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4 OBSTACLES TO GROWTH: THE ECONOMIC CULTURE The Economic Culture The tem1 economic culture is designed to describe the complex of attitudes members of a society develop toward the economic environment in which they operate. Every society develops its own ways of viewing its economy and the problems that it presents. People are not born with established economic philosophies or with the information they need to make financial decisions and political choices. Rather, opinions and information are acquired through a teaming process, which is very much determined by the economic environment in which people grow up, and on the experiences which they encounter. ln this chapter, we shall deal with the economic culture as it concerns the individual, or the consumer. Treatment of the business sector is undertaken in Chapters 6 and 7. Israelis grew up, and in many respects still operate, in a contrived economy . A contrived economy is defined for the present purpose as one in which there exists a substantial wedge, mostly driven by the government, between the productive sector and consumers. The wedge separates consumers from the productive sector in two ways. First, it causes signals observed by producers to be different from the ones observed by consumers. For example, although producers observe a low rate of interest, consumers observe a high one.1 Second, signals transmitted by the producing sector to individuals are distorted, so that individuals observe signals that do not give them an honest picture of the producing sector. For example, there may be a shortage for nurses, but hospitals are not allowed to convey this information by offering higher wages. Nor are they allowed to charge higher prices in response to the increased demand for health services that caused the nurse shortage in the first place. Wedges of this nature exist virtually in all free economies to one degree or another. For instance, there is a wedge between the prices received by milk producers in the EEC and the lower prices paid for milk by consumers. Every 80 The Poltica/ Economy ofIsrael price support, subsidy, and price control produces a wedge. There is therefore nothing unique in this respect as far as Israel is concerned, and it boils down to a question of extent. An attempt will be made to show that the extent of the contrived economy in Israel is such that individuals operate mostly in response to rigged signals. They therefore have scant opportunity to come to grips with the real world. Three major areas of the contrived economy will be described. The first deals with the most crucial component of the wedge: the separation of the productive effort from the reward. It will be shown that consumers in Israel enjoy a standard of living, both in terms of the rate of consumption and in terms of personal wealth, that can in no way be supported by what they produce. The second major aspect of the contrived economy is the image the government has as the creator of the economy. Government policies over long periods of time have convinced at least some parts of the public that economies are created by governments. Third, we shall examine the impact of the wedge on the willingness of people to assume responsibility for their actions. Here one confronts what might be viewed as a sort of moral hazard, where people act irresponsibly in the belief that there exists an implicit government insurance that will bail them out in case of trouble. First, let us ask what is so bad about creating contrived economies. The answer is that it can be deemed bad only in relation to some criterion or objective . The Germans may be perfectly happy with the milk-subsidization arrangement, but when economic growth is as important as it is for Israel, obscuring the signals transmitted by the real world is bad. It is bad because it generates a misallocation of resources and is thus detrimental to growth. In the example of the milk producers, the subsidy keeps many more of them active in milk production than would have been the case without subsidies. These superfluous milk producers cannot be employed in alternative trades, where from the standpoint of the real economy they would have been more productive. Each of the aspects of the wedge causes, as we shall see, distortions that reduce the chances of successful entrepreneurship and therefore reduce the outlook for economic growth. The Wedge Between Effort and Reward Even a cursory review of Israel's national accounts suggests...


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