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Public Choice 118: 11–24, 2004. © 2004 Kluwer Academic Publishers. Printed in the Netherlands.


Misplaced applications of economic theory to the Middle East
Graduate School of Business Administration, University of Haifa, Haifa 31905, Israel; e-mail:

Abstract. Tyler Cowen in this issue proposes an application of public choice and game theory as a means of understanding the Middle East conflict and viewing the “Road Map for Middle East Peace”. Cowen’s approach is not based on appreciation of the “hidden agendas and rules of the game” that are present in the Middle East. Economic theory may indeed usefully contribute to understanding aspects of the Middle East war, but through different avenues and in different directions from those suggested by Cowen. In this paper I suggest a view consistent with the institutional characteristics of the conflict and the objectives of the participants.

“For you shall make war through subterfuges and achieve salvation through much counsel.” – Proverbs 24, 6

1. A tale of two neighbors Imagine two neighbors living in homes on a hill, one further back and higher up than the other. A tree in the yard of the neighbor whose home is lower down the hill blocks the view of the neighbor who is located up the hill, lowering the latter’s property value and lowering his utility. If the law recognizes the property rights of the lower neighbor to keep any tree that he wishes on his property at any height, then the second neighbor may attempt to internalize the externality due to the tree and may offer payment for permission to enter the neighbor’s property with an axe to cut down or trim the tree. Alternatively, if the law acknowledges the rights of the neighbor higher up the hill to a nonimpinged view, then the first neighbor can offer payment to him in exchange for his agreeing not to chop down the offending tree with his axe. This is a straightforward illustration of the Coase Theorem. Now let us change the problem ever so slightly. The same two neighbors live in the same two homes, with the same tree in the lower yard blocking the view of the neighbor with the higher yard. Now, however, the neighbor in the higher yard seeks to murder the neighbor in the lower yard because he hates his guts. The hatred has nothing to do with the tree and certainly nothing to

12 do with transaction costs. However, the neighbor in the higher yard makes pretend that it does, as an excuse to enter the yard of his neighbor with his axe, in order to lop off his neighbor’s head. While the Coase Theorem might stipulate that side-payments for designated property rights regarding the tree are the way to achieve Pareto efficiency, the neighbor with the axe is not interested in Pareto efficiency. He seeks the death of his neighbor. Finally, assume that the two neighbors live in a college town whose inhabitants include economists who view the world within rational Coasean principles. If these economists control the town council or the local police, they could seek to achieve or impose a Pareto-efficient solution to the dispute between the two neighbors by instructing the neighbor in the lower yard to admit the neighbor with the axe from the upper yard onto his property for purposes of conducting dialogue and negotiations regarding the disposition of the tree and side payments. And as a result of their intervention, the neighbor with the axe would chop off the head of the neighbor with the tree in his yard. Now such an outcome would be entirely irrational, public choice theorists would protest, because – after all – the two neighbors were simply squabbling over a silly tree. Except that the neighbors were not squabbling over a tree. One neighbor was seeking to murder the other. It had nothing to do with foliage. It is unlikely that the economists had ever confronted any axe murderer as a neighbor who simply hated their guts. The economists were convinced that it was an externality conflict over the tree because they did not have the foggiest idea of what was going on. They had never gotten to know the two neighbors, had no idea of the history of their relationship, had never been to either of the properties in question, had not checked the criminal record of the axe murderer, and could not speak the languages spoken by the two neighbors. Consequently they were not well attuned to the nuances, code words and agendas of the two neighbors. Of course, the two neighbors should have been able to resolve their conflict amicably to their mutual advantage, as the Coase Theorem predicts, if indeed they were squabbling over a view impaired by a tree. The economists were sure of that. Except the tree was nothing more than the excuse for the axe murderer to get past the gate.

2. Naivety with good intentions Tyler Cowen (this issue), in his analysis of the Middle East conflict and the “Road Map for Middle East Peace”, is trying to get the two neighbors to agree to a side payment regarding the tree, whereas one of the neighbors is trying to get into the yard with an axe in order to murder the other.1

13 The axe-bearing neighbor does not want to murder his neighbor because of any tree, blocked view, or because of the inadequacy of side payments, and certainly not because of transaction costs. He has been trying to murder his neighbor for seventy-five years. He is not the only neighbor with murder on his agenda. Moreover, his neighbor down the hill has never really had any resources of value to speak of, certainly nothing to make the murder financially explainable. The axe murderer wishes to murder his neighbor because he hates his neighbor. His would-be victim does not seek to murder him in return but merely wants to be left alone. The neighbor with the tree has nothing in particular against his neighbor up the hill, is not interested in murdering him, and might be willing to negotiate over the tree; he simply wishes to keep possession of his home. The axe murderer in fact is not even the real party to the conflict, but merely a front man or Agent for a larger Principal, an organized crime family that is not actively participating in the negotiations over the tree but has a blood vendetta with the man with the tree in his yard. The axe-murderer neighbor does not care how much money it costs him nor how much of his own resources he loses, just as long as he gets to axe his neighbor. Indeed, he hates his neighbor so passionately that he is proudly willing to send out his own son and daughter to blow themselves up with bombs in exchange for the immense pleasure of seeing his neighbor’s corpse. By resorting to the predictions of the Coase Theorem as a basis for imposing a solution where the neighbor with the axe gains entry to the yard of his victim, the town economists who portray the conflict as having to do with a tree may end up imposing a disaster. Such economists would not be intentional accomplices to murder, but nevertheless could end up making the situation worse out of a naive passion for applying their Theorem.

3. Homo Economicus lives in the West Homo Economicus lives in the West. He may also live in Japan and some other places. But he does not live in the Arab Middle East. Now none of this means that markets fail to work in the Arab Middle East, nor that demand curves rise there instead of falling. It means that, at the national level and at the “public” level of decision making, pursuit of prosperity or maximization of consumer surplus just do not count for very much. Improving the standard of living of the public may be a goal somewhere on the national agenda, but it is never pursued at the expense of wars of aggression, especially – but not exclusively – when it comes to wars for the purpose of annihilating Israel. Standards of living (health, literacy, etc.) in Syria are in many ways worse than in sub-Sahara Africa, yet there exists

14 near-totalitarian control of the economy by the regime and its near-complete conscription to finance the military (see Plaut, 1999). Syria is hardly alone in these respects in the Arab world. The preference for pursuing violence and military adventurism over consumerism in the Arab world is extraordinarily popular among the consumers themselves.2 Support among Palestinians for murder through suicide bombers has never fallen significantly below 100%, except occasionally when the PLO has signaled that the “timing” is wrong for it. Palestinian standards of living dropped by more than 70% in the mid-1990s after Israel transferred rule over them to the PLO under the Oslo Accords. Ordinary Palestinians have been brutalized by the “Palestinian Authority” and deprived of the civil rights they had enjoyed while under Israeli occupation. Life for both Israelis and Palestinians was infinitely more pleasant back before the Oslo “peace process” began. Yet, with all their squalor and loss of civil rights, not a single Palestinian has visibly demanded a return to the pre-Oslo conditions, and few (if any) have denounced the PLO-cum-Hamas and Islamic Jihad for the campaign of terrorism against innocent Israeli civilians. Support for bin Laden and for Saddam Hussein was enormous among Palestinians, as it has been among other Arab populations, and in Moslem countries in general, with exception of the Turkic world. Homo Economicus maximizes utility attained through income or wealth. He or she seeks consumer goods, leisure, and comfort. Homo Economicus is risk adverse when it comes to his or her wealth. Conflict is entered into only when there is a prospect of gaining resources. Resource costs are traded off against resource benefits. It is a symptom of Western provinciality when Westerners think that Homo Economicus lives everywhere. He was not present in World War II, such as when Germans and their European accomplices murdered Jews using resources that could have been utilized to further the war effort against the allies. He is notoriously absent now from the Arab world. He was not present among Bin Laden’s hijackers. Most particularly, the Middle East conflict is not and never was a conflict based upon economic interests and drives. Since the conflict was not and is not motivated by economic interests, it is unlikely to be resolved through appeals to economic interests or economic models.

4. The principles that explain There are indeed theories and general principles that can be called upon to assist the novice in understanding the complexities of the Middle East conflict. None of them appear in the paper by Cowen. One important principle

15 governing negotiations and the seeking of agreement concerns reputation: Parties to agreements who have in the past consistently broken each and every agreement to which they have committed themselves are unlikely to comply with any new accords or agreements that they sign. Curiously, despite the importance he attaches to reputation, Cowen never discusses reputation for dishonesty and non-compliance with treaty obligations. The PLO and the Palestinian Authority have violated fundamental clauses in every accord they have ever signed since the onset of the Oslo “peace process” in 1993. Most basically, after receiving political and civil control over the areas inhabited by Palestinian Arabs, the Palestinian Authority was to be responsible for promoting peaceful coexistence between Jews and Arabs. And for this purpose the Palestinian Authority was supplied by the government of Israel and the world with weapons and funds, supposedly so that law and order could be established. Those weapons were in fact used almost exclusively to murder Jews. There is no reason to believe that the Palestinian Authority will honor future agreements. Its policy and behavior are clearly guided by “a higher objective” or “supreme value” (see Bernholz, 1997, 2004), which allows no trade-offs; in terms of our parable, it is the lopping off of the neighbor’s head. Israel has its own supreme value – to survive. Game theory analyzes what happens when side payments are made between parties to a conflict, and also explains how reputation should affect willingness to transact or cooperate. Cowen is telling Israelis to act as if there is no history, no track records, and no reputation to be considered. Inference, precedent, and reputation through awareness of past behavior should be applied to the analysis of the “Road Map”. Suppose, just suppose, that the Road Map were implemented in full and that all Arab demands were met by Israel in full. What would be the result? Would it bring peace and tranquility, or would it result in the utilization of the new state of “Palestine” as a launching base for a war of terror and annihilation against Israel? Would “Palestine” serve in the future (as it does now in the form of the territory of the Palestinian authority) as nothing more than a base for murder, terrorism and shelling of Israeli civilians? Inference from past Palestinian behavior suggests the answer quite unambiguously. Perhaps a look at the official map of the region as seen by the Palestinian Authority would also help with predictions and answers. A look at the web site of the Palestinian Authority is quite revealing. In its map of the region; there is no State of Israel. It is not there. There IS a map of Arab Palestine encompassing Tel-Aviv and Haifa and every other part of Israel. There is no cycle of violence in the Middle East: one neighbor is trying to axe the other, while the would-be target occasionally uses force half-heartedly

16 to defend himself. The down-hill neighbor is often inhibited from carrying out his self-defense because he is so commonly accused of being an aggressor when he defends himself, while the aggression of the up-hill neighbor is commonly painted as resistance to the aggressions of the down-hill criminal. The West Bank and Gaza Strip are about the size of the Borough of Queens in New York City. The Arabs control territory in 22 sovereign states, stretching from the Atlantic Ocean to Southeast Asia, with more land than the continental United States. It is a mockery of inference to argue that this vast territory without an area the size of Queens is insufficient for Arab appetites, and so the Arab world needs that micro-territory before it will stop aggression, terror, mass atrocities, and war. Now suppose that one were to insist that inference is not reliable and that one does not really know the answer to the question above regarding what would happen if the Road Map were implemented, until it is. That takes us to the next point regarding risk aversion and issues of an existential manner.

5. Risk aversion about survival Risk aversion is sensible. When one is speaking of risks of national annihilation and genocide, decision making becomes lexicographic (see for example Fishburn, 1974). Suppose that implementing the Road Map for the Middle East were to involve a 96% probability (in the Bayesian sense) of success, resulting in peace and tranquility, but a 4% chance that it would result in a new all-out Arab assault on the rump Israel (which would be as wide in its waist as the length of the San Francisco Bay Bridge with its ramps), in a war initiated by the Palestinians, with the tanks and armies of the Arab world joining in to rescue the “Palestinians” from Israeli “aggression”. Such an allout assault is likely to result in the destruction of Israel and its population, in a new Holocaust of the Jews. If such were the probability distribution of consequences, the Road Map should be rejected summarily. The people of Israel would be irrational to accept it. The rejection should be all the more absolute if the probabilities are not 96% and 4% as we have hypothesized here, but rather epsilon above 0% for peace and tranquility with epsilon beneath 100% for destruction of Israel, which is what I happen to believe they are. If you reward someone for murder, he is likely to pursue murder more vigorously.3 The Oslo “peace process” since 1993 has been based upon rewarding the PLO for terror and murder. It was based on the presumption that war could be ended by public pretending that it did not exist, that reality would follow the lead of fantasy, that demand for peace would create its own supply. The PLO and its affiliates have been repeatedly rewarded for their violence, with

17 ever-escalating offers of appeasement from governments of Israel, from presidents of the United States, and of course from Europe and the “unaffiliated” world, with bankrolls and lands and international legitimization. The PLO, including its armed terrorist Tanzim and Al-Aqsa Martyrs Brigades, both of which are under the direct personal command and control of Yassir Arafat himself, as well as PLO affiliates in the Hamas and Jihad, did not even halt the violence temporarily while Arafat was meeting with Israel’s Far Leftist Labor Party Prime Minister Ehud Barak at Camp David in 2000. Barak was offering them the entire yard, tree and all. They rejected his offer because Barak did not agree to burn his own house down and vacate the premises as part of the trimming of the yard tree. They rejected the offer because the neighbor with the tree and house would still have a home. The PLO has never faced lasting international sanctions nor borne any serious costs due to its terrorism and violations of its Oslo commitments. It has never been forced to bear costs for its violent misbehavior. To the contrary, the more savage and barbaric the Palestinian terror, the more cordial the welcomes for its leaders in the capitals of the world, the more some national leaders have fawned over the terrorists and have wrung their hands over Palestinian “suffering”, and the more the demand has been voiced that Israel invite the neighbor with the axe into its yard.

6. Asymmetric payments for peace Economic theory tells us that those who most value a public good, in this case fighting terror, end up paying the most for it. Israelis have been the main payers in the fight against terror, which enjoys many free riders (see Lee, 1988), and have also repeatedly expressed willingness to make enormous – some would say, given the likely consequences, suicidal – payments in order to achieve peace. As the only ones in the Middle East who value peace as a public good, they have offered the most generous payments for it. For most of the past century, the Arab nations stated explicitly that they regarded peace as a public bad, not a public good, as something to be prevented. In recent years they have granted lip service to peace as a public good, but not one they are willing to pay for at all. If one offers to sell something for nothing, one will not be able to persuade the buyer to pay anything for it. For a decade, governments of Israel have been making unilateral concessions to the PLO, including offering the Palestinian Arabs their own state, while receiving no quid pro quo in any form. In particular, Palestinian terror has escalated after each Israeli goodwill offer. Israeli leaders never seriously conditioned any of Israel’s concessions and goodwill offers on Palestinian compliance with past Oslo Accord ob-

18 ligations. Israeli political leaders on the Left were so enamored with their “Concept” of achieving peace through removing Israeli “occupation” of the Palestinians that they chose to forego all testing of Palestinian intentions and all conditionality. Yitzhak Rabin and Shimon Peres turned Arab occupied areas in the West Bank and Gaza Strip over to the Palestinian Authority. The Likud government of Benjamin Netanyahu continued the process, releasing even more cities to the PLO. 98% of Palestinians living in these areas were self-governing by the mid-1990s. What was the result? The Palestinian response was a campaign of mass murder of Israeli civilians. The terrorists in many cases went out of their ways to target Jewish children. Transaction costs had nothing to do with this; many of the victims of the terror were too young to have ever participated in any transactions before they were killed. From the time of the signing of the Oslo Accords, in which the PLO pledged to renounce violence, suppress terrorism, arrest Islamist terrorists, suppress anti-Jewish “incitement”, democratize Palestinian zones, permit free access by Jews to their religious sites in the Palestinian areas, and pursue trade and commerce together with peaceful nation building, the PLO did none of these things. Yet it was continuously offered new “sweeteners”, new “goodwill” gestures, new aid, and new concessions. Since pledging in 1993 to end the terror, the Palestinians have perpetrated the equivalent of more than twenty-two September 11ths in terms of the scope of Israeli victims, this datum based on the size of Israel’s population size relative to that of the United States. Most of the Israeli victims were civilians and a great many were children. The savagery of the PLO’s antiJewish incitement and its daily doses of its bloodcurdling demonization of Jews are like nothing since Germany of the 1930s and 1940s. The PLO has learned “meta-rationally” that murder of innocents can continue and that it need never comply with any of its commitments in order for almost the entire world to line up and demand that Israel offer it new concessions “for peace”.

7. Settlements Game-theoretical representations of strategy and negotiation show the benefit of making time work against one’s adversary. It makes sense to show one’s adversary that there are costs for wasting time and delaying agreement. This makes agreement far more likely. If the principles of rationality apply, agreement should be instantaneous.4 Successive governments in Israel adopted a strategy of imposing costs on the Arabs for refusing to reach a negotiated accommodation and for delays in agreement to negotiate. Those costs were called settlements.5 In addition, Jewish “settlers” in the West Bank and Gaza Strip are the “mine canaries”

19 that empirically illustrate the general Arab attitude towards Jews living in their midst and towards any Israeli state in particular.

8. Signaling There is an extensive literature in economics on market “signaling”, and it has even been (mis-?)applied to terrorism (Overgaard, 1994; Lapan and Sandler, 1993). Signaling is extraordinarily relevant to the Middle East conflict. Repeated transmission of Middle East signals with no backup at all results in signals that have neither content nor substance and eventually lose their credibility. To put it another way, game theorists have analyzed games of “Chicken” but have long overlooked games of “Wolf”. Israel has been threatening really, really drastic retaliations against the Hizbollah, against their Syrian patrons, and against the PLO for their atrocities for so long, without ever delivering more than half-hearted retaliations or bombings of empty buildings as “signals”, that the Arab world is entirely meta-rational in assuming that Israel is all bluff, shackled, and on the run. It is a rule that “one cannot change an adversary’s behavior through a threat to do nothing.” The Middle East corollary is that the best way to create credibility for a threat to do something is to do it and not threaten it. The rule implies that in the game of “Wolf”, empty signals in fact end up conveying the understanding that the signaler is weak and destructible and bluffing. For game theory to be applied, players need to understand the rules of the game being played. A player in a game of chess who thinks he can win by pretending that his opponent no longer possesses a queen and knights when in fact the latter still does, will lose the game. In the 1990s, through the Oslo Accords, Israel’s leaders attempted to end the war by pretending that it no longer existed. One cannot win a game of chess against an opponent who responds to being placed in “check” by pulling out a machine gun and opening fire. Nested games also cannot be played successfully when the parties do not understand the rules or think they are playing a completely different game from the one actually being played, even if it is different from the one that the economist making his analysis thinks they are playing. Game theory is unable to predict outcomes in strange neighborhoods in which rules operate that are not understood. It may well be, in various games and conflict scenarios, that goodwill gestures build confidence, lower tensions, prove non-belligerent intentions, and serve to reduce tensions. In the Middle East they signal weakness, defeatism and destructibility. Such is the problem with the “marital dispute” game cited by Cowen and misused by all-too-many people proffering advice about the Middle East conflict. In the Middle East, goodwill gestures and offers of generous concessions

20 are understood to be signs of weakness and vulnerability. Israeli restraint, and the endless international demands for ever more of it, serve to fuel the bonfire of Arab terrorism and Palestinian violence.

9. Suffering and wealth Let me give an example of inconsistency in neighborhood-specific rules of games. In the neighborhood of Fairfax, Virginia, we expect a strong negative correlation between violent criminality and personal wealth or income. Lower-income people are those mainly involved in violent crime. In the Middle East neighborhood there is a well-documented, stronglypositive correlation between violence and wealth or income. Higher income, higher education, and greater wealth are all associated with higher likelihood of participating in terror, greater support for terror and violence, and with political extremism. Palestinian violence and fanaticism grew steadily with improvements in their standard of living after the change from the illegal Jordanian occupation to Israeli rule in 1967. By the dawn of the “Intifada”, Arabs living under Israeli rule had the highest health and education standards of any Arabs in the Middle East, the highest consumption levels outside the elites in the petroleum feudal states, and they were the only Arabs in the Middle East enjoying protection of human rights, including freedom of speech and the press, rights to judicial due process, and the right to vote. If Intifada violence were indeed a consequence of political repression and violations of human rights, as is so often repeated mindlessly by the media, then Israel should have been the only state in the Middle East without an Intifada. A positive correlation between income and fanaticism may be a matter of serendipity for economists, but it is a long-time familiarity for Middle East scholars (see for example Pipes, 2002). President Bush has repeatedly indicated his awareness of the myth that poverty produces terrorism ( The positive correlation between violence and wealth is manifested in many other ways. There is evidence that the most extremist anti-West and pro-terror Moslems in the world are the expatriate Middle Eastern yuppies who were educated at Western universities and stayed on to live in London and Hamburg. Bin Laden’s people are incredibly rich Saudis. The September 11 hijackers were mostly college students or recent graduates. Palestinian suicide bombers are almost always college students or educated middle-class professionals. Since September 11, perhaps the most dramatic illustration of misunderstanding of the Middle East conflict based on misapplying rules of the game

21 from other neighborhoods has been the presumption that Islamic terrorists engage in self-immolating atrocities because they “suffer”, are “victims”, or are “impoverished”. There has never been an undernourished suicide bomber. In the literature on game theory, an often overlooked game is Military Victory. As it turns out, Military Victory is the strategy by which totalitarianism has been defeated in the last hundred years or so. It is how fascism was defeated in Europe in the 1940s. In a sense, it is how Soviet totalitarianism was brought to an end, not through actual combat but through defeat in an arms race that totalitarian Soviet communism could not survive. Islamist fascism and its accompanying terrorism can only be neutralized by being demonstrably and unambiguously defeated.

10. Outside parties Relying on outside parties to enforce agreements, such as reliance on the United States as the solution touted in Cowen’s paper, will not resolve the Middle East war. The United States has never acted at all to force the PLO to comply with its Oslo Accord obligations. To the contrary, the long position espoused by of the U.S. State Department is that it must wink, blink and ignore those endless violations, thinking it beneficial to promote pretense and fantasy over reality. The U.S. State Department has defended its insistence that the PLO be rewarded with ever greater concessions even after the PLO murdered dozens of American citizens. Cowen insists that the United States is truly committed to non-tolerance of threats to Israeli security. He cannot tell that to the hundreds of Jewish children who have been murdered by the same Palestinians, whom the United States now seeks to reward with statehood. Cowen wants the United States to “signal” its commitment to Israeli security. The people of Israel would have to be fools to accept such a signal at face value and bet their national existence upon it, where mass murder and possible anti-Jewish genocide are a likely outcome. Cowen cites Milton Friedman on his impressions of touring the West Bank in 1969. Cowen might be well advised to consult the same Friedman regarding his contemporary thoughts on the Oslo “peace process” and the “Road Map to Peace”. In 1957 the Suez War ended, the United States provided Israel with an unambiguous commitment, which guaranteed that the Straits of Tiran would remain open to Israeli shipping and that their closure would be regarded as an act of war, to be fought by the United States itself if necessary. In exchange for the commitments, Israel withdrew from the Sinai Peninsula that it had conquered from Egypt in the war. When Egypt closed the Straits to Israeli shipping in an act of war in 1967, the US State Department responded

22 to Israeli requests that the US government honor its obligations and enforce its pledge – by insisting that it could not find the relevant document containing the commitment, apparently having been eaten by the Foggy Bottom dog.

11. What is terrorism? Terrorism is not a “periodic retaliation” designed to achieve concessions and gain points in future negotiations about how to share, as Cowen and some others would have it. Terrorism exists because the terrorists seek to achieve the annihilation of their targets, not a negotiated resolution. They want to kill the neighbor with the tree and could not care less about his tree. Von Clausewitz7 said that war is diplomacy by other means, but in the Middle East diplomacy has often been a game of pretense to complement war and to promote or accompany terrorism. Treating terrorists as if they are merely players in a game of negotiations is a guaranteed path toward proliferation of more terrorism. No one has ever been murdered by a dead terrorist, one who had been previously assassinated. Suicide bombers cannot be stopped by threatening to punish them with fines or jail terms. If no sanctions are applied to the family members of suicide killers, and if those who dispatch the suicide killers are not assassinated, there is no way of stopping the carnage and the terror. Usual forms of deterrence are ineffective in dissuading murderers who set out to die for rewards of virgins awaiting them in the afterlife.8 Incentives are the central concept of all economics, including in matters related to violence and crime.9 When no deterrence incentives operate, terrorists will not change their behavior.10 Preemption is then the only means to stop atrocities. That is without a doubt the most important lesson economists can provide to those trying to understand the Middle East conflict.

12. Postscript: when Coase was not applied As this paper was being composed, a young Palestinian woman from the West Bank – one Hanadi Jaradath - walked into a restaurant down the road from my home. She was transported and assisted by Israeli Arabs, citizens of the democratic state of Israel who have for two generations enjoyed European standards of living and health and a Scandinavian style welfare state, but who have by and large been radicalized by Israel’s demonstrations of its weakness and defeatism since the start of the “Oslo peace process” and its willingness to resolve the conflict through appeasements.11 She had explosives strapped to her belly.

23 She calmly sat down at a table and ordered lunch. She observed the other people eating in the restaurant, many of them children, taking each of them in as individual fellow humans, and coolly savored the thought of what was about to happen to them. She stood up and paid for her lunch, pocketing her change. She then detonated the explosives attached to her belly inside the restaurant and murdered 21 Israelis. Her victims were both Jews and Arabs. She annihilated three generations of two entire families. A surviving orphaned little boy from one of those families was blinded. This mass murderer was not an impoverished bag woman, but a lawyer from the West Bank. As part of her law studies, she no doubt was introduced to the school of law and economics. In particular she almost certainly learned about the Coase Theorem for resolving conflict and internalizing externalities. She chose not to apply Coase for purposes of settling any conflict. Some might think that her behavior was due to her transaction costs being too high; they would be wrong. Before detonating her explosives belt, she intentionally placed herself next to a baby carriage to make certain that the baby was among those blown to small pieces. Her achievement was widely reported to have been celebrated joyfully among the Arab population throughout the West Bank and Gaza Strip. She is as good a demonstration as any why the Middle East conflict requires its own sub-school of analysis, and why naïve attempts that misapply game theory and public choice theories inappropriate to the conflict are a guaranteed road map to disaster. Notes
1. Cowen is not the first to apply economic theory to the topic of terrorist violence. See for example Crenshaw (1992) and Sandler and Enders (2003). 2. I intentionally mention consumers and not voters because the Arab world has yet to conduct its first free election. 3. The principle applies more broadly, see Buchanan (1975). 4. See Ariel Rubinstein (1982). 5. Contrary to media misrepresentations, these settlements in fact violated no one’s private property rights and were by and large on public lands that had been controlled by the Jordanian government before 1967. They also did not preclude any political solutions; should peace with an independent “Palestine” emerge, there is no reason why Jews should not live as a minority in that state, much as Arabs live as a minority in Israel. 6. Spenser (2003) is a recent internet commentary that appreciates the correlation. 7. An anthology of his quotations is at html. 8. Not only has Israel never executed nor even expelled relatives of suicide bombers, but when Arab terrorists holding Israeli citizenship have been killed while engaged in terror, their surviving relatives have been granted Israeli social security survivors benefits.

9. Beginning with Becker (1968). 10. Konrad (2002). 11. A recent study by Tal Shachor of the Galilee Academic College documents the fact that Israeli Arab towns have long been over-funded in fiscal allotments. Plaut and Plaut (2001) document econometrically that no discrimination against Israeli Arabs is visible in the wage structures of Israel.

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