In terms of skills and education, Israel probably has the highest level of human capital per person in the whole world. Yet it’s per capita output is mediocre – in the middle of the developed country pack. Why is that? Because Israel has been slow to adopt capitalism.

How do I know that? Because Bibi Netanyahu told me that in an interview in Dallas, several years before he became prime minister. Once he became Israel’s leader, he was been able to do something about it.

In recent years Israel has become a center for entrepreneurship, innovation and capitalist spirit. But it wasn’t always that way. Modern Israel began as a quasi-socialist society with a centrally controlled economy and a Histadrut labor federation. The Histadrut became a mainstay of the Labor Zionist movement and it wasn’t merely a trade union. It owned a number of businesses and, for a time, was the largest employer in the country. Until Israel began moving away from a socialism, the Histadrut, along with the government, owned most of the economy.

This is strange considering what Jews were doing elsewhere in the world. Like the Chinese in Southeast Asia, when the Jews migrated to Europe and North America, where ever they found free markets they thrived and prospered. Both the Chinese and the Jews excelled as entrepreneurs – except in their home countries, where entrepreneurship wasn’t allowed.

Mati Wagner writes in the Jerusalem Post:

> While it may be true that socialism was the dominant articulated ethos in the first decades of the State of Israel’s existence, the Jews of Israel – like Jews elsewhere – always had a predisposition to capitalism and free markets. > > Even before the modern era, wherever Diaspora Jews were given a chance to compete on a level playing field, they have excelled… Their high levels of literacy made them particularly well-positioned to take advantage of the increasing importance of learned knowledge as a means of making money.

Israel’s transformation to a market economy was led by government efforts to sell off state-owned companies, deregulate markets and reduce state spending. How well is it working? Wagner writes:

> Today the Jewish state’s industries – particularly hi-tech – compete as equals in international markets. In hindsight, the short-lived era of socialism was nothing but an unrepresentative blip.

The Heritage Foundation’s lndex of Economic Freedom report ranks Israel the 33rd freest economy in the world. While that’s nothing to brag about, Israel posted 10th largest score increase. Heritage comments:

> Broad, sustained improvements in property rights and the regulatory sectors over the past five years have propelled Israel into the ranks of the “mostly free” for the first time.

You might think that someone like Paul Krugman would applaud all this. I know most economists would. Instead Krugman refers to Israel’s socialist past as “the gilded age” and complains that:

> Key measures of inequality have soared; Israel is now right up there with America as one of the most unequal societies in the advanced world.

Here is what everyone needs to understands to understand about free markets and people at the bottom of the income ladder: capitalism is really good for poor people. For almost 20 years, the Fraser Institute, along with a network of other think tanks has been publishing the Economic Freedom of the World (EFW) annual reports, which present an economic freedom index for more than 120 nations. Based on that accumulated evidence, Robert Lawson writes:

> While there is no clear evidence that economic freedom creates greater income inequality, there is clear evidence that lowest-income people in freer countries are better off than their counterparts in less free countries. [The figure below] shows the average income level of the poorest tenth of the population by economic freedom quintile. Clearly, as Adam Smith recognized more than 230 years ago, economic freedom and the economic prosperity it brings work to the advantage of the poor.