Capitalism and the Jews

No, you have not just stumbled on a neo-Nazi website by mistake. This topic has long been radioactive for obvious reasons, but some scholars are finally getting over it, as shown by a great book by Jerry Z. Muller by the same title (Princeton U. Press, 2010). The obvious patterns of interest: (1)                           Some capitalists are Jews

(2)                           Some anti-capitalists are anti-Semites

Both facts have been caricatured. It does not follow from (1) that all Jews are capitalist exploiters, and it does not follow from (2) that all anti-capitalists are anti-Semites.

Jews were prominent in capitalist history in particular as financiers and traders (“middlemen”). Famous banking examples are the Rothschilds in Europe and the Guggenheims in New York. In Hungary in the 1920s, 85 percent of bank directors and owners were Jewish. Famous Jewish traders in America were the Filenes (yes, THAT department store) and Levi Strauss (a trader before he stumbled across that whole denim thing).

Trade and finance are what is known as “contract-intensive” sectors. Unlike cash-and-carry transactions, transactions in these sectors need to separate delivery and payment. The huge need for a mechanism to enforce contracts is because one party can always abscond with the money or goods. One informal mechanism to enforce contracts is doing transactions within a tightly knit ethnic group with high trust between its members, backed up by the threat of expulsion from the group if you cheat. A previous post discussed how many ethnic minorities form business networks.

The Jews just happened to form the largest networks in the two most critical sectors for the emergence of European capitalism – trade and finance. Unfortunately, these two sectors have also been the ones that attract the most hatred from those opposed to capitalism, who can only see unproductive middlemen, speculators, and financial tricksters.

Actually, this is how European Jews wound up in those sectors in the first place, since European Christians traditionally banned “usury” in finance and “speculation” in trading goods. They also often banned the Jews from landowning and agriculture. So the outsiders, the Jews, were forced into trade and finance. When the Industrial Revolution conferred wealth on people good at trade and finance , there was the tragic anti-Semitic backlash against Jews for operating in sectors they had been forced into by previous waves of anti-Semitism.

Hatred of trade and finance is still very much alive today, in both non-racist and anti-Semitic varieties. For the latter, take Osama bin Laden’s Letter to America in November 2002:

You are the nation that permits Usury, which has been forbidden by all the religions. Yet you build your economy and investments on Usury. As a result of this…the Jews have taken control of your economy…and now control all aspects of your life.

To keep reiterating over and over, it would be fallacious and unfair to equate any criticism of Finance (some of them very well-deserved) with anti-Semitism or Osama bin Laden. Indeed, another striking phenomenon that Muller discusses is that some Jews have also played prominent parts in anti-capitalism, beginning with the partly-Jewish Marx through Trotsky (the Nazis absurdly blamed the Jews for Both Capitalism and Communism), Israel’s strong socialist traditions, and continuing through some of today’s most prominent anti-globalization writers. I won’t try to analyze Jewish anti-capitalism here (read Muller).

Yet for those who ARE anti-Semitic, anti-capitalist, and anti-Western all at the same time today, anti-Semitism is providing a lot of the rocket fuel for the anti-capitalism and anti-Westernism. As Ian Buruma and others have pointed out, some anti-Western movements around the world today are drawing upon anti-capitalist and anti-Semitic ideas that originated in the West itself.

Gujarati hotels and Chaldean liquor stores

UPDATE 2 (3/27, 8:24am EDT) Great academic paper on Jewish domination of the diamond trade (see end of post) UPDATE (3/26, 12:34EDT) Great NYT mag article explaining the details of the Gujarati hotel story (see end of post)

I’ve long been fascinated by the Vietnamese nail salon phenomenon. My female friends report a remarkably high concentration of Vietnamese women in nail salons in US cities. I even heard there was a nail trade magazine for the US market that is in Vietnamese. Alas I was never able to do more to document this systematically. Today I happened to stumble over a University of Chicago Ph.D. dissertation by Martin Mandorff that finally nailed it (bad pun was unavoidable).

Mandorff shows that ethnic specialization is remarkably widespread among US immigrants. The following table from 2000 census data shows the leading specializations (the OVER is how much males from that group are over-represented in the industry,* is for self-employed and ** is for employees).

Gujaratis (already famous worldwide as entrepreneurs and traders) are even more specialized as hotel owners. And then there is a group that I had only vaguely heard of: Chaldeans – they are Aramaic-speaking Roman Catholics from northern Iraq. They’ve got the liquor franchise.

It’s amazing how something so unexpected appears from the spontaneous efforts and social interactions of ethnic entrepreneurs. Mandorff of course has much more detailed and analytical explanations, which you should check out.

The phenomenon of ethnic business networks is of course not new, but it’s far more widespread than most people realize (almost every African nation has an indigenous group known as the entrepreneurs and traders –the Hausa in Nigeria, Gurage in Ethiopia, Serahule in the Gambia, etc.) And it’s too well known to even bother mentioning the famous merchant diasporas like the Jews, the Lebanese, East African Indians, overseas Chinese in SE Asia, and so on. Thomas Sowell has written at least TWO insightful books on the phenomenon: Race and Culture, and  Migrations and Cultures.  Avner Greif's now standard explanation  (at least partial explanation) for ethnic networks was that small ethnic clusters could use the the threat of explusion from the group to enforce contracts and other trustworthy behavior (a more precise version was worked out in his  famous article on the experience of Mediterranean traders called Maghribis --11th century Jews in Cairo).

It’s all a very big hint that social and family relationships, culture, and self-organizing networks are an important part of economic development that has been much neglected by previous generations of development economists. Now the tide is turning – I gave a whole two-hour Ph.D. class on Wednesday that only scratched the surface of recent research by economists on culture, social norms, and development.

UPDATE: just received link to an NYT article by the always amazing Tunku Varadarajan (formerly at Wall Street Journal, now colleague of mine at NYU) explaining where the Gujarati dominance of hotels came from:

70 percent of all Indian motel owners -- or a third of all motel owners in America -- are called Patel, a surname that indicates they are members of a Gujarati Hindu subcaste. ... ''In some American small towns they think 'Patel' is an Indian word for 'motel.'"

{Patels are members of a caste called} vaishyas, or traders, who were once employed to calculate the tithes that were owed to medieval kings by farmers in Gujarat, an Indian state on the Arabian Sea.

More great details follow in Tunku's article on how the "Patel Motel Cartel" came about in America.

UDPATE 2: An academic paper that traces the origins of Hasidic Jews dominating the 47th Street Diamond District in Manhattan all the way back to the 11th century, with some suggested explanations.