How capitalism was built in Israel

Very often among people who consider themselves Marxists there is a mechanical, non-dialectical approach to how capitalism comes into existence in any given country. They take Britain or France as their historical touchstones and judge everything from this angle.

According to this outlook the process goes more or less according to the following simplified schema. Society passes from slavery to feudalism, under feudalism a bourgeois class emerges at some stage and this class then carries out the bourgeois revolution which in turn lays the basis for the development of capitalism.

However, if we try to superimpose this schema on all countries we find that it does not help to understand a whole series of historical processes. This dogmatic, mechanical approach was to prove to be the undoing of the Mensheviks in Russia. It also played a role in the degeneration of the Second International.

They looked at a country like Russia and saw that it was predominantly feudal in nature. Therefore they concluded that the next revolution would be bourgeois and the role of the working class and its organisations was to support the bourgeoisie against the landed aristocracy.

The problem was that the Russian bourgeoisie had become reactionary even before coming to power. This contradiction was dealt with by Trotsky in his brilliant masterpiece of Marxist analysis, The Permanent Revolution. In this he explained how the Russian bourgeoisie was incapable of carrying out its own revolution. It was tied to the old landed aristocracy with a thousand strings. And at the same time, although a minority of society, there was already a modern, developed working class.

This was not the embryonic working class that existed at the time of the French Revolution (1789) or the English Revolution (1640) that was historically immature and incapable of playing an independent role from that of the nascent bourgeoisie. The Russian working class was already concentrated in large production units and had its own independent organisations, both trade unions and political parties.

In these conditions the Russian bourgeoisie was terrified of promoting revolution, as breathing down their necks they had this powerful working class. Thus, as Trotsky explained, the unfinished tasks of the Russian bourgeois revolution had to be carried out by another class, precisely the Russian working class. However, Trotsky added that in taking upon itself this role the working class would not stop at the bourgeois “stage” but would tend to move beyond this and begin the socialist transformation society.

The events of 1917 unfolded precisely as Trotsky had predicted! But we leave our readers to read Trotsky directly, in particular his theory of the Permanent Revolution and his History of the Russian Revolution.

One essential point we need to grasp is that once capitalism had developed in a few advanced countries, such as Britain and France and later the USA and so on, it became practically impossible for the less advanced countries to follow the path of the classical bourgeois revolutions. The first major capitalist countries to appear on the scene of history had a tendency to imperialist aspirations. They needed sources of raw materials for their industries; they needed new fields of investment and new markets. This led them first to militarily occupy whole areas of the planet, and even after they were forced to relinquish direct military control, they continued to dominate these countries through the means of exchange, through their control of advanced technology, finance capital and so on.

In these conditions the development of some kind of so-called “progressive bourgeoisie”, as the Stalinists were fond of calling it, became practically impossible. Any bourgeois elements that did exist were tied to their imperialist masters and could play no independent role.

By stubbornly sticking to this concept, the Stalinists led many revolutions to defeat as they insisted that the stage was “bourgeois” and that the workers had to support the national bourgeoisie. On this basis they held the workers back from taking power.

Returning to Russia, we see how the tasks of the bourgeois revolution had to be carried out by the working class. This is an important element in our understanding of many historical developments. At times, when society is faced with an impasse and the class which is supposed to carry out the task of moving society forward to the next “stage” is so corrupt and effete another class can step in and carry out the those tasks.

This phenomenon we have seen in several countries where capitalism was not brought into existence by the bourgeoisie. Thus we see how capitalism developed in such countries as Japan or Germany. The promoters of capitalism in these countries actually came from within the old landed aristocracy, or at least from the bureaucracy of the old feudal state.

Why was this? If these countries had remained on the basis of the old feudal relations instead of becoming powerful (bourgeois) states they would have become prey to the imperialist aspirations of the already established capitalist world powers. It was clear to the more farsighted elements within the old ruling class that the powerful countries on a world scale were those that had developed modern industry. Thus they consciously set about building capitalism.

In this the state played a key role. The bourgeoisie as a class was too weak, and therefore the state provided both the political conditions and the capital upon which capitalism could be nurtured and brought into existence. We are not going to deal here with either Japan or Germany. Suffice it so say that history shows that they were two clear examples where the tasks of the bourgeois revolution were not carried out by the bourgeoisie. (Marx already saw the limited reactionary nature of the German bourgeoisie in the 19th century and wrote about it at length).

Marxists understand that one important element in determining events and processes in any one country is to be found in world events. Once capitalism had become the dominant system on a world scale we can understand phenomena such as Japan and Germany. If these countries wanted to maintain a powerful independent position they could only do so by developing industry and therefore capitalism. Thus the world developments outside these countries determined the path they were to take.

Another key element to understand in this brief outline is the question of productivity and rates of growth. A country whose rate of growth is fastest and who manages to raise productivity to a higher level than its competitors will end up becoming a dominant power.

This also applies to different economic systems. Feudalism was gradually superseded by capitalism precisely because of this question. It was far superior in developing the productive forces. That also explains why the Asiatic mode of production died out as soon as it came into contact with capitalism.

In passing it also explains why the former Stalinist regimes of the Soviet Union and Eastern Europe collapsed, and it explains why the Chinese bureaucracy is presently using capitalist methods to develop the productive forces. The dominant layer of the old Stalinist bureaucracy has swung over to the idea that for China to be powerful it must adopt capitalism. Again, there was no bourgeoisie in China, but the bureaucracy of the old “deformed workers’ state” is building that bourgeoisie. But, again, we will return to China shortly in other publications.

The case we want to deal with here is Israel. Here, not only was there no Jewish bourgeoisie, there was no Jewish state, no working class, and no national territory. The founders of Israel had to build all of this, and they used Zionism as the glue that held it all together. The idea of reclaiming the “Promised Land” for the Jews was, however, for many years a reactionary utopia. What finally created the real basis for the creation of Israel was the Holocaust which provided the manpower, with hundreds of thousands of Jews looking for somewhere “safe” to live after the Second World War. This also coincided with the interests of US imperialism in particular, which saw in the creation of Israel the possibility of having a puppet regime within the very unstable Middle East. [For more detailed information on this see: Some historical clarifications on Israel/Palestine ]

In these circumstances it was inevitable that the state would have to play the major role in building the basis of capitalism in Israel. Thus right from the very beginning many of the industries in Israel were state-owned.

This led to some on the left of having the incredible illusion that what was operating here was some kind of unique “Israeli socialism”. The existence of the Kibbutzim helped to add to this illusion.

Thus, the post-partition history of the British Mandate in Palestine/Israel began with a long phase of this so-called “Israeli socialism”, where the state played an important role. In the early part of Israel’s history there were in fact high rates of GNP growth that lasted until 1973.

In line with the rest of the capitalist world Israel then faced a period of crisis that continued through to the middle of the 1980s. In contrast to the first phase, between 1973 and 1985 GNP growth declined to about 2 percent per year, with no real increase in per capita output. At the same time, the inflation rate spiralled out of control, reaching a high of 445 percent in 1984. These two phases were punctuated by three crises in 1975, 1983, and 1984, where Israel encountered very serious difficulties in balancing the payment of deficits.

It was this period of crisis which led to the transformation of Israel’s economy, beginning in 1985. This third phase saw the selling off of the state sector of the Israeli economy and the move towards the more traditional forms of monopoly capitalism. So we see that in the early stages Israel’s economy was in large part built up by the state and now began a period of handing this over to the private capitalists.

After the massive expulsion of the Palestinians in 1947-48, the nascent Israeli ruling class needed to form a new large working class. They quickly realized that this large working class base could be formed by the Jews that had survived the Nazi death camps in Europe. The Israeli state thus promoted unrestricted immigration in drafting the Law of Return in 1950. Hundreds of thousands of immigrants came to Israel over the next decade, including some 300,000 from North Africa. This effectively doubled the population of Israel.

The two prominent features of the Israeli economy during this period were high rates of population growth, due to the massive migration of Jews from Europe and North Africa, and a rapid growth of GNP, which grew at an average annual rate of 10.4 percent between 1948-1972. This was the phase of building the nation state.

The task of forging a new working class in Israel was beyond the capability of the small bourgeois class. The ruling class had to deal with the absorption of massive immigration. Given the shortage of capital, the small ruling class was simply unable to provide food, clothing, shelter or employment to these immigrants. The task of dealing with these problems fell to the state sector of the economy.

Israel was in fact desperate for capital. Not only did it have to feed, house, and find employment for the large numbers of immigrants, it also had to establish a civil service, the military, and establish an independent foreign exchange, monetary, and fiscal system. The capital needed to deal with these problems was drawn from large sums of capital inflow. This came in the form of US aid transfers and loans, German reparation payments, and the sale of Israeli state bonds abroad. The government also took other measures, including an austerity programme of price controls and rationing, in Israel known as “Tzena”. These are the origins of so-called “Israeli socialism”.

The role of the Histadrut

Another interesting paradox of the way capitalism developed in Israel is that the labour movement and its organisations provided a solid basis upon which to build the economy. The Histadrut, the Israeli trade union federation, was not just a union. It was also in many cases the owner of companies, providing many different services. (It still is to a degree today, although gradually many of its interests have been whittled away.)

The Histadrut, the umbrella organization of Jewish trade unions, quickly became one of the most powerful institutions in Israel. Together with the state and the Jewish Agency it owned many enterprises. These enterprises served to supply the capitalist class with cheap goods, including agricultural products and services, which allowed the capitalist class to focus their investments in profit making fields ‑ particularly in non-military industries, as the military industry, especially in its initial stage, requires large investments which do not return profits immediately.

The Israeli state and Histadrut (the trade union federation) eventually came to dominate the service sector of the economy. Histadrut-affiliated cooperatives held a near monopoly in such areas as public transport and the production and marketing of agricultural products. Histadrut also owned the water and electricity utilities as well as the oil refineries in Haifa. The Jewish Agency acquired two of Israel's major banks, together making up 70 percent of the banking system. The Histadrut also owned the two largest insurance companies in Israel.

The importance of the state and Histadrut in the public sector was not limited to services. They became increasingly involved in the industrial sector as well. One of the major factors that accounts for the increased role of Histadrut in industry was the development of Israel's military industries, particularly during the first stage in the development of the economy.

In the 1980s two state owned companies, Israel Aircraft Industries and Israel Military Industries, were among the largest companies in the country. Tadiran Electronic Industries, owned by Histadrut, the state’s largest electronics firm, also became a major defence contractor. Histadrut also owned the giant Koor conglomerate and the Solel Boneh construction company. Sole rights to mine potash, bromine, and other raw materials around the Dead Sea were given to the state-owned Israel Chemicals Ltd. The state also owned most of the oil refineries and gas distributors. However, the state is now in the process of privatising all of these companies.

In 1977 the Labour Party fell from office and the Likud came to power. How does one explain the fact that the Likud government maintained the state’s control over big sectors of the economy for eight years? If Israel’s vast state sector was supposedly “socialist”, then why would the Likud have maintained it? Why would the party not abolish it?

The reason for this is simple. Israeli "socialism" was not socialism at all but a form of capitalism known as state capitalism. Such a phenomenon, to one degree or another, existed in other countries such as India under Nehru and Egypt under Nasser. In India seventy-four per cent of the economy was nationalised at one stage and this allowed the state to produce goods at low prices. State goods and services were provided to the capitalist class at cheap prices, boosting their profits. High tariffs were installed to preserve domestic markets and other measures were adopted to facilitate the Israeli bourgeoisie in developing Israel into a modern capitalist state.

In a situation where a weak capitalist class faces a lack of accumulated capital and is unable to develop the economy, it will tend to allow the state to assume these burdens. This serves to free profits for the accumulation of capital and allows the state to develop the nascent capitalist class until it is able to re-take possession of the state-owned industries on a profit-making basis. The state will nationalise the loss-making industries to absorb the damage, and privatise the profits once the industries have been established and can make money. The state acts as the protector of the ruling class, absorbing the losses until the industry can make profits again.

For those who confuse a workers’ state with state capitalism the major difference is that the laws of labour value do not operate in a workers’ state and therefore crises of overproduction do not exist.

The move to monopoly capitalism

In July 1985, the Israeli government instituted an emergency programme to stop hyperinflation. This was the beginning of the change to what the economic priests of capitalism call the "free market economy".

Since the introduction of the 1985 stabilisation plan, the transition to private monopoly finance capitalism has continued full speed ahead and opened the doors to international trade and the privatisation of various state-owned enterprises and financial institutions.

The Ben-Gurion government imposed tariffs on international trade as a measure of protectionism. The first step away from this system came in 1962, when the government replaced various administrative import limitations with high duties. The next step was taken in 1975, when Jerusalem and Brussels signed a pact by which Israel and the Common Market would gradually reduce all mutual duties by 1989.

In 1985 Israel and the US signed a free-trade agreement. This pact forced Israel to fully abolish all non-tariff barriers on goods produced in the US by 1995. These "free-trade" pacts with the US and the EU created a situation where goods from the US and Europe dominated Israel’s imports.

In August 1997, in what was the largest privatisation deal in Israeli history, the Israeli state sold 43 percent of the shares in Bank Hapoalim, Israel’s largest financial institution.

Established long before the state itself – paradoxically ‑ as the financial arm of the labour movement, Bank Hapoalim ultimately came to symbolize the state-controlled economy. The bank was owned by the Histadrut labour federation, which used it to finance the activity of its different economic ventures as well as its social and political policies.

In 1983, the Tel Aviv Stock Exchange collapsed, bursting a huge financial bubble that had been growing for years. The Likud government used the public outrage and blamed the banks, including Bank Hapoalim, of illegal activity. Likud charged that the bank had raised funds from the public through shares that could not be sustained in the long run. The concern was that this was likely to cause mass bankruptcies of the sort that happened in the US after the Great Crash of 1929.

Claiming that its intention was to prevent such disasters, the government bought the public's heavily devalued bank shares, thus transferring the burden of the debts to the state. As Bank Hapoalim had direct and indirect control over some 770 companies and controlled some 35 percent of the Israeli economy; this was a major move on the road to privatisation.

Jacob Frankel, the governor of the Bank of Israel, pushed very hard, along with other bourgeois economists, for the implementation of the "structural reforms" that would lead to the so-called free market economy - or more precisely, for a monopoly capitalist system dominated by finance capital and fully integrated into the globalised capitalist economic system.

The state eventually sold the three major banks: Bank Hapoalim, Bank Leumi, and Bank Discount to private capitalists. The telecommunications industry was privatised and the ports are now going through the same process. A similar fate awaits the state-owned Electric Corporation, the whole of Israel's fuel industry, its public transportation and military industries. There is even a move to privatise the jails and establish a system similar to that in the US, where inmates are used as a source of extremely cheap labour.

This new open door policy in Israel has attracted foreign investment. Israel is very attractive to investors because of its high-tech industries and highly educated working class – Israel has more scientists and engineers per capita than any other country in the world.

The Israeli example is a peculiar example of how capitalism and the capitalist class can be built not out of a bourgeois revolution, but from within the state itself.

Now of course, capitalism has been established. We now see a completely different Israel to that of over 50 years ago. Now it is much more like it international patrons, in particular the United States. There is an established bourgeois class, but it is a class did not create the economy that it now dominates.

Of course, the other side of the coin is the fact that to create such a capitalism it was also necessary to bring into being an Israeli working class. Thus Israel is not the paradise on earth, a safe haven for all Jews. It is a class divided nation like all other nations, where Jewish workers will have to fight Jewish capitalists and join their brothers and sisters internationally – starting with the Palestinian workers ‑ in the struggle against capitalism.

March 6, 2006