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INTRODUCTION The description of an economy, if it is to constitute more than just a compendium of facts and statistics, must be based on some conceptual framework , which serves as a guide in straining the wealth of data and organizing the data chosen along some logical lines. Needless to say, the chosen conceptual framework presents, in a sense, a biased picture, if only because it determines which data will constitute the evidence and which will be ignored or assigned secondary importance. Hence, the resulting description of the economy cannot be called neutral in the sense of a catalogue. That the Israeli economy has failed, on any number of criteria, for roughly the past two decades is not a subject for debate. The evidence is beyond dispute. What may be hotly contested is the question why. The basic hypothesis advanced here is that the failure can be explained by the extent of the economy's departure from the institutions and rules that govern predominantly market economies. Israel's economy operated on principles too far from liberalism (in the European sense; neo-conservatism in the American sense) and too close to socialism. Liberalism in the present context is not meant in the ideological sense. It could be: many liberals argue that individual freedom is impossible without economic freedom , and that for this reason alone people should aspire to market economies. Not that I deny the connection, but my critical study of the Israeli economy is not motivated by the observation of lack of individual economic freedom per se. Rather, the motivation here is completely pragmatic: at the end ofthe day, could an economy that did not conform to the rules of a market economy perform as well, or even bener, than one that does? Can one tell a coherent story of the Israeli economy on the supposition that what happened, and what did not happen, can be traced to the economy's lean toward socialism? The temptation to tell the story of Israel's economy on this basis is not surprising. One did not have to await the collapse of the communist block in Eastern Europe to suspect that socialist, centrally planned economies do not fare well in comparison with capitalist, market economies. Not one of the prosperous economies in Europe and North America came to prosperity on the strength ofgovernment plans. No government-built economy ever allowed the members ofa society to become affluent. Although ideology is not at issue here, there is no way one can completely divorce oneself from value judgments when dealing with economics. 2 Introduction Without ideology of any sort, one would be unable to identify goals that an economy is supposed to strive for. Hence, it would be impossible to tell whether or not an economy is successful. Nor would it be possible to formulate economic policies, if objectives are not set first. But this cannot be done without a measure of ideology. Liberal ideology enters the framework in the following way. First, there is the fundamental working assumption that people are motivated by the desire to improve their economic lot. The value judgement lies with the postulate that the economy should be designed in such a way as to create the best environment for people to do so. This implies, among other things, efficiency and the desirability of economic growth. It is not, of course, the only possible postulate. One could pursue instead, guided by a different set of values, an economy that provides as equal a distribution or claims to consumption as possible. Or one could base an economy, as has been attempted at various times in various places, on the premise that the pursuit of a high standard of material living is evil, and the economy should therefore be geared to the provision of"necessities" only. Why should one expect a market economy to work so much better than any known alternative? It seems that the basic reason for its superiority is the discipline which the market imposes on economic agents. A competitive market is the only one in which survival depends exclusively on economic success . A firm which is not good at what it is doing, or which produces something which society no longer wants, is guaranteed to fail only if it operates in a competitive environment, where it cannot receive favors or bribe its way to survival. One exceedingly important consequence of this is what Hayek calls the process of discovery that is facilitated by competition.1 The need to survive...


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MARC Record
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