Hi-tech prospects and pitfalls

Individual initiative and freedom are essential for creativity—in hi-tech as in all other spheres.

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fundamentals • public policy • limiting government • media

Last November’s Forbes-Gilder Telecosm—a distinguished annual conclave on science and technology—was devoted entirely to Israel. Telecosm is a co-venture of George Gilder—whose global best-seller Wealth and Poverty ushered the era of Reaganomics and its unprecedented economic growth—and of Steve Forbes, the author, publisher and candidate for US presidency who taught millions the virtues of markets and entrepreneurship.

Telecosm’s showcase of Israeli hi-tech followed the publication of the most recent Gilder best-seller The Israel Test. Gilder, a guru of technology and entrepreneurship, claims that attitudes toward Israel are a test case of attitudes toward civilization. Attacks on Israel express “barbarism, envy and death, [a conflict] with civilization, creativity and life.”

Israel and the US are hated “primarily because of hostility toward capitalist creativity,” Gilder adds.

Since the Middle Ages, Jews have been the pioneers in the great capitalist expansion through international trade. They also led its more recent scientific revolution and its astounding technological applications, creating vast improvement in human life. Jews were also central in creating the weapons that crushed evil regimes. In Milton Friedman’s innovative contributions to economics they helped propel 50 years of unprecedented prosperity that spread even to the most laggard economies of China and India.

Anti-Semitism expresses envy and greed, Gilder believes. It is rooted in the Marxist assumption that profit derives from exploitation and that economic creativity is therefore basically sinful. Israel is hated because it is “a leader of human civilization, technological progress and scientific advance,” Gilder concludes. On opening a computer you first read “Intel Inside,” but it should actually read, he says, “Israel inside,” because most major inventions, even of Intel, were largely made here.

IN THESE somber days, it is heartening to get such compliments, especially backed by facts. But we might be dangerously complacent if, when celebrating the extraordinary achievements of Israeli hi-tech, we ignore the serious problems facing it, some general in origin, but many—as is the case with most Israeli economic problems—self-inflicted.

Excessive government intervention caused the recent economic crisis partly by giving free scope to irresponsibility and greed. It choked start-up development even before the 2008 crisis.

“The new [Sarbanes and Oxley] laws and regulations,” a December 2008 Wall Street Journal editorial concluded, “have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the US, cripple the venture capital business and damage entrepreneurship.”

Costing vast sums to implement the burdens they imposed on small businesses and start-ups resulted—according to the National Venture Capital Association—in just six companies going public in 2008; this compared to 269 IPOs in 1999, 272 in 1996, and 365 in 1986. Nurturing start-ups became even more difficult after the financial markets crisis dried up credit and IPOs were restricted to companies with quadruple the annual income than before.

Besides this US-generated problem, Israel has many homemade problems. Though certain improvements were made in the worse aspects of its complex, rigid and costly incorporation and tax laws, Israel is still not a welcoming environment for “garage type,” individualistic start-ups, the kind that have proven most productive. Most capital for start-ups still comes from abroad. Israel’s oligolopolistic banks usually shun small enterprises, and hi-tech was no exception. Local companies tended to make their exits far too early, so that their immense potential has seldom been fully enjoyed by Israel.

IRONICALLY, THE worse danger facing Israeli hi-tech may be the bear hug of the government. Politicians and bureaucrats—chiefly President Shimon Peres, but also some in the Treasury—are so determined to nurture innovation that they may choke it to death. Back in the 1980s, Peres, a true man of vision (who has, alas, the inclination to implement it through massive government spending—a reason the Negev and the Galilee, two regions he repeatedly tried to develop by sinking billions in taxpayer money, remain economically and socially backward), tried to establish a government superfund to plan and rationalize hi-tech investment so as to minimize risk and duplication. Luckily the plan did not materialize.

The billions it would have raised did not end up in politically connected loss-making ventures, as happened so often in subsidized industries. Instead “neglected” hi-tech entrepreneurs struggled through the normal chaos of the market’s process of trial and error. Oblivious to bureaucratic dictates, markets rewarded, as usual, some risk-taking entrepreneurs while weeding out the less talented or fortunate. On the whole, their performance was stellar and will continue to be so if left alone. Yet the lesson apparently did not sink in, and we again hear talk about massive government support and “direction” for hi-tech development.

Israelis believe that the army, a government body, was the chief catalyzer of hi-tech development. While the army’s hi-tech units were an excellent magnet for talent, providing it with purposeful objectives and a can-do attitude, this does not prove that other methods of selection could not have been more efficient. Just note that most known Israeli innovations were not done in the army or in other institutional settings, even those affiliated with our research universities.

This should not surprise those who understand that individual initiative and freedom are essential for creativity, in hi-tech as in all other spheres.

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