Why intolerance is bad for business

The economic legacy of anti-Semitism

By Robin Mordfin     
February 26, 2016

From: Magazine

Areas with a history of persecution may distrust financial institutions, and the deep-rooted distrust in finance may have been transmitted from one generation to the next.

Strasbourg, France, is a picturesque city on the Rhine river—with a dark stain on its history. On February 14, 1349, at the height of the Black Death that swept across Europe, residents rounded up and murdered several hundred of the city’s Jews.

Today there is little sign of that violent event, apart from a plaque on the wall of the city’s opera house, and yet the city may still be paying for its historical crimes.

Europe still struggles with anti-Semitism. According to Tel Aviv University’s annual report on anti-Semitism, there were 766 violent incidents targeting Jews across the continent in 2014, the year that Israel launched a military operation in the Gaza Strip. That was more than in any other year in the previous decade. “The overall feeling among vast parts of the Jewish population is one of living in an intensifying anti-Jewish environment that has become not only insulting and threatening, but outright dangerous,” the report states. In a sign of growing tensions, a gunman killed four people in a kosher supermarket in Paris in January 2015.

Of course, Jews are not the only victims of the most recent wave of populist bigotry, which has chiefly targeted Muslims and immigrants. Yet intolerance may be bad economics, and research focused on anti-Semitism illustrates why.

Anti-Semitism can pollute a culture for centuries, according to academic findings. Historical episodes of violence against Jews may affect the present size of an area’s middle class, prevailing wages, and investment habits. Taken together, the research findings indicate that prejudice can be costly—and painfully persistent.

The deep roots of Jew hating

After the Roman Empire officially adopted Christianity in the fourth century, it became more difficult for people to practice other faiths. As the centuries passed, Jews and other minorities were at times isolated in Western Europe, made to take out special permits to settle in an area—and sometimes forced to leave. By the Middle Ages, Jews were being persecuted in many Western European countries, at times massacred or expelled. Some were restricted to living in certain areas and engaging in certain occupations.

History does not always confine itself to the past. Researchers Nico Voigtländer of UCLA and Hans-Joachim Voth, of the University of Zurich, mapped the persistence of anti-Semitism from the Middle Ages into the 20th century. They find that the areas that experienced the most frequent violent attacks on Jews during the Black Death were the same regions where, six centuries later, Germans were most likely to vote for the Nazi Party and engage in anti-Semitic violence.

The researchers offer as an example two similarly sized German cities: Würzburg in Bavaria, which experienced a pogrom during the Black Death; and Aachen in North Rhine-Westphalia, which did not.

In Würzburg, where Jews had lived since the 11th century, some 900 Jews were murdered in 1298 after having been accused of desecrating the sacramental bread, according to Yad Vashem, the Holocaust research center in Jerusalem. Fifty years later, during the Black Death, residents accused Jews of poisoning the city’s wells.

By the 1920s, when the Nazis were growing in popularity, Würzburg saw intermittent violence against Jews. According to the researchers, its residents published ten times more anti-Semitic letters in Nazi newspaper Der Stürmer than any other area, and the Nazi Party scored 6 percent in local elections there in 1928, almost double the German district average. According to records from the German Federal Archive, 44 percent of Würzburg’s Jews were deported, many to concentration camps, during World War II.

In contrast, Aachen had no pogrom during the Black Death, and no anti-Semitic violence in the 1920s. Its residents wrote less than half the number of anti-Semitic letters to the editor that Würzburg did, say Voigtländer and Voth, and only 1 percent of the population voted for the Nazis in 1928. Jews suffered from federal anti-Semitic legislation put in place during the run-up to World War II, but the city ultimately deported a lower percentage—37 percent—of its Jews.

Voigtländer and Voth find a few locations where anti-Semitism weakened or even disappeared, as it did in towns that specialized in long-distance trade, where it was costly to discriminate against outsiders. Those exceptions aside, “the influence of medieval pogroms for 20th century anti-Semitism underlines the importance of deeper historical antecedents of post-WWI German anti-Semitism at the local level,” they write. Anti-Semitism may ebb and flow, as it did in the years between the Black Death and Nazi rule, but even in its dormancy it can be destructive.

Anti-Semitism leads to lower stock-market participation

Economists are quantifying the effects of such dormant hate, arguing, for example, that anti-Semitism is linked to people distrusting financial institutions, including the stock market, commercial banks, and local banks.

Jews have a reputation for being involved in finance and moneylending, although their role is a matter of debate among historians and other academics. While some argue that Jews excelled in moneylending due to factors such as high literacy levels, the University of Chicago’s David Nirenberg says that Jews in finance is an old, anti-Semitic, and unwarranted cliché. He says that after playing prominent roles in moneylending for short periods of time in some medieval Christian societies, Jews came to represent those roles in the Christian imagination and literature. “There were no Jews in Chaucer’s or in Shakespeare’s England, but both used Jews as representations of avarice and moneylending,” says Nirenberg, who adds that Jews only became significant in European banking starting in the late 18th century, and always remained a small minority in the financial sector, even as that sector came to be stereotyped as “Jewish.”

To examine more closely the lasting economic effects of anti-Semitism, the University of Maryland’s Francesco D’Acunto, Leibniz University Hanover’s Marcel Prokopczuk, and Chicago Booth’s Michael Weber used data on historical persecution of Jews, including Voigtländer and Voth’s data, election results, and a survey of a representative sample of contemporary Germans, collected between 1984 and 2010. The researchers find that in German counties with higher rates of historical persecution of Jews, contemporary residents trusted the stock market significantly less than other Germans. In some places, many people avoided investing their money in stocks—a decision generally regarded as bad for an economy. And irrespective of the present-day level of anti-Semitism, residents in counties with higher historical anti-Jewish sentiment still mistrusted the stock markets and were less likely to invest in stocks.

The researchers looked back to 1349, when not only were Jews massacred in Strasbourg, there were also pogroms in a string of other European cities, including Erfurt, Germany; Basel, Switzerland; Aragon, an autonomous region of Spain; and Flanders, Belgium.

Households in counties that experienced a pogrom in 1349 were, centuries later, significantly less likely to invest than households in counties that didn’t have a pogrom, the researchers find. Pogroms then correlated with a 2 percentage point lower participation rate in the financial markets. Moreover, households in counties that had high levels of persecution in 1349 were 10 percent less likely to have a mortgage, despite average levels of home ownership. And where persecution existed, people held fewer bank deposits and “appear more likely to keep their money in cash form,” the researchers write.

D’Acunto, Prokopczuk, and Weber see several possible explanations. Jewish persecution may correlate with what they describe as “backwardness,” which manifests itself as xenophobia and generalized distrust. Also, households that remain anti-Semitic even now may continue to associate stock markets with Jews, and therefore not put their money in stocks, the researchers hypothesize. Yet they doubt that these two possible explanations could completely explain the effects they observe, as those effects are consistent across households’ varying education levels.

They gravitate toward a third explanation: areas with a history of persecution may distrust financial institutions, and the deep-rooted distrust in finance may have been transmitted from one generation to the next. “This last reason is particularly interesting when we bring education into the mix,” Weber notes. Since World War II, the German government has provided education that has specifically addressed and decreased anti-Semitism, he says, but the government doesn’t put the same emphasis on financial literacy or economic education. Education appears to be chipping away at anti-Semitism but not at a prejudice that may be affiliated: the general mistrust of financial institutions.

Anti-Semitism hampers entrepreneurship

While anti-Semitism lowers investment rates, it may also produce a more general distrust of business. In areas with a long history of anti-Semitism, residents surveyed by researchers expressed less satisfaction with the economy and engaged less in entrepreneurship.

This finding comes from a study of the Pale of Settlement, the area to which Jews were confined in the Russian Empire for 123 years leading up to World War I. The region encompasses large portions of what is today Poland, Lithuania, Belarus, Ukraine, western Russia, and Moldova. Before World War II, Jews accounted for 37 percent of the urban population there, and 11 percent of the total. The majority of Jews in the Pale had fled by the end of 1942. But while Jews are gone, as is the official Pale itself, a mindset remains: another set of economists argues that ethnic hatred toward the Jews created a persistent antimarket culture.

Irena Grosfeld and Ekaterina Zhuravskaya, both of the Paris School of Economics, and Alexander Rodnyansky, a PhD candidate at Princeton University, looked at residents of what they describe as “transition countries” affected by the fall of the Soviet Union and its satellites. The researchers aligned this data with geographic information on the Pale, demographic data, and historical numbers on pogroms.

Over the centuries, Jews and non-Jews exhibited considerable hostility and rivalry in the Pale. While the groups had many market transactions, they had few social interactions, as documented by historians including Yuri Slezkine in his 2004 book The Jewish Century. Grosfeld, Rodnyansky, and Zhuravskaya argue that the presence of a group with an alien religion, language, and traditions gave non-Jews a feeling of solidarity. “Self-identification of one ethnic group and cohesion among its members may depend on the co-existence with another (rival) group,” they write.

The us-versus-them feeling manifested itself in business dealings. A number of previous studies, including Slezkine’s, suggest that the majority of Jews in the Pale had predominantly white-collar occupations. While most non-Jews farmed and did other less-skilled work, many Jews engaged in activities such as trading and finance—which many historians believe helped develop markets and capitalism in the region. The proportion of entrepreneurs and self-employed individuals was much higher among Jews than among their non-Jewish counterparts.

Jews came to represent a liberal, promarket force—one that triggered a conservative, antimarket, and anti-Jewish backlash. Analyzing pogroms in the area between 1821 and 1946, the researchers find that areas that experienced the most pogroms during that time also had the highest antimarket sentiments in the late 20th century.

They also find that recent residents of what had been the Pale, compared to their counterparts elsewhere in Russia, voted more often for antimarket parties with socialist or communist leanings and had less interest in markets, entrepreneurship, and democracy. Centuries of anti-Semitic practices and beliefs have left behind a distrust of markets and business. “The Pale of Settlement and the Holocaust have tangible consequences for political and social development of Eastern Europe today,” the researchers argue.

Anti-Semitism destroys the middle class

MIT’s Daron Acemoğlu, Chicago Booth’s Tarek Alexander Hassan, and University of Chicago’s James A. Robinson didn’t study anti-Semitism per se, but a result of it—the mass murder of Jews that occurred during the Holocaust. What, they ask, is the enduring effect of the Holocaust on the societies left behind? The result, they find, is a devastated middle class and weakened economic prospects in the long run.


The researchers looked at 278 cities across the Soviet Union, 76 of which were occupied by the Germans during World War II. While a handful of those cities were located in the Pale of Settlement, the majority were in areas farther east where Jews migrated after the restrictions of the Pale were lifted in 1917. Using census data and German death-squad reports, the researchers looked at 48 oblasts, administrative units larger than US counties but smaller than US states.

Before Germany invaded the Soviet Union in June 1941, Jews were “heavily overrepresented in what we would typically consider to be ‘middle class’ occupations,” write Acemoğlu, Hassan, and Robinson. More than two-thirds of Jews in the 48 oblasts had white-collar jobs, while only 15 percent of non-Jews held such positions. In oblasts with the largest Jewish populations, 68 percent of physicians and 10 percent of all white-collar workers were Jewish, despite the fact that Jews represented only 1 percent of the population.

The researchers find that in oblasts in which Jews constituted 1 percent of the middle class in 1939, the middle class shrank 5 percent by 1989. The Holocaust thus appears to have set these areas on a divergent course from that followed by other places. Removing Jews from these oblasts created an enormous economic and social shock. The disappearance of middle-class Jews “may have changed the overall economic and social development of the areas and set them on a path that does not allow for the creation of middle-class jobs,” Hassan says. They may, he adds, not be places that attract aspiring professionals long term.

Oblasts where Jews were most persecuted and displaced had, later on, lower wages and per-capita income than the national average. These areas showed greater support for communist candidates in the 1990s, were less reform minded, and were more likely to cling to old loyalties—such as voting in support of the preservation of the Soviet Union in March 1991. The authors used support for noncommunist candidates in the 1999 Duma elections as a proxy for political development, and compared this with population and income growth in cities that were impacted most by the Holocaust. In these areas, the researchers find, the middle class has yet to recover.

Anti-Semitism damages education for all

The loss of teachers, in particular, has had significant, long-lasting effects. In 1933, soon after the Nazi Party took power, it passed a law that allowed the government to purge Jews from the civil service. More than 15 percent of university professors, schoolteachers, doctors, and other white-collar professionals were dismissed as a result.

The departure had a direct and quantifiable effect on students. Mevlude Akbulut-Yuksel and Mutlu Yuksel, both of Dalhousie University in Nova Scotia, find that adults who were school aged during Nazi rule wound up with six months less of schooling on average in adulthood than the national average. Those who lived in cities that had the highest fraction of Jews prior to the war had almost 10 months less formal education. Children in Frankfurt, where Jews had been a relatively large 3.25 percent of the population, had around one less year of schooling.

Germans affected by the teacher exodus were later less likely to have gone to college or to have obtained postgraduate degrees. They ended up earning less money. The experience of the war made them less likely to have an interest in politics and conditioned them to take fewer risks as adults—effects that continue to the present day, say the researchers. Residents of Frankfurt who were in school during the Nazi era remain 23 percent less likely to show an interest in politics than the same cohort in Bremen, where Jews comprised a smaller 0.4 percent of the population.

The dismissal of scientists all over Germany had a similarly significant effect. In 1933, more than 1,000 academics were dismissed from German universities, including 15 percent of physicists, 14 percent of chemists, and 19 percent of mathematicians. Fabian Waldinger of the University of Warwick points out that the majority dismissed were Jewish, and the rest were “politically unreliable” individuals.

In this period, Albert Einstein resigned from the Prussian Academy of Sciences, and 11 Nobel laureates lost their jobs. In the fall of 1933, only 590 Jewish students were left in German universities, compared with 3,950 the previous summer. Anti-Semitic faculty and Hitler Youth activists soon forced out the rest.

Waldinger observes that removing faculty in physics, chemistry, and math hurt the productivity of faculty who remained behind, if they lost a coauthor. He notes that in physics, the loss of a coauthor lowered productivity of the remaining scientist by 13–16 percent.

Before World War II, Germany was the world’s scientific superpower. Universities in Göttingen and Berlin had top German scholars on their faculties and attracted an array of international scientists at the pinnacle of their professions. Among those were Arthur Compton, who won the Nobel Prize in Physics in 1927; Julius Robert Oppenheimer, a theoretical physicist who helped develop the first atom bomb; and Enrico Fermi, an Italian physicist who helped develop the first nuclear reactor, and whose wife was Jewish. German scientists working in the universities at that time included James Franck, who won the Nobel Prize in Physics in 1925, and Werner Heisenberg, who won the award in 1932.

Using data from 105 science departments, Waldinger estimates that the dismissals reduced output by German and Austrian science departments by 34 percent. He argues that productivity declines persisted until 1980 and helped Germany lose its preeminence in science to the United States.

Losing academics proved more destructive than physical bombings of buildings and labs. Waldinger’s data indicate it took only 10–15 years to rebuild damaged and destroyed property, but German universities never recovered from the loss of human capital.

Protecting minorities, protecting society

Jews are far from the only minority group to have been scapegoated over the centuries. The Roma, homosexuals, and Muslims are just three examples of groups that have historically—and very recently—been victims of intolerance.

In the past year, rhetoric about Muslims and other perceived outsiders has grown as a political issue. US presidential hopeful Donald Trump built his campaign on demonizing Mexican and Muslim immigrants, echoing historical anti-immigrant sentiment. This has proven popular, even though—as the nonprofit, nonpartisan Economic Policy Institute points out—deporting unauthorized immigrants, “would actually hurt, not help, the economy and the jobs situation.” In Europe, concern over the influx of immigrants has solidified far-right parties such as France’s National Front, which dominated the first round of regional elections last year.

Strasbourg, whose residents once massacred Jews, is now the seat of the European Parliament, where lawmakers are grappling with how to handle a flood of more than 1 million refugees, a good portion of them fleeing the civil war in Syria. The response of some sovereign countries has been to shut their doors. Hungary built a razor-wire fence to keep migrants from entering the country. Even Sweden and Denmark, which have traditionally welcomed immigrants, closed their borders this year. Germany’s open-door policy is likely to come under increasing pressure.

Policy makers would do well to pause, and check the data. While the migrant crisis is complex, the research suggests that xenophobia can be costly. Openness, rather than intolerance, may be a better way to economic growth.

Works cited

Daron Acemoğlu, Tarek Alexander Hassan, and James A. Robinson, “Social Structure and Development: A Legacy of the Holocaust in Russia,” Quarterly Journal of Economics, June 2011.

Mevlude Akbulut-Yuksel and Mutlu Yuksel, “The Long-Term Direct and External Effects of Jewish Expulsions in Nazi Germany,” American Economic Journal: Economic Policy, August 2015.

Francesco D’Acunto, Marcel Prokopczuk, and Michael Weber, “Distrust in Finance Lingers: Jewish Persecution and Households’ Investments,” Working paper, December 2013.

Edward L. Glaeser, “The Political Economy of Hatred,” Quarterly Journal of Economics, February 2005.

Irena Grosfeld, Alexander Rodnyansky, and Ekaterina Zhuravskaya, “Persistent Anti-Market Culture: A Legacy of the Pale of Settlement after the Holocaust,” American Economic Journal: Economic Policy, August 2013.

Yuri Slezkine, The Jewish Century, Princeton: Princeton University Press, 2006 (reprint).

Nico Voigtländer and Hans-Joachim Voth, “Persecution Perpetuated: The Medieval Origins of Anti-Semitic Violence in Nazi Germany,” Quarterly Journal of Economics, May 2012.

Fabian Waldinger, “Bombs, Brains, and Science: The Role of Human Physical Capital for the Creation of Scientific Knowledge,” Review of Economics and Statistics, forthcoming.

———, “Peer Effects in Science,” Review of Economic Science, November 2011.