Milton Friedman on How Trade Created Peace in Middle East

From David Henderson.

"Economic freedom matters.

On a recent visit to Israel, I toured the west-bank territory occupied during the 1967 six-day war. Much to my surprise, there was almost no sign of a military presence. Israeli soldiers were conspicuous only by their absence. The Jordanian Arabs were peacefully going about their business. I had no feeling whatsoever of being in occupied territory.

This is from Milton Friedman, “Invisible Occupation,” Newsweek, May 5, 1969.

I “discovered” Milton Friedman while perusing old Newsweek magazines in the summer of 1968. I still remember the first column that caught my eye, a column titled “The Public Be Damned.” So I started reading every 3rd Newsweek to see what he would write next. (Milton, Paul Samuelson, and Henry Wallich took turns.)

I didn’t know much about Israel but I had followed the 1967 6-day war. So when I saw this piece less than 2 years later, I found it eye-opening.

Another excerpt:

This wise policy involved almost literal laissez-faire in the economic sphere–and is possible only because it did. Jordanian money is permitted to circulate alongside Israeli money. West-bank farmers may grow whatever they wish and may sell their produce at any price they can command not only in the west bank but also in Jordan itself, so there is active trade across the Jordan River. An agricultural extension service manned by several hundred Jordanian civil servants, plus a literal handful of Israeli experts added after the war, has been galvanized into greater activity and has been extremely effective, so that agricultural output is growing rapidly. To a casual observer, the area appears to be prospering.

The major interferences with economic laissez-faire are restrictions on the export of farm products to Israel and on the movement of labor. Restrictions on exports have been imposed because Israel has adopted a governmental policy of supporting the prices of some farm products (we are by no means the only country that goes in for such foolishness). The importation of these products into Israel from the west bank would tend to force down the fixed prices or require the accumulation of additional surpluses. Restrictions on the movement of labor partly have a similar rationale–preservation of union wage rates–and partly the valid justification of reducing social tension and the danger of disruptive activity.

Read the whole thing. It’s a Newsweek column and so it’s short.

I wondered what Milton’s further thoughts would be and I found them in Chapter 27 of Milton and Rose D. Friedman, Two Lucky People, 1998. (My copy is autographed by Rose.) Milton wrote:

Unfortunately, the happy situation described in the Newsweek column was short-lived. The six-day war was followed by the Yom Kippur war in 1973. Palestinian guerrillas launched terrorist attacks on Israeli civilians, and the rest of the dreary record of violence of the ensuing years unfolded. In addition, the Dayan policy of laissez-faire was largely abandoned, in line with growing government control of the Israeli economy.

I believe that the increased socialization of the Israeli economy was a tragedy for both the internal economy and external relations. If Israel had followed a more laissez-faire policy internally, it would have been more prosperous and could have followed more nearly a Dayan policy with the occupied territories. That would have provided greater economic opportunities for the Palestinians and greatly eased political relations."