Capitalism and the Jews

No, you have not just stumbled on a neo-Nazi website by mistake. This topic has long been radioactive for obvious reasons, but some scholars are finally getting over it, as shown by a great book by Jerry Z. Muller by the same title (Princeton U. Press, 2010). The obvious patterns of interest: (1)                           Some capitalists are Jews

(2)                           Some anti-capitalists are anti-Semites

Both facts have been caricatured. It does not follow from (1) that all Jews are capitalist exploiters, and it does not follow from (2) that all anti-capitalists are anti-Semites.

Jews were prominent in capitalist history in particular as financiers and traders (“middlemen”). Famous banking examples are the Rothschilds in Europe and the Guggenheims in New York. In Hungary in the 1920s, 85 percent of bank directors and owners were Jewish. Famous Jewish traders in America were the Filenes (yes, THAT department store) and Levi Strauss (a trader before he stumbled across that whole denim thing).

Trade and finance are what is known as “contract-intensive” sectors. Unlike cash-and-carry transactions, transactions in these sectors need to separate delivery and payment. The huge need for a mechanism to enforce contracts is because one party can always abscond with the money or goods. One informal mechanism to enforce contracts is doing transactions within a tightly knit ethnic group with high trust between its members, backed up by the threat of expulsion from the group if you cheat. A previous post discussed how many ethnic minorities form business networks.

The Jews just happened to form the largest networks in the two most critical sectors for the emergence of European capitalism – trade and finance. Unfortunately, these two sectors have also been the ones that attract the most hatred from those opposed to capitalism, who can only see unproductive middlemen, speculators, and financial tricksters.

Actually, this is how European Jews wound up in those sectors in the first place, since European Christians traditionally banned “usury” in finance and “speculation” in trading goods. They also often banned the Jews from landowning and agriculture. So the outsiders, the Jews, were forced into trade and finance. When the Industrial Revolution conferred wealth on people good at trade and finance , there was the tragic anti-Semitic backlash against Jews for operating in sectors they had been forced into by previous waves of anti-Semitism.

Hatred of trade and finance is still very much alive today, in both non-racist and anti-Semitic varieties. For the latter, take Osama bin Laden’s Letter to America in November 2002:

You are the nation that permits Usury, which has been forbidden by all the religions. Yet you build your economy and investments on Usury. As a result of this…the Jews have taken control of your economy…and now control all aspects of your life.

To keep reiterating over and over, it would be fallacious and unfair to equate any criticism of Finance (some of them very well-deserved) with anti-Semitism or Osama bin Laden. Indeed, another striking phenomenon that Muller discusses is that some Jews have also played prominent parts in anti-capitalism, beginning with the partly-Jewish Marx through Trotsky (the Nazis absurdly blamed the Jews for Both Capitalism and Communism), Israel’s strong socialist traditions, and continuing through some of today’s most prominent anti-globalization writers. I won’t try to analyze Jewish anti-capitalism here (read Muller).

Yet for those who ARE anti-Semitic, anti-capitalist, and anti-Western all at the same time today, anti-Semitism is providing a lot of the rocket fuel for the anti-capitalism and anti-Westernism. As Ian Buruma and others have pointed out, some anti-Western movements around the world today are drawing upon anti-capitalist and anti-Semitic ideas that originated in the West itself.

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Stop panicking: Capitalism repeatedly recovers from financial crises

UPDATE 2 (3/24, 12:59PM EDT) Tyler Cowen is almost convinced (see end of this post) UPDATE (3/23, 2:30 EDT): see GREAT responses by Ross Levine and Mark Thoma at the end of this post

I am just beginning to dive into the awesome book by Carmen Reinhart and Ken Rogoff, This Time is Different: Eight Centuries of Financial Folly. Along with great analysis, they have some wonderful pictures, evidence, and data. What I say here is my own take on it.

First, financial crises are remarkably common. Their Figure 5.1 shows the number of countries that have defaulted on their external debt (one possible dimension of a financial crisis) over the last two centuries. The numbers come in episodic waves of defaults and involve a remarkably high number of countries in each wave:

Second, the global capitalist system does well in the long run anyway.  Average per capita income in the world (a shaky estimate, but probably right order of magnitude) increased by a multiple of 12 over 1800-2008, despite repeated epidemics of financial crises.

The US is arguably the country with democratic capitalism the longest, and it also shows a steady upward trend from 1870 to the present, despite repeated banking crises (using those identified by Reinhart and Rogoff), with usually little effect of each crisis on output relative to trend (except for the Great Depression).

I don’t mean to minimize the short run pain that the current financial crisis has caused. It’s horrible. But there is no reason to panic about the long run growth potential looking forward.

The obvious rejoinder is Keynes’ “in the long run, we are all dead.” But we can’t ignore that Capitalism already survived repeated financial crises and has made us all vastly better off despite them. So here’s a counter-quote: “In the long run, we are all better off because our dead ancestors stuck with capitalism.”

UPDATE (3/23, 2:30PM EDT) Ross Levine, the scholar whom I trust most about addressing financial crises, sent me the following comment by email when I asked him his opinion:

This is a great summary! I would, however, point out that this crisis could be different, depending on your view of the adaptability and elasticity of institutions.  In particular, this crisis, including the build-up and the resolution, involved a massive redistribution of wealth to the very wealthy.  It also involved an unprecedented decline in market discipline through government policy.  Thus, from my perspective, to get the Reinhart and Rogoff result over the next decade or so, this must involve an institutional adjustment to correct the distorted incentives that currently exist.  What are the forces that lead to this type of adjustment in some economies and not in others?

Mark Thoma, on his great blog Economist's View, responded to my request for a comment. A summary (see his post for his full response):

My take is a bit different. The graph of per capita income from 1870 - 2008 seems to say we shouldn't worry that aggressive intervention to stimulate the economy will cause long-run problems. It may help substantially in the short-run, but the graph above indicates it's unlikely to have long-run consequences. So, I agree, let's not panic. Let's not panic and start reducing stimulus measures too soon, or be too timid with stimulative policies, out of fear it might harm long-run growth.


Finally, on the general "stop panicking" message, when people are hurting -- and they are -- we ought to panic. Legislators have given little indication that the understand the urgency of the employment problem we face. We need more panic, not less, about the employment situation.

UPDATE 2: Tyler Cowen on a view he "toys with but does not (yet?) hold":

Financial panics and economic crises are nearly inevitable...

More and more, people will turn to the wisdom of the great 19th century economists on financial panics, bank runs, and the like.  It was an intellectual mistake to think we had ever left that world for good.

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