Following a high-profile career in finance in which he became one of the first well-known hedge fund managers, Michael Steinhardt began the Taglit Birthright Israel program, a philanthropic enterprise which has provided free 10-day trips to Israel for some 220,000 Jewish youth to learn more about their heritage. Steinhardt spoke with Knowledge@Wharton about how the program helps to improve the country’s image and the challenges of what he calls a deteriorating educational system in Israel – marked by a brain drain in higher education. Steinhardt also discussed the country’s culture of business innovation and how deep democratic roots can sometimes slow progress.

an edited excerpt from the conversation:

Steinhardt: I started Birthright to try to instill in the next generation of non-Orthodox Jews a sense of their Jewish heritage. And that’s basically what it’s about. The quality of Jewish education in America is really poor. Many young people go on the trip because it’s free, and they would take a free trip to Israel or India or Italy or Ireland. But they’re only offered a free trip to Israel. And many of them come back understanding that there is something to their Jewish heritage. They come back understanding that when they walk in the cemetery on Mount Zion and they see photographs on the graves of 20-year old Israeli soldiers that it’s not but for an accident of history that they could have been a soldier in the Israeli army as opposed to a kid growing up in Great Neck [New York] and living an upper-middle-class life filled with luxury and never having to think about the military. The idea is to create, at this last moment in youth, a sense of Jewish identity, which the Jewish education system in America has failed to do.

Knowledge@Wharton: Has the program achieved what you wanted it to?

Steinhardt: I think the real answer to that will only be seen in the longer term. There are some positive indications. We’ve sent 220,000 young people on this program from, I think, 52 different countries, and I think as many as 15,000 have returned to Israel – even though the objective is not for them to return to Israel, not for them to make aliyah. But some of them are deeply inspired. Many of them, to the degree we can measure it – and we do measure it – act differently than their peer groups who have not gone on Birthright. They tend to want to marry Jewish people. They tend to want to observe Shabbat [and do] things like that relatively more. So, there are at least superficial indications that [the program] is having a positive impact.

Knowledge@Wharton: In your professional life, you think so consciously about return on investment. How would you measure the return on the investment you have made in the Birthright program?

Steinhardt: I would consider it almost infinite. I am an absolutely irreligious person. I am an atheist, actually. So I don’t believe in [ideas like] if you save one soul or three souls, you save the world…. But so many of these young people have had their lives changed [by Birthright], and they say it openly and happily and proudly. I guess I buy those statements…. [And] it’s only 10 days. Think about your life: How many 10 [day periods] do you even remember in your life? I think these 10 days have had a remarkable impact on many, many of these kids. In that sense, it justifies the investment.

Knowledge@Wharton: As you were speaking, I could almost see in microcosm the program that you described as being a part of the solution to the issue we began with, which is how does one market Israel and improve the Israeli brand? Are you aware of other such programs that have had a positive effect on Israel’s reputation?

Steinhardt: The Diaspora community has at various times organized itself to try to facilitate the success of Israeli commercial brands. And to my knowledge, none of this has been very meaningful – getting together and buying Israeli food products and other things. I don’t know of anything that’s meant very much. I have some strong views, and some of them are a little bit enigmatic. They’re not exactly a direct response to your question, but you’ll see what I mean.

From the time of its inception, Israel was viewed as a place without natural resources. It was surrounded by countries with oil and other things. And it had nothing. It was a largely desert country that had but one asset, and that asset was the Jewish brain – thus all that talk in the early days of its statehood about how it turned its land green when the land around it was mostly brown; how it had used its ingenuity and its technology in agriculture to achieve miraculous improvements in agricultural productivity, etc. And it was true. Indeed, some of that sort of stuff has gone into international markets…. It really has wonderful world recognition as an expert in using scarce water resources very effectively through fertilization and other things, and it has become a world leader in that. But my point is that it was the brain, the Israeli brain, the Jewish brain that was greatly emphasized. And in the first years of its existence, Israel built a number of universities mostly from immigrant European intellectuals who were first-rate by any standard.

But now it’s 60-plus years later and the Israeli education system has fallen apart – shockingly so, where both the higher education system and the secondary education system are ranked well toward the bottom of the OECD [Organization for Economic Co-operation and Development] measurements…. It’s almost shocking that Israel, which is the product of the great Jewish brain and a great emphasis on education, has fallen to such a low level. There have been, as you may or may not know, all sorts of education commissions and conclusions and recommendations within Israel as to how to change things, and the results to date have been zero.

Knowledge@Wharton: Why did that happen? What do you think went wrong?

Steinhardt: It’s a good question. I think what went wrong, which goes wrong perhaps in a number of Western countries is, number one, the country allocates insufficient resources to its world of education. The teachers in Israel are paid really poorly. Now you might say they are paid really poorly in a lot of places, but in Israel they really are, relative to other countries, paid appallingly poorly. In the higher education system, a good 25% of Israel’s senior professors have left Israel to teach at first-class universities in other countries, mostly in the United States, seemingly on a permanent basis. When you talk about brain drain, there ain’t no brain drain as there has been in Israel. So, a vast number of people have left Israel for considerably higher salaries outside of Israel in higher education.

And in secondary education, the compensation is appallingly poor – an objective statement by almost any measure. You might then ask the question: Well, what’s going on? If that’s happened, why does Israel continue to have this extraordinary degree of innovation? Why does Israel have the second-largest – or largest – number of NASDAQ listings of any foreign country? You hear all these things that don’t seem to make sense in light of the fact that Israel’s education system is so bad. What’s the answer? I’m not sure.

There are two possible answers. One, the economist’s answer, is that there’s a lag. A lousy education system is going to catch up with them and they’re going to start falling apart in terms of innovation. Another, different, answer is that so much of this extraordinary innovation which has created these extraordinary companies – which have done so well – doesn’t come so much from their education system but comes from their military. And their military continues to be truly first rate. Another possible answer is they have had this extraordinary injection of people beginning in the 1990s where almost 20% of their population was in one fell swoop added from Russia. That was a highly educated population and they added a lot to their innovative potential.

Knowledge@Wharton: Could it also be that the Israeli brain is more resilient than people sometimes give it credit for?

Steinhardt: That’s another interesting question. What is it about that environment that provokes innovation, that provokes competition? It is, I assure you, the toughest, most competitive environment in the world. And maybe education or no education, these people work in an environment that is so challenging that somehow only the fittest survive. And when they do survive, they become extraordinarily able. It seems that there’s something to that, but I’m not exactly sure how you articulate it.

Knowledge@Wharton: Necessity being the mother of invention might be one way.

Steinhardt: That’s one way to say it. Exactly.

Here’s the complete interview, Michael Steinhardt discussion on Israel’s Place in the World.