In my book, The Israeli Economy, published in 1992, I called for extensive reforms – largely designed to reduce government intervention – many of which have since been implemented. I also suggested that Israel’s political culture made it difficult to create consensus around economic and other objectives. Since then, Israel’s political structure has become more fragmented. A debate about economic and socioeconomic strategy has not, however, occurred. Instead governments of all kinds have implemented neoliberal policies. Political choices have been made about economic issues, usually under the guise of stabilization policies or because of the requirements of globalization, often with severe social consequences. The public was offered no alternatives by any significant political party. Despite this, there have been many economic achievements, including the absorption of more than a million immigrants in the 1990s and early 2000s, mainly from the former Soviet Union and Ethiopia during a period of regional conflict. It is against this complex background that I decided to write this book, which expands on what I wrote nearly twenty years ago, develops new themes, and reaches different conclusions, as would be expected with the passage of time.
The central theme in this book is the clash between efficiency and growth on the one hand and equity on the other. Market economies produce many, but not all, of the goods and services that people want: State bureaucracies do not. Market economies do not coincide with the model of perfect competition so laboriously taught to economics students. The truth is rather the opposite: In market economies, there are, as Adam Smith suggested, constant attempts to undermine competition. Even more worrying is the collusion of governments in the negation of competition. Furthermore, in a globalized system, governments are under pressure to limit public spending in order to reduce taxation. This limits their ability to compensate for the inequalities that market forces produce. The other issue that plays an increasing role is market failure. We are rediscovering, at great cost, something that some – usually the so-called unorthodox – economists knew all the time: Markets do not always work. Global warming is perhaps the greatest of these failures, but the international financial collapse of the second half of 2008 also raised fundamental questions about unregulated or deregulated financial markets. These issues are present in Israel, sometimes in an acute form, although they are hidden behind the more immediate problems of defense and so are neglected even more than in other countries.