Why Nations Fail

by Daron Acemoglu

  A SMALL DIFFERENCE THAT MATTERED

  Absolutism crumbled in England during the seventeenth century but got stronger in Spain. The Spanish equivalent of the English Parliament, the Cortes, existed in name only. Spain was forged in 1492 with the merger of the kingdoms of Castile and Aragon via the marriage of Queen Isabella and King Ferdinand. That date coincided with the end of the Reconquest, the long process of ousting the Arabs who had occupied the south of Spain, and built the great cities of Granada, Cordova, and Seville, since the eighth century. The last Arab state on the Iberian Peninsula, Granada, fell to Spain at the same time Christopher Columbus arrived in the Americas and started claiming lands for Queen Isabella and King Ferdinand, who had funded his voyage.

  The merger of the crowns of Castile and Aragon and subsequent dynastic marriages and inheritances created a European superstate. Isabella died in 1504, and her daughter Joanna was crowned queen of Castile. Joanna was married to Philip of the House of Habsburg, the son of the emperor of the Holy Roman Empire, Maximilian I. In 1516 Charles, Joanna and Philip’s son, was crowned Charles I of Castile and Aragon. When his father died, Charles inherited the Netherlands and Franche-Comté, which he added to his territories in Iberia and the Americas. In 1519, when Maximilian I died, Charles also inherited the Habsburg territories in Germany and became Emperor Charles V of the Holy Roman Empire. What had been a merger of two Spanish kingdoms in 1492 became a multicontinental empire, and Charles continued the project of strengthening the absolutist state that Isabella and Ferdinand had begun.

  The effort to build and consolidate absolutism in Spain was massively aided by the discovery of precious metals in the Americas. Silver had already been discovered in large quantities in Guanajuato, in Mexico, by the 1520s, and soon thereafter in Zacatecas, Mexico. The conquest of Peru after 1532 created even more wealth for the monarchy. This came in the form of a share, the “royal fifth,” in any loot from conquest and also from mines. As we saw in chapter 1, a mountain of silver was discovered in Potosí by the 1540s, pouring more wealth into the coffers of the Spanish king.

  At the time of the merger of Castile and Aragon, Spain was among the most economically successful parts of Europe. After its absolutist political system solidified, it went into relative and then, after 1600, absolute economic decline. Almost the first acts of Isabella and Ferdinand after the Reconquest was the expropriation of the Jews. The approximately two hundred thousand Jews in Spain were given four months to leave. They had to sell off all their land and assets at very low prices and were not allowed to take any gold or silver out of the country. A similar human tragedy was played out just over one hundred years later. Between 1609 and 1614, Philip III expelled the Moriscos, the descendants of the citizens of the former Arab states in the south of Spain. Just as with the Jews, the Moriscos had to leave with only what they could carry and were not allowed to take with them any gold, silver, or other precious metals.

  Property rights were insecure in other dimensions under Habsburg rule in Spain. Philip II, who succeeded his father, Charles V, in 1556, defaulted on his debts in 1557 and again in 1560, ruining the Fugger and Welser banking families. The role of the German banking families was then assumed by Genoese banking families, who were in turn ruined by subsequent Spanish defaults during the reign of the Habsburgs in 1575, 1596, 1607, 1627, 1647, 1652, 1660, and 1662.

  Just as crucial as the instability of property rights in absolutist Spain was the impact of absolutism on the economic institutions of trade and the development of the Spanish colonial empire. As we saw in the previous chapter, the economic success of England was based on rapid mercantile expansion. Though, compared with Spain and Portugal, England was a latecomer to Atlantic trade, she allowed for relatively broad-based participation in trading and colonial opportunities. What filled the Crown’s coffers in Spain enriched the newly emerging merchant class in England. It was this merchant class that would form the basis of early England economic dynamism and become the bulwark of the anti-absolutist political coalition.

  In Spain these processes that led to economic progress and institutional change did not take place. After the Americas had been discovered, Isabella and Ferdinand organized trade between their new colonies and Spain via a guild of merchants in Seville. These merchants controlled all trade and made sure that the monarchy got its share of the wealth of the Americas. There was no free trade with any of the colonies, and each year a large flotilla of ships would return from the Americas bringing precious metals and valuable goods to Seville. The narrow, monopolized base of this trade meant that no broad class of merchants could emerge via trading opportunities with the colonies. Even trade within the Americas was heavily regulated. For example, a merchant in a colony such as New Spain, roughly modern Mexico, could not trade directly with anyone in New Granada, modern Colombia. These restrictions on trade within the Spanish Empire reduced its economic prosperity and also, indirectly, the potential benefits that Spain could have gained by trading with another, more prosperous empire. Nevertheless, they were attractive because they guaranteed that the silver and gold would keep flowing to Spain.

  The extractive economic institutions of Spain were a direct result of the construction of absolutism and the different path, compared with England, taken by political institutions. Both the Kingdom of Castile and the Kingdom of Aragon had their Cortes, a parliament representing the different groups, or “estates,” of the kingdom. As with the English Parliament, the Castilian Cortes needed to be summoned to assent to new taxes. Nevertheless, the Cortes in Castile and Aragon primarily represented the major cities, rather than both the urban and rural areas, as the English Parliament did. By the fifteenth century, it represented only eighteen cities, each of whom sent two deputies. In consequence, the Cortes did not represent as broad a set of groups as the English Parliament did, and it never developed as a nexus of diverse interests vying to place constraints on absolutism. It could not legislate, and even the scope of its powers with respect to taxation was limited. This all made it easier for the Spanish monarchy to sideline the Cortes in the process of consolidating its own absolutism. Even with silver coming from the Americas, Charles V and Philip II required ever-increasing tax revenues to finance a series of expensive wars. In 1520 Charles V decided to present the Cortes with demands for increased taxation. Urban elites used the moment to call for much wider change in the Cortes and its powers. This opposition turned violent and quickly became known as the Comunero Rebellion. Charles was able to crush the rebellion with loyal troops. Throughout the rest of the sixteenth century, though, there was a continuous battle as the Crown tried to wrest away from the Cortes what rights to levy new taxes and increase old ones that it had. Though this battle ebbed and flowed, it was ultimately won by the monarchy. After 1664 the Cortes did not meet again until it would be reconstructed during the Napoleonic invasions almost 150 years later.

  In England the defeat of absolutism in 1688 led not only to pluralistic political institutions but also to the further development of a much more effective centralized state. In Spain the opposite happened as absolutism triumphed. Though the monarchy emasculated the Cortes and removed any potential constraints on its behavior, it became increasingly difficult to raise taxes, even when attempted by direct negotiations with individual cities. While the English state was creating a modern, efficient tax bureaucracy, the Spanish state was again moving in the opposite direction. The monarchy was not only failing to create secure property rights for entrepreneurs and monopolizing trade, but it was also selling offices, often making them hereditary, indulging in tax farming, and even selling immunity from justice.

  The consequences of these extractive political and economic institutions in Spain were predictable. During the seventeenth century, while England was moving toward commercial growth and then rapid industrialization, Spain was tailspinning toward widespread economic decline. At the start of the century, one in five people in Spain was living in urban areas. By the end, this figure had halved to
one in ten, in a process that corresponded to increasing impoverishment of the Spanish population. Spanish incomes fell, while England grew rich.

  The persistence and the strengthening of absolutism in Spain, while it was being uprooted in England, is another example of small differences mattering during critical junctures. The small differences were in the strengths and nature of representative institutions; the critical juncture was the discovery of the Americas. The interaction of these sent Spain off on a very different institutional path from England. The relatively inclusive economic institutions that resulted in England created unprecedented economic dynamism, culminating in the Industrial Revolution, while industrialization did not stand a chance in Spain. By the time industrial technology was spreading in many parts of the world, the Spanish economy had declined so much that there was not even a need for the Crown or the land-owning elites in Spain to block industrialization.

  FEAR OF INDUSTRY

  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 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 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 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 I was opposed to the development of industry. Industry led to factories, and factories would concentrate poor workers in cities, particularly in the capital city of Vienna. Those workers might then become supporters for opponents of absolutism. His policies were aimed at locking into place the traditional elites and the political and economic status quo. He wanted to keep society primarily agrarian. The best way to do this, Francis believed, was to stop the factories being built in the first place. This he did directly—for instance, in 1802, banning the creation of new factories in Vienna. Instead of encouraging the importation and adoption of new machinery, the basis of industrialization, he banned it until 1811.

  Second, he opposed the construction of railways, one of the key new technologies that came with the Industrial Revolution. When a plan to build a northern railway was put before Francis I, he replied, “No, no, I will have nothing to do with it, lest the revolution might come into the country.”

  Since the government would not grant a concession to build a steam railway, the first railway built in the empire had to use horse-drawn carriages. The line, which ran between the city of Linz, on the Danube, to the Bohemian city of Budweis, on the Moldau River, was built with gradients and corners, which meant that it was impossible subsequently to convert it to steam engines. So it continued with horse power until the 1860s. The economic potential for railway development in the empire had been sensed early by the banker Salomon Rothschild, the representative in Vienna of the great banking family. Salomon’s brother Nathan, who was based in England, was very impressed by George Stephenson’s engine “The Rocket” and the potential for steam locomotion. He contacted his brother to encourage him to look for opportunities to develop railways in Austria, since he believed that the family could make large profits by financing railway development. Nathan agreed, but the scheme went nowhere because Emperor Francis again simply said no.