quite the contrary, acting in a self-interested manner most often produces socially beneficial results when the underlying institutional conditions are right - it is not from the benevolence of the butcher that we get our meat. and 2. for government policy good intentions are absolutely necessary but absolutely not sufficient. With the best intentions in the world governments, being basically limited human beings acting in a complex world, are very likely to fail. And most often they do NOT have the right intentions, because they predictably, even excusably' act in their own interest - Adam Smith pointed out individuals never spend other people's money as carefully as they spend their own, they have an incentive to inflate their budgets not economize on them - and to fake results to claim spurious successes - and there is no market feedback to check them. 

Rituals and Beliefs

Last night a student asked me off the record what my personal religious beliefs were. I said that although I was a convinced agnostic, I did very much appreciate the beauty and function of many of the traditions in which I was raised and live. These rituals, I suggested, enabled us, among other things, to celebrate together and to grieve together. We are not at a loss about what to do, what to say, etc. because it is all scripted for us and the meaning and significance is understood by us all. These ritual events nudge us to take time out from the every day forest to take a look at the beauty and wonder and sometimes sadness of the trees. Rosh Hashanah to Yom Kippur starting next Wednesday night are traditionally known as the days of awe - days of appreciation, of self-reflection, when we are urged to ask those whom we may have offended to forgive us (only they can, not even God can).

These are beautiful traditions, that require action not belief. And they certainly do no harm.

Anti-Zionsim and Anti-Semitism

The fallout from the Israel-Hamas conflict makes me realize that there is a lot of misunderstanding as to what Antisemitism is. A lot of people think it is simply another kind of racism - a sort of irrational prejudice based on color or religion. It is that, but it is more - there is a history in which "the Jew" as an object of fear and aversion was a vital necessity for the viability of both Christianity and Islam and this has spilled over into the secular descendants of those cultures. Hence, in the story below, Jews, not Israelis, are banned from the university campus, and many Palestinians make no distinction.

Yom Kippur 2014

A custom among many Jewish families on the night preceding Yom Kippur - the holiest, most reflective night of the year - parents invoke the blessing of the high priests as found in the bible and "give" it to their children.

For me it says 'I love you and I hope with all my heart for a happy and prosperous year for you. I just want you to know that.'

In the synagogue service when the high priests say this they raise their hands, put their thumbs together and separate the first and second fingers from the third and fourth - five points for the five books of Moses.

The most important application of this is the blessing invoked by Mr. Spock in Star Trek, who raises one hand in this way (with the V separation) and intones 'live long and prosper.' Leonard Nimoy, Spock's alter ego, is Jewish and introduced this into the series as an adaptation of the priestly blessing. Maybe you did not know that.

Here is the blessing. It is also part of many Christian liturgies.

Then God spoke to Moses and said, Tell Aaron and his sons,

דבר אל אהרן ואל בניו

This is how you are to bless the children of Israel. Say to them:

May God bless you, and keep you;
May God shine his face on you,
And be gracious to you;
May God look at you,
And give you peace.

So they shall invoke my name on the children of Israel, and I shall bless them.

(Numbers 6:22-27)