How Would Milton Friedman Tackle Israel's Monopoly Problem?

Private initiative and free competition can turn the tide at Israel's ports and public utilities market.

“Israel is being strangled by an enormous group of people with vested interests who have grown fat through government assistance and won monopolistic status from the government bureaucracy. They are the greatest foes of free enterprise and private initiative.” (Milton Friedman)

Milton Friedman, the acclaimed economist most closely identified as a firm believer in free markets and human liberty, passed away in November 2006, two years before the collapse of the Lehman Brothers investment bank helped set off the global economic crisis. It would have been interesting to hear Friedman’s opinion about the free market’s performance, the high levels of risk assumed by the United States financial system, the deranged incentives for taking on risk and the fact that the cost of all this was borne by the U.S. taxpayer.

It would also have been interesting to see what Friedman, who despised government intervention, would have recommended to the governments that nationalized their banks. Would he have suggested, in the name of the free market, to let them collapse? And what would have been his attitude toward the quantitative easing that’s been going on now for five years?

It seems the years since Friedman’s death have actually done a measure of justice to another noted economist, John Maynard Keynes, who died 50 years earlier. Keynes presented a worldview where governments still have a much greater central role to play than Friedman would grant them. The balance of opinion over who was right will keep swinging back and forth long into the future, according to the ebbs and flows of the business cycle.

Friedman’s name often comes up in Israel in reference to absolute freedom resulting in the removal of government responsibility from the individual’s life. On a visit to Israel in the 1970s, he was attacked by socialist groups worried that the new Likud government would adopt his worldview. Friedman, however, didn’t espouse capitalism and free markets out of an admiration for the rich and the love of wealth accumulation, but out of burning faith in the importance of human freedom and the rewards for initiative and economic development that arise from that freedom. Neither did Friedman call for abandoning the poor and the weak, believing the government has a role to play in taking care of them.

Friedman didn’t consider himself a great authority on monopolies, but he was quite forthright in saying that governments should deal with them by doing away with any and all measures that directly support them, regardless of whether it's a business monopoly or the labor market. The government, he thought, should also enforce antitrust laws and treat corporate ownerships and labor unions the same way.

Antitrust commissioner David Gilo’s decision last week to declare the ports of Ashdod and Haifa an oligopoly fits Friedman’s outlook quite well. The government has been trying to streamline work at the ports, introduce competition, and improve their services for a full decade.

The workers committees controlling the ports and running them in an irresponsible, nepotistic, and inefficient manner have the backing of the Histadrut labor federation and, unfortunately, have also gained the protection of the labor court. As finance minister 10 years ago, Benjamin Netanyahu even tried bribing the workers to agree to reforms, giving them bonuses amounting to tens of thousands of shekels each – to no avail.

Gilo is now trying to put an end to government impotence by declaring the ports an oligopoly. The government is trying to move ahead in building new ports (actually new wharfs at the existing ports,) and Gilo’s statement means that each new port that is built will only be run by competitors to the Ashdod and Haifa ports, barring any backdoor maneuver by the state-owned ports to wrest control of the projected private ports.

It also means that the existing ports and their workers will be banned from participating in building the new ports, and any expansion of the existing ports will require the commissioner’s approval. Any attempt at thwarting a competitor trying to enter the port business or hinder it in carrying out its operations will constitute a criminal offense. The existing ports will also be required to allow the use of shared installations by the new operators without discrimination.

The government estimates the damage caused by inefficiency at the ports due to low productivity and lengthy delays in unloading ships at somewhere between NIS 720 million to NIS 820 million a year. This is a price we all pay through the high cost of living, since part of the costs to importers is passed along to the consumer. The extent to which Israel’s foreign trade also suffers an impact is hard to quantify.

But going back to Friedman, there is additional damage that the government doesn’t relate to at all. Israel’s ports constitute a monopoly of its employees, who have taken control over them through their unions. Friedman doesn’t exaggerate the importance of such monopolies, but he does describe their effect on the labor market. He claims that in raising wages in one occupation or field, unions necessarily reduce the number of jobs available in that industry. This, he says, results in an increase in the number of jobseekers elsewhere, which also lowers their pay.

In other words, high pay for unionized labor groups in monopolistic workplaces inevitably leads to lower pay at other organizations without a monopoly or organized workers. This obviously isn’t a problem created just by the dockworkers, but also by employees at Israel Electric Corporation, the Israel Airports Authority, the banks and even in the defense establishment.

So, not only have the unions harmed the public and the rest of Israel’s working population by distorting the use of labor, they’ve also made the income earned by the working class less equal, by reducing the opportunities available to those at the bottom of the social ladder, according to Friedman.

Friedman’s analysis of the wage gaps between unionized workers at monopolies and everyone else is distressingly accurate with regard to the Israeli economy. But there’s just one problem: It contradicts another economist. Adam Smith said that pursuing one’s own economic benefit leads to the greater good for everyone to enjoy - his famous invisible hand. So it seems the trade unions at large monopolies are doing exactly what Adam Smith recommended, as are high-ranking executive pulling down salaries in the hundreds of thousands of shekels a month.

The catch is that workers at the ports and other monopolies, as well as senior executives in noncompetitive markets and those who control monopoly businesses, are interest groups that have grown fat not due to initiative and talent but through government assistance, obtaining their economic power from officials on high rather than from consumers below. This means the sin belongs to whomever allowed them to do so. The port workers can’t be expected to give up anything on their own initiative. The government, the antitrust commissioner and the labor court, too, should understand that now’s the time to take action. Private initiative and free competition at the ports and in the electricity market will improve the public’s situation. The invisible hand won’t do the job for us.

AP