Israel cannot be explained solely through the lens of the Israeli-Palestinian war, the policies of the Netanyahu government, or the country’s special relationship with the United States. Like Saudi Arabia, Turkey, and other Middle Eastern states, Israel is part of a larger structure: the global capitalist system, the international division of labor, great-power rivalry, and the ongoing conflict between social and class forces.
Yet Israel has one distinguishing feature. Its state was built not merely on territory and citizenship, but on a national-ethnic project whose historic aim has been to establish and preserve a Jewish state. This feature has shaped, from the outset, the relationship between the state, social classes, labor, and land.
At the same time, over several decades Israel has moved from a relatively statist economy anchored in a powerful labor movement toward one of the most globalized and technologically advanced economies in the region. The Histadrut and the Labor Party, once the twin pillars of the political and economic order, have lost much of their former weight, as private capital, global markets, advanced technology, and the military-security industries have grown correspondingly more central.
The question of Israel, then, is not simply a question of “Zionism,” nor simply one of “imperialism.” It must be examined at the intersection of ethnic statehood, global capitalism, neoliberalism, security, war, and class conflict.
The central thesis of this article is that Israel’s transformation from a statist, labor-based economy into neoliberal capitalism did not weaken the state, nor did it erase class politics. Instead, a powerful security state took shape alongside a globalized capitalism. In this process, the national-ethnic divide between Israeli Jews and Palestinians has repeatedly overridden class conflict, blocking the emergence of a shared class subject.
This leads to a broader question: when a state grounds its very existence in a particular ethnic or national identity, what happens to the working class and to class struggle?
From Labor Zionism to the Capitalist State
Israel’s economy in its first decades differed fundamentally from today’s neoliberal capitalism. The state played an expansive economic role, and the labor movement was more than a bargaining actor in the labor market. The Histadrut, the country’s major labor federation, owned and managed a vast array of enterprises; state companies, cooperatives, kibbutzim, and welfare institutions together formed a distinct economic structure.
This model should not be mistaken for socialism in any strict sense. Public and cooperative ownership existed within a national, Zionist project, and Palestinian Arab workers remained largely excluded from equal integration into this order.
A foundational contradiction was present from the start: Israel’s labor movement was highly organized, but that organization was defined primarily within the project of building a Jewish nation-state. Israeli labor socialism was never a universalist project for uniting Jewish and Arab workers; building a Jewish society and state took priority over transnational class solidarity. This is why, despite its extensive organization, the Israeli labor movement never became a transnational class movement uniting Jewish and Palestinian workers.
1985: Crisis and the Turning Point
The great economic turn did not occur in a vacuum. From the 1970s, Israel’s economy faced mounting difficulties: the 1973 Yom Kippur War left heavy costs, the budget deficit widened, and a banking crisis emerged in the early 1980s, forcing the state to nationalize major banks. But the critical breaking point was runaway inflation, which by the mid-1980s had made the continuation of the old economic model untenable.
In 1985, the government implemented a stabilization program combining wage and price controls, fiscal and monetary contraction, and a set of structural reforms, pulling the economy out of its inflationary crisis. This program can be seen as the turning point in Israel’s shift toward a market-oriented economy, though the neoliberalization of the economy was a gradual process that continued through subsequent decades via privatization, financial liberalization, changes in ownership structures, and the slow erosion of the corporatist model.
Importantly, this turn cannot be reduced simply to a “right-wing assault” on the working class. The stabilization program was carried out within a coalition government, and segments of the Labor Party themselves participated in shaping the new economic order. This distinguishes the Israeli experience from Thatcherism in Britain: there, neoliberalism proceeded through open confrontation with the unions, whereas in Israel the first phase of reform gained legitimacy by presenting itself as rescuing the economy from monetary collapse. For a society facing runaway inflation, economic stability was itself experienced as an achievement rather than an imposition — which helps explain the relative absence of broad social resistance to this first phase of reform.
Privatization and the Collapse of the Labor Bloc
Following stabilization, market reforms continued. Privatization accelerated through the 1990s, state enterprises passed into private hands, and the Israeli economy became more tightly bound to foreign capital, global trade, and technology. During this period the Histadrut lost much of its economic power — not merely because ownership of a few companies changed hands, but because a significant part of the material base of an entire social-political bloc disappeared.
Under the old model, the state, the Histadrut, public enterprises, cooperatives, and the Labor Party formed an interlocking network. Under the new model, the state, private capital, global markets, technology, and foreign investment became the economy’s central axis.
Even so, the working class did not vanish; what changed was its form of organization, its bargaining power, and its political standing. As privatization, outsourcing, and the growth of the service sector reshaped the labor market, the workforce became more diverse and more fragmented — a pattern familiar from many neoliberal economies: the working class does not disappear, but its social organization is broken apart and dispersed.
One should distinguish between union power and the working class’s political power: a union can strike over wages without thereby possessing a political project for transforming the structure of society.
The Palestine Question: A Fracture Within the Working Class Itself
Here we arrive at one of the most important lessons of the Israeli case: the national-ethnic question does not merely divide society at large — it fractures the working class from within.
Palestinian and Jewish workers can share real economic interests in higher wages, job security, affordable housing, and better healthcare and education. But national belonging, legal status, control over land, and political conflict have prevented these shared interests from coalescing into a unified labor movement. Israel’s labor market has never been simply an economic market; nationality and citizenship have shaped it from the start.
When the workforce is divided along lines of nationality and legal status, capital and the state confront a labor force that is organizationally and politically fragmented — a structural advantage for the ruling class. Jewish capitalists and Jewish workers may find common ground within a framework of national security, even as Jewish and Palestinian workers, despite shared economic interests, remain separated from one another.
The war following October 7, 2023 made this dynamic starkly visible: employment for many Palestinian workers in Israel was suspended or restricted, and international unions raised protests over unpaid wages. The national divide, then, is not confined to parliament or borders — it runs through the relationship between capital and labor itself.
This relationship is not fixed or unchangeable. If workers were able to place shared material interests above national divisions, the possibility of a new politics would open — one that could neither deny Jewish history and identity nor disregard Palestinian national rights. A third path would have to begin from social and political equality.
Why Didn’t Neoliberalism Lead to Revolution?
If neoliberalism deepened inequality and eroded social security, why didn’t Israeli society erupt into class rebellion? The answer lies in a combination of factors.
First, the early phase of economic reform coincided with a genuine, severe crisis; for much of society, post-1985 stability was experienced as an achievement rather than an imposition. Second, neoliberalism did not produce only losers. The growth of advanced technology, specialized services, foreign investment, and the security industries created a new middle class. This economy has not distributed its gains evenly, but it has created real opportunities for a substantial layer of professionals, managers, and educated workers, who now sit between big capital and low-wage labor — a social structure that makes revolutionary mobilization considerably harder. Third — and this point is developed further below — existing institutions (elections, unions, collective bargaining, street protest) have provided channels for expressing and moderating discontent without necessarily producing structural change.
This explanation alone, however, is not sufficient, and right-wing or liberal critics challenge this class-based analysis at its foundation. From their perspective, the absence of class rebellion should not be attributed mainly to economic integration or ideological containment; rather, it reflects the view that the ethnic-national divide is not an instrument of class suppression but an independent existential and security reality that precedes any class analysis. In this reading, the solidarity of Israeli Jews around national security is not merely a product of state engineering but a response to genuine threats that class analysis alone cannot account for.
This article’s answer to that critique is not that the security threat is fabricated — the threats have been real. The point is that the reality of the threat does not prevent the state from using that very real experience to organize a national coalition that absorbs class contradictions within it. These two explanations are not rivals; they operate together.
The Security State and the Containment of Class Conflict
Israel is a society in which security is not a matter of foreign policy alone but part of citizens’ everyday experience. Military service, reserve duty, war, and regional threats have given national-security identity an outsized place in society. A person can simultaneously be a worker, a Jew, an Israeli, and a reservist — so class identity is never a person’s only social identity, and in moments of crisis, conflict with an employer may be temporarily overshadowed by the question of security.
This does not mean security is an “ideological illusion.” The point is that a genuine experience of security can be organized by the state into a political form that absorbs class contradictions within a national coalition. Class continues to exist, but in such moments, nation casts a shadow over class.
From the Labor Party to the Tech Economy
The decline of Israel’s Labor Party should be understood in this same light. The party once represented an enormous social network: the Histadrut, an organized working class, the kibbutzim, a large part of the state apparatus, and the secular Zionist elite. As that economic structure disintegrated, the party’s social base weakened along with it. The Labor Party did not simply suffer an electoral defeat; the society that had produced it had changed.
This resembles the broader decline of European social-democratic parties, with the difference that in Israel the Labor Party faced the crisis of labor Zionism and the crisis of the peace process simultaneously. The vacuum this left was not filled by the radical left; a significant part of it was occupied by the nationalist, religious, and security-oriented right.
The 2011 protest movement, which brought large numbers of people into the streets over housing costs and inequality, showed that this social vacuum did not mean the end of discontent. But protest did not turn into revolution, because that discontent still lacked a political organization capable of transforming scattered demands into a project of structural change. The protests remained centered on the cost of living and social justice rather than on ownership and the organization of production — a pattern seen in many societies since the 1980s: social crisis without a revolutionary subject.
Part of what filled this political vacuum was the rise of the tech economy. Beginning in the 1990s and 2000s, the combination of technology, universities, foreign capital, and military experience gave rise to an advanced technology sector later known, in popular narrative, as the “start-up nation.” Israeli companies grew in fields such as cybersecurity, artificial intelligence, medical technology, and defense technology, giving this sector considerable weight in the Israeli economy.
Yet this economy carries an internal contradiction: the advanced technology sector is intensely global, while a large part of the Israeli economy remains dependent on the domestic market and on security policy. Global demand for defense and cybersecurity can boost Israeli exports in this area.
The “security economy,” then, should not be reduced to arms industries alone; cybersecurity, surveillance, artificial intelligence, and intelligence services are part of it as well. This complicates the relationship between war and capital accumulation: war imposes heavy costs on society as a whole, while simultaneously boosting demand for certain industries. This does not mean war is simply a product of military-industrial interests — such an explanation would be reductive. War results from a combination of geopolitical, security, ideological, and class interests. But security capitalism can profit from conditions of permanent insecurity.
The Ethnic State: Solution or Contradiction?
Israel is not merely a capitalist state; it is a national-ethnic one. By an ethnic state, I mean a state that places Jewish national-ethnic identity at the center of its official and institutional definition of state and nation.
This feature is historically comprehensible: Zionism arose in response to centuries of persecution and discrimination against Jews, and above all to the catastrophe of the Holocaust, making the security and political sovereignty of the Jewish people a central concern. But realizing a Jewish state on land where a Palestinian society was also present created a historical contradiction that cannot be resolved by erasing either side from history: Israeli Jews have a right to security and collective life; Palestinians have a right to self-determination, freedom, and equal rights. The question is how these two sets of rights can be reconciled within a stable political structure.
States that tie their political existence to a particular ethnic or national identity face a permanent contradiction in multinational societies: how to balance the primacy of the state’s national identity against the equality of its citizens. If the state’s ethnic identity overrides citizenship rights, the other group will feel dispossessed; if full civic equality is accepted, the state’s ethnic definition must inevitably be modified.
In Israel’s case, the unresolved Palestinian question makes this contradiction far deeper. This is why debate over “one state” or “two states” should not be reduced to a question of geographic borders alone; the more fundamental question is what kind of citizenship, what kind of state, and what kind of relationship between the two peoples is possible.
Nor is the question of ethnic statehood purely a moral one. The ethnic definition of the state can shape the distribution of land, housing, citizenship, employment, investment, and public resources — turning the national question into a question of political economy as well.
A durable way out of this crisis is neither purely military nor simply a matter of agreement among political elites; any new order will also have to resolve social questions of housing, employment, wages, welfare, education, and healthcare. If these are distributed along ethnic lines, national antagonisms will reproduce themselves; but if social rights become equal rights of citizenship, the possibility of transnational solidarity emerges.
This is not a call to deny nations, but to move past the assumption that one nation’s security must be built on another nation’s insecurity. Jewish and Palestinian workers may disagree over history, nationality, and statehood, but on questions of housing, wages, and social welfare they can share common interests — interests that have not yet become a political force, but whose potential cannot be dismissed.
Israel in the World System: A Semi-Periphery Linked to the Core
Israel’s place in the global system also needs a more precise definition. It cannot be treated like Saudi Arabia, a rentier oil state, nor is it, like Turkey, primarily a large industrial-commercial power.
Within world-systems theory, Israel is best understood as a semi-peripheral power — neither a core state nor a simple peripheral one — but a semi-periphery of a particular kind: part of its economy (advanced technology, defense industries, specialized human capital) is directly integrated into the production and capital networks of core states, while its political and security structure remains simultaneously dependent on the strategic backing of core powers, above all the United States. In other words, Israel compensates for its semi-peripheral position not through distance from the core but through a kind of functional integration into it — a pattern that distinguishes it from classical semi-peripheries, which typically mediate raw-material exports or mid-level industry.
This relationship is not one-directional: Israel also produces value for the Western security architecture — military technology, cybersecurity, intelligence, operational experience, and defense industries. The US-Israel relationship, then, should be understood as a form of geopolitical and economic interlinkage rather than a simple relationship of patron and client.
Seen this way, Israel becomes comparable to Saudi Arabia and Turkey, examined in earlier articles: Saudi Arabia draws on oil capital and rentier statehood, Turkey on industry, trade, and geographic position, and Israel on the combination of human capital, technology, defense industries, and a security state — three different paths within the same semi-peripheral position, each aimed at improving the state’s standing within the global division of labor and capitalist competition.
From this vantage point, Israel is not an exception outside global capitalism; it is one particular form of capitalist organization in the Middle East.
War and the Reproduction of the Security State
After October 7, 2023, this structure entered a new phase. Military spending rose, parts of the labor market faced shortages of manpower, and foreign investment came under the pressure of political risk. Israel’s economy has shown real capacity to recover from military shocks, though the risk of renewed war, pressure on public budgets, and reduced investment remain significant concerns.
This economic resilience is itself a sign of the structural strength of the Israeli model, but its cost is clear: the more security and war expenditures rise, the more resources flow toward the military, defense industries, and military reconstruction. An important social question follows from this: if the state must choose between military spending and social spending, which will take priority? Under such conditions, the security state may once again override the welfare state.
Conclusion: Israel as a Compressed Contradiction
Israel is one of the most contradictory cases of contemporary capitalism: a highly advanced, globalized economy entangled in an unresolved national conflict; unions with real organizational capacity, yet a working class that has lost its historic political power; a country that moved from a statist, labor-based economy toward privatization and global capital while remaining one of the most securitized states in the region.
None of these contradictions can be explained by a single factor — not “American imperialism,” not “Zionism,” not “capitalism,” and not “security” alone. What constitutes Israel is the intersection of these structures: neoliberalism did not destroy the working class, it dispersed it and weakened it politically; the ethnic state did not eliminate class conflict, it routed it through the channels of national identity and security.
Seen this way, the question of Israel is part of a larger question of our era: capital has become global, while politics remains organized largely within the framework of nation-states and ethnic identities. In Israel this tension appears in especially compressed form, because state, nation, ethnicity, war, and capitalism are bound together within a single structure.
Israel’s future, then, does not depend only on military strength, election outcomes, or the relationship with Washington; it also depends on whether a new politics becomes possible — one in which security is decoupled from military domination, citizenship from ethnicity, welfare from market logic, and social solidarity from national borders.
The final question will no longer simply be which nation prevails over the other, but whether an order can be built in which no nation must deprive another of its rights in order to secure its own. Perhaps it is precisely here that the Palestinian question moves from being a narrowly geopolitical conflict into a global question about nation, class, capital, and the state.