Why Nations Fail: The Origins of Power, Prosperity, and Poverty

F
EAR OF
 I
NDUSTRY
Without the changes in political institutions and political power
similar to those that emerged in England after 1688, there was little
chance for absolutist countries to benefit from the innovations and
new technologies of the Industrial Revolution. In Spain, for example,
the lack of secure property rights and the widespread economic
decline meant that people simply did not have the incentive to make
the necessary investments and sacrifices. In Russia and Austria-
Hungary, it wasn’t simply the neglect and mismanagement of the
elites and the insidious economic slide under extractive institutions
that prevented industrialization; instead, the rulers actively blocked
any attempt to introduce these technologies and basic investments in
infrastructure such as railroads that could have acted as their
conduits.
At the time of the Industrial Revolution, in the eighteenth and early
nineteenth centuries, the political map of Europe was quite different
from how it is today. The Holy Roman Empire, a patchwork quilt of
more than four hundred polities, most of which would eventually

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coalesce into Germany, occupied most of Central Europe. The House
of Habsburg was still a major political force, and its empire, known as
the Habsburg or Austro-Hungarian Empire, spread over a vast area of
around 250,000 square miles, even if it no longer included Spain,
after the Bourbons had taken over the Spanish throne in 1700. In
terms of population, it was the third-largest state in Europe and
comprised one-seventh of the population of Europe. In the late
eighteenth century the Habsburg lands included, in the west, what is
today Belgium, then known as the Austrian Netherlands. The largest
part, however, was the contiguous block of lands based around
Austria and Hungary, including the Czech Republic and Slovakia to
the north, and Slovenia, Croatia, and large parts of Italy and Serbia to
the south. To the east it also incorporated much of what is today
Romania and Poland.
Merchants in the Habsburg domains were much less important than
in England, and serfdom prevailed in the lands in Eastern Europe. As
we saw in 
chapter 4
, Hungary and Poland were at the heart of the
Second Serfdom of Eastern Europe. The Habsburgs, unlike the Stuarts,
were successful in sustaining strongly absolutist rule. Francis I, who
ruled as the last emperor of the Holy Roman Empire, between 1792
and 1806, and then emperor of Austria-Hungary until his death in
1835, was a consummate absolutist. He did not recognize any
limitations on his power and, above all, he wished to preserve the
political status quo. His basic strategy was opposing change, any sort
of change. In 1821 he made this clear in a speech, characteristic of
Habsburg rulers, he gave to the teachers at a school in Laibach,
asserting, “I do not need savants, but good, honest citizens. Your task
is to bring young men up to be this. He who serves me must teach
what I order him. If anyone can’t do this, or comes with new ideas, he
can go, or I will remove him.”
The empress Maria Theresa, who reigned between 1740 and 1780,
frequently responded to suggestions about how to improve or change
institutions by remarking. “Leave everything as it is.” Nevertheless,
she and her son Joseph II, who was emperor between 1780 and 1790,
were responsible for an attempt to construct a more powerful central

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state and more effective administrative system. Yet they did this in
the context of a political system with no real constraints on their
actions and with few elements of pluralism. There was no national
parliament that would exert even a modicum of control on the
monarch, only a system of regional estates and diets, which
historically had some powers with respect to taxation and military
recruitment. There were even fewer controls on what the Austro-
Hungarian Habsburgs could do than there were on Spanish monarchs,
and political power was narrowly concentrated.
As Habsburg absolutism strengthened in the eighteenth century, the
power of all non-monarchical institutions weakened further. When a
deputation of citizens from the Austrian province of the Tyrol
petitioned Francis for a constitution, he responded, “So, you want a
constitution! … Now look, I don’t care for it, I will give you a
constitution but you must know that the soldiers obey me, and I will
not ask you twice if I need money … In any case I advise you to be
careful what you are going to say.” Given this response, the Tyrolese
leaders replied, “If thou thinkest thus, it is better to have no
constitution,” to which Francis answered, “That is also my opinion.”
Francis dissolved the State Council that Maria Theresa had used as
a forum for consultation with her ministers. From then on there
would be no consultation or public discussion of the Crown’s
decisions. Francis created a police state and ruthlessly censored
anything that could be regarded as mildly radical. His philosophy of
rule was characterized by Count Hartig, a long-standing aide, as the
“unabated maintenance of the sovereign’s authority, and a denial of
all claims on the part of the people to a participation in that
authority.” He was helped in all this by Prince von Metternich,
appointed as his foreign minister in 1809. Metternich’s power and
influence actually outlasted that of Francis, and he remained foreign
minister for almost forty years.
At the center of Habsburg economic institutions stood the feudal
order and serfdom. As one moved east within the empire, feudalism
became more intense, a reflection of the more general gradient in
economic institutions we saw in 
chapter 4
, as one moved from

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Western to Eastern Europe. Labor mobility was highly circumscribed,
and emigration was illegal. When the English philanthropist Robert
Owen tried to convince the Austrian government to adopt some social
reforms in order to ameliorate the conditions of poor people, one of
Metternich’s assistants, Friedrich von Gentz, replied, “We do not
desire at all that the great masses shall become well off and
independent … How could we otherwise rule over them?”
In addition to serfdom, which completely blocked the emergence of
a labor market and removed the economic incentives or initiative
from the mass of the rural population, Habsburg absolutism thrived
on monopolies and other restrictions on trade. The urban economy
was dominated by guilds, which restricted entry into professions.
Until 1775 there were internal tariffs within Austria itself and in
Hungary until 1784. There were very high tariffs on imported goods,
with many explicit prohibitions on the import and export of goods.
The suppression of markets and the creation of extractive economic
institutions are of course quite characteristic of absolutism, but
Francis went further. It was not simply that extractive economic
institutions removed the incentive for individuals to innovate or
adopt new technology. We saw in 
chapter 2
 how in the Kingdom of
Kongo attempts to promote the use of plows were unsuccessful
because people lacked any incentive, given the extractive nature of
the economic institutions. The king of Kongo realized that if he could
induce people to use plows, agricultural productivity would be
higher, generating more wealth, which he could benefit from. This is
a potential incentive for all governments, even absolutist ones. The
problem in Kongo was that people understood that whatever they
produced could be confiscated by an absolutist monarch, and
therefore they had no incentive to invest or use better technology. In
the Habsburg lands, Francis did not encourage his citizens to adopt
better technology; on the contrary, he actually opposed it, and
blocked the dissemination of technologies that people would have
been otherwise willing to adopt with the existing economic
institutions.
Opposition to innovation was manifested in two ways. First, Francis

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I was opposed to the development of industry. Industry led to
factories, and factories would concentrate poor workers in cities,