The Lie of the Free Market in Israel: The Right-Wing Bloc's Mistake | Prof. Yaron Zelekha

The mixing of economic ideologies in Israel, which I addressed in the previous column, is particularly evident in the right-wing bloc. Apparently, right-wing parties adhere to the principle of the free market, which is one of the fundamental principles of capitalism, and to its founding father — the Scottish philosopher and economist Adam Smith. In his seminal book "The Wealth of Nations" (1776), Smith formulated the immense benefits that will accrue to the economy when there is competition in a free market, where the entry and exit of businesses are free and a large number of producers and consumers compete with each other.

Under these conditions, the "invisible hand" helps to organize production and the distribution of resources in a way that promotes the general welfare, and greatly reduces the need for government intervention in the management of economic activity.

These words are considered sacred for large parts of the right in Israel, as well as in the world. See, for example, the shock therapy that Javier Milei has implemented in recent years in Argentina as one of the most prominent expressions of this concept in the global right. Against this background, right-wing governments claim that they seek to reduce government involvement in the economy, and in the same breath, they tend to express reservations about the actions of labor unions.

However, words are one thing and actions are another. Israel has become a non-competitive country, with a large number of monopolies, exclusive importers, and business groups enjoying significant market power. A significant part of this power was not created as a result of business genius or successful competition, but grew under the auspices of government involvement — tax benefits, government contracts, licenses, import barriers, or insufficient enforcement of competition laws. Moreover, while the right speaks loudly against labor unions, a look at its political power centers (and in particular the Likud party center) reveals a prominent presence of unions from large and central companies, and especially from monopolistic or non-competitive bodies.

However, the reliance on the free market principle and the "invisible hand" sometimes ignores other things that Adam Smith wrote in that very same book. The free market is not a stable natural state that exists on its own. Capital owners have an incentive to join together, reduce competition, and concentrate power against workers, consumers, and small businesses. Smith himself was very suspicious of associations of business owners and their attempts to limit competition.

From here, it is a short step to recognizing the legitimacy of labor organization, which is intended to at least partially balance the structural power advantage enjoyed by employers.

Indeed, the late Prof. Chaim Barkai, the great Israeli interpreter of Adam Smith, emphasized that Smith's position regarding labor organization is much more complex than his accepted image as the father of the free market who opposes any collective organization. Smith saw a built-in asymmetry in bargaining power between employers and employees. Employers are fewer, it is easier for them to organize and coordinate positions among themselves, and above all, they are able to hold out longer without income from work. Workers, on the other hand, depend on their wages for their livelihood and therefore are at a disadvantage from the start.

From this stemmed Smith's criticism of the legal situation in his time. The law effectively allowed associations of employers, but prohibited associations of workers. As Barkai explains, Smith does not accept a situation in which the organization of workers is presented as an artificial distortion of the market, while coordination between employers is perceived as a natural part of the "free market". Employers also act collectively, but due to their economic power, they are able to do so more easily.

Smith, of course, does not support labor unions in their modern sense out of a socialist or class struggle perspective. But he certainly recognizes the legitimacy of labor organization and its possible role in balancing the excess power of employers (see pp. 31-32 in the introduction to "The Wealth of Nations").

Therefore, Smith's free market principle does not require workers to negotiate as individuals against employers who are themselves able to organize and concentrate power. When bargaining power is asymmetrical and employers are allowed to organize, a ban on labor organization is not an expression of market freedom but rather a tilting of the rules of the game in favor of capital owners.

It is no wonder, then, that capital owners have an economic interest in weakening organized labor: the more the bargaining power of workers is weakened, the stronger, given other conditions, the power of the employer becomes in the distribution of the surplus between workers and capital owners. However, it certainly does not follow from this that every labor union and every action of organized labor deserves protection.

This is exactly where the "trust but verify" approach comes into play. Smith did not grant labor associations immunity from criticism. Just as he was suspicious of associations of business owners and their attempts to limit competition, there is no reason to assume that he would have accepted with resignation labor organization that itself becomes a mechanism that limits competition or holds the public hostage to monopolistic power. The protection is for the right to organize and the possibility of balancing bargaining power, not for every use of a labor union's power.

And here lies one of the great confusions in the Israeli discourse: the lack of distinction between labor unions operating in companies subject to competition and unions operating within monopolies, and in particular "switch-flipping unions" in bodies like Israel Railways, the Ashdod Port, or the Israel Airports Authority. The damage that such bodies are capable of causing to the economy does not stem primarily from the organized labor itself, but from the fact that the union operates within a body with monopolistic power and receives part of that power into its hands.

The economic problem, therefore, is not the organization itself but the monopolistic power it rides on. Privatizing a public monopoly and transferring it from the hands of a powerful labor union to the hands of a capital owner does not create competition; it only changes the identity of the holder of the monopolistic power. In contrast, a labor union in a company operating in a competitive market can serve as a legitimate counterweight to the bargaining power of capital owners, without harming competition in the product market.

The conclusion, therefore, is simple. Anyone who wishes to be a faithful student of Adam Smith does not need to choose between capital owners and labor unions. He must choose competition. He must oppose monopolistic power when it is in the hands of a capital owner, but also when it is in the hands of a labor union; dismantle monopolies instead of settling for transferring them to private hands; and at the same time protect the right of workers to organize where they face the superior bargaining power of employers.

Capitalism, therefore, is not the rule of capital owners, just as a free market is not a market where the worker is left alone against a powerful employer. Anyone who opposes labor unions but accepts private monopolies is not a student of Adam Smith. He simply chose which side of the monopoly he prefers to stand on. The real debate in Israel is not right versus left or capital versus labor, but competition versus the concentration of economic power.

The author is the chairman of the Economic Party and head of the School of Accounting, Economics and Financial Management at Ono Academic College.