Why Nations Fail

by Daron Acemoglu

  This was all to change soon. In 1791 the French National Assembly emancipated French Jewry. The French armies were now also occupying the Rhineland and emancipating the Jews of Western Germany. In Frankfurt their effect would be more abrupt and perhaps somewhat unintentional. In 1796 the French bombarded Frankfurt, demolishing half of the Judengasse in the process. Around two thousand Jews were left homeless and had to move outside the ghetto. The Rothschilds were among them. Once outside the ghetto, and now freed from the myriad regulations barring them from entrepreneurship, they could seize new business opportunities. This included a contract to supply grain to the Austrian army, something they would previously not have been allowed to do.

  By the end of the decade, Rothschild was one of the richest Jews in Frankfurt and already a well-established businessman. Full emancipation had to wait until 1811; it was finally implemented by Karl von Dalberg, who had been made Grand Duke of Frankfurt in Napoleon’s 1806 reorganization of Germany. Mayer Amschel told his son, “[Y]ou are now a citizen.”

  Such events did not end the struggle for Jewish emancipation, since there were subsequent reverses, particularly at the Congress of Vienna of 1815, which formed the post-Napoleonic political settlement. But there was no going back to the ghetto for the Rothschilds. Mayer Amschel and his sons would soon have the largest bank in nineteenth-century Europe, with branches in Frankfurt, London, Paris, Naples, and Vienna.

  This was not an isolated event. First the French Revolutionary Armies and then Napoleon invaded large parts of continental Europe, and in almost all the areas they invaded, the existing institutions were remnants of medieval times, empowering kings, princes, and nobility and restricting trade both in cities and the countryside. Serfdom and feudalism were much more important in many of these areas than in France itself. In Eastern Europe, including Prussia and the Hungarian part of Austria-Hungary, serfs were tied to the land. In the West this strict form of serfdom had already vanished, but peasants owed to feudal lords various seigneurial fees, taxes, and labor obligations. For example, in the polity of Nassau-Usingen, peasants were subject to 230 different payments, dues, and services. Dues included one that had to be paid after an animal had been slaughtered, called the blood tithe; there was also a bee tithe and a wax tithe. If a piece of property was bought or sold, the lord was owed fees. The guilds regulating all kinds of economic activity in the cities were also typically stronger in these places than in France. In the western German cities of Cologne and Aachen, the adoption of spinning and weaving textile machines was blocked by guilds. Many cities, from Berne in Switzerland to Florence in Italy, were controlled by a few families.

  The leaders of the French Revolution and, subsequently, Napoleon exported the revolution to these lands, destroying absolutism, ending feudal land relations, abolishing guilds, and imposing equality before the law—the all-important notion of rule of law, which we will discuss in greater detail in the next chapter. The French Revolution thus prepared not only France but much of the rest of Europe for inclusive institutions and the economic growth that these would spur.

  As we have seen, alarmed by the developments in France, several European powers organized around Austria in 1792 to attack France, ostensibly to free King Louis XVI, but in reality to crush the French Revolution. The expectation was that the makeshift armies fielded by the revolution would soon crumble. But after some early defeats, the armies of the new French Republic were victorious in an initially defensive war. There were serious organizational problems to overcome. But the French were ahead of other countries in a major innovation: mass conscription. Introduced in August 1793, mass conscription allowed the French to field large armies and develop a military advantage verging on supremacy even before Napoleon’s famous military skills came on the scene.

  Initial military success encouraged the Republic’s leadership to expand France’s borders, with an eye toward creating an effective buffer between the new republic and the hostile monarchs of Prussia and Austria. The French quickly seized the Austrian Netherlands and the United Provinces, essentially today’s Belgium and the Netherlands. The French also took over much of modern-day Switzerland. In all three places, the French had strong control through the 1790s.

  Germany was initially hotly contested. But by 1795, the French had firm control over the Rhineland, the western part of Germany lying on the left bank of the Rhine River. The Prussians were forced to recognize this fact under the Treaty of Basel. Between 1795 and 1802, the French held the Rhineland, but not any other part of Germany. In 1802 the Rhineland was officially incorporated into France.

  Italy remained the main seat of war in the second half the 1790s, with the Austrians as the opponents. Savoy was annexed by France in 1792, and a stalemate was reached until Napoleon’s invasion in April 1796. In his first major continental campaign, by early 1797, Napoleon had conquered almost all Northern Italy, except for Venice, which was taken by the Austrians. The Treaty of Campo Formio, signed with the Austrians in October 1797, ended the War of the First Coalition and recognized a number of French-controlled republics in Northern Italy. However, the French continued to expand their control over Italy even after this treaty, invading the Papal States and establishing the Roman Republic in March 1798. In January 1799, Naples was conquered and the Parthenopean Republic created. With the exception of Venice, which remained Austrian, the French now controlled the entire Italian peninsula either directly, as in the case of Savoy, or through satellite states, such as the Cisalpine, Ligurian, Roman, and Parthenopean republics.

  There was further back-and-forth in the War of the Second Coalition, between 1798 and 1801, but this ended with the French essentially remaining in control. The French revolutionary armies quickly started carrying out a radical process of reform in the lands they’d conquered, abolishing the remaining vestiges of serfdom and feudal land relations and imposing equality before the law. The clergy were stripped of their special status and power, and the guilds in urban areas were stamped out or at the very least much weakened. This happened in the Austrian Netherlands immediately after the French invasion in 1795 and in the United Provinces, where the French founded the Batavian Republic, with political institutions very similar to those in France. In Switzerland the situation was similar, and the guilds as well as feudal landlords and the Church were defeated, feudal privileges removed, and the guilds abolished and expropriated.

  What was started by the French Revolutionary Armies was continued, in one form or another, by Napoleon. Napoleon was first and foremost interested in establishing firm control over the territories he conquered. This sometimes involved cutting deals with local elites or putting his family and associates in charge, as during his brief control of Spain and Poland. But Napoleon also had a genuine desire to continue and deepen the reforms of the revolution. Most important, he codified the Roman law and the ideas of equality before the law into a legal system that became known as the Code Napoleon. Napoleon saw this code as his greatest legacy and wished to impose it in every territory he controlled.

  Of course, the reforms imposed by the French Revolution and Napoleon were not irreversible. In some places, such as in Hanover, Germany, the old elites were reinstated shortly after Napoleon’s fall and much of what the French achieved was lost for good. But in many other places, feudalism, the guilds, and the nobility were permanently destroyed or weakened. For instance, even after the French left, in many cases the Code Napoleon remained in effect.

  All in all, French armies wrought much suffering in Europe, but they also radically changed the lay of the land. In much of Europe, gone were feudal relations; the power of the guilds; the absolutist control of monarchs and princes; the grip of the clergy on economic, social, and political power; and the foundation of ancien régime, which treated different people unequally based on their birth status. These changes created the type of inclusive economic institutions that would then allow industrialization to take root in these places. By the middle of the nineteenth century, industriali
zation was rapidly under way in almost all the places that the French controlled, whereas places such as Austria-Hungary and Russia, which the French did not conquer, or Poland and Spain, where French hold was temporary and limited, were still largely stagnant.

  SEEKING MODERNITY

  In the autumn of 1867, Ōkubo Toshimichi, a leading courtier of the feudal Japanese Satsuma domain, traveled from the capital of Edo, now Tokyo, to the regional city of Yamaguchi. On October 14 he met with leaders of the Chōshū domain. He had a simple proposal: they would join forces, march their armies to Edo, and overthrow the shogun, the ruler of Japan. By this time Ōkubo Toshimichi already had the leaders of the Tosa and Aki domains on board. Once the leaders of the powerful Chōshū agreed, a secret Satcho Alliance was formed.

  In 1868 Japan was an economically underdeveloped country that had been controlled since 1600 by the Tokugawa family, whose ruler had taken the title shogun (commander) in 1603. The Japanese emperor was sidelined and assumed a purely ceremonial role. The Tokugawa shoguns were the dominant members of a class of feudal lords who ruled and taxed their own domains, among them those of Satsuma, ruled by the Shimazu family. These lords, along with their military retainers, the famous samurai, ran a society that was similar to that of medieval Europe, with strict occupational categories, restrictions on trade, and high rates of taxation on farmers. The shogun ruled from Edo, where he monopolized and controlled foreign trade and banned foreigners from the country. Political and economic institutions were extractive, and Japan was poor.

  But the domination of the shogun was not complete. Even as the Tokugawa family took over the country in 1600, they could not control everyone. In the south of the country, the Satsuma domain remained quite autonomous and was even allowed to trade independently with the outside world through the Ryūkyū Islands. It was in the Satsuma capital of Kagoshima where Ōkubo Toshimichi was born in 1830. As the son of a samurai, he, too, became a samurai. His talent was spotted early on by Shimazu Nariakira, the lord of Satsuma, who quickly promoted him in the bureaucracy. At the time, Shimazu Nariakira had already formulated a plan to use Satsuma troops to overthrow the shogun. He wanted to expand trade with Asia and Europe, abolish the old feudal economic institutions, and construct a modern state in Japan. His nascent plan was cut short by his death in 1858. His successor, Shimazu Hisamitsu, was more circumspect, at least initially.

  Ōkubo Toshimichi had by now become more and more convinced that Japan needed to overthrow the feudal shogunate, and he eventually convinced Shimazu Hisamitsu. To rally support for their cause, they wrapped it in outrage over the sidelining of the emperor. The treaty (Ōkubo Toshimichi had already signed with the Tosa domain asserted that “a country does not have two monarchs, a home does not have two masters; government devolves to one ruler.” But the real intention was not simply to restore the emperor to power but to change the political and economic institutions completely. On the Tosa side, one of the treaty’s signers was Sakamoto Ryūma. As Satsuma and Chōshū mobilized their armies, Sakamoto Ryūma presented the shogun with an eight-point plan, urging him to resign to avoid civil war. The plan was radical, and though clause 1 stated that “political power of the country should be returned to the Imperial Court, and all decrees issued by the Court,” it included far more than just the restoration of the emperor. Clauses 2, 3, 4, and 5 stated:

  2. Two legislative bodies, an Upper and Lower house, should be established, and all government measures should be decided on the basis of general opinion.

  3. Men of ability among the lords, nobles and people at large should be employed as councillors, and traditional offices of the past which have lost their purpose should be abolished.

  4. Foreign affairs should be carried on according to appropriate regulations worked out on the basis of general opinion.

  5. Legislation and regulations of earlier times should be set aside and a new and adequate code should be selected.

  Shogun Yoshinobu agreed to resign, and on January 3, 1868, the Meiji Restoration was declared; Emperor Kōmei and, one month later after Kōmei died, his son Meiji were restored to power. Though Satsuma and Chōshū forces now occupied Edo and the imperial capital Kyōto, they feared that the Tokugawas would attempt to regain power and re-create the shogunate. (Ōkubo Toshimichi wanted the Tokugawas crushed forever. He persuaded the emperor to abolish the Tokugawa domain and confiscate their lands. On January 27 the former shogun Yoshinobu attacked Satsuma and Chōshū forces, and civil war broke out; it raged until the summer, when finally the Tokugawas were vanquished.

  Following the Meiji Restoration there was a process of transformative institutional reforms in Japan. In 1869 feudalism was abolished, and the three hundred fiefs were surrendered to the government and turned into prefectures, under the control of an appointed governor. Taxation was centralized, and a modern bureaucratic state replaced the old feudal one. In 1869 the equality of all social classes before the law was introduced, and restrictions on internal migration and trade were abolished. The samurai class was abolished, though not without having to put down some rebellions. Individual property rights on land were introduced, and people were allowed freedom to enter and practice any trade. The state became heavily involved in the construction of infrastructure. In contrast to the attitudes of absolutist regimes to railways, in 1869 the Japanese regime formed a steamship line between Tokyo and Osaka and built the first railway between Tokyo and Yokohama. It also began to develop a manufacturing industry, and (Ōkubo Toshimichi, as minister of finance, oversaw the beginning of a concerted effort of industrialization. The lord of Satsuma domain had been a leader in this, building factories for pottery, cannon, and cotton yarn and importing English textile machinery to create the first modern cotton spinning mill in Japan in 1861. He also built two modern shipyards. By 1890 Japan was the first Asian country to adopt a written constitution, and it created a constitutional monarchy with an elected parliament, the Diet, and an independent judiciary. These changes were decisive factors in enabling Japan to be the primary beneficiary from the Industrial Revolution in Asia.

  IN THE MID-NINETEENTH CENTURY both China and Japan were poor nations, languishing under absolutist regimes. The absolutist regime in China had been suspicious of change for centuries. Though there were many similarities between China and Japan—the Tokugawa shogunate had also banned overseas trade in the seventeenth century, as Chinese emperors had done earlier, and were opposed to economic and political change—there were also notable political differences. China was a centralized bureaucratic empire ruled by an absolute emperor. The emperor certainly faced constraints on his power, the most important of which was the threat of rebellion. During the period 1850 to 1864, the whole of southern China was ravaged by the Taiping Rebellion, in which millions died either in conflict or through mass starvation. But opposition to the emperor was not institutionalized.

  The structure of Japanese political institutions was different. The shogunate had sidelined the emperor, but as we have seen, the Tokugawa power was not absolute, and domains such as that of the Satsumas maintained independence, even the ability to conduct foreign trade on their own behalf.

  As with France, an important consequence of the British Industrial Revolution for China and Japan was military vulnerability. China was humbled by British sea power during the First Opium War, between 1839 and 1842, and the same threat became all too real for the Japanese as U.S. warships, led by Commodore Matthew Perry, pulled into Edo Bay in 1853. The reality that economic backwardness created military backwardness was part of the impetus behind Shimazu Nariakira’s plan to overthrow the shogunate and put in motion the changes that eventually led to the Meiji Restoration. The leaders of the Satsuma domain realized that economic growth—perhaps even Japanese survival—could be achieved only by institutional reforms, but the shogun opposed this because his power was tied to the existing set of institutions. To exact reforms, the shogun had to be overthrown, and he was. The situation was similar in China, but the different i
nitial political institutions made it much harder to overthrow the emperor, something that happened only in 1911. Instead of reforming institutions, the Chinese tried to match the British militarily by importing modern weapons. The Japanese built their own armaments industry.

  As a consequence of these initial differences, each country responded differently to the challenges of the nineteenth century, and Japan and China diverged dramatically in the face of the critical juncture created by the Industrial Revolution. While Japanese institutions were being transformed and the economy was embarking on a path of rapid growth, in China forces pushing for institutional change were not strong enough, and extractive institutions persisted largely unabated until they would take a turn for the worse with Mao’s communist revolution in 1949.

  ROOTS OF WORLD INEQUALITY

  This and the previous three chapters have told the story of how inclusive economic and political institutions emerged in England to make the Industrial Revolution possible, and why certain countries benefited from the Industrial Revolution and embarked on the path to growth, while others did not or, in fact, steadfastly refused to allow even the beginning of industrialization. Whether a country did embark on industrialization was largely a function of its institutions. The United States, which underwent a transformation similar to the English Glorious Revolution, had already developed its own brand of inclusive political and economic institutions by the end of the eighteenth century. It would thus become the first nation to exploit the new technologies coming from the British Isles, and would soon surpass Britain and become the forerunner of industrialization and technological change. Australia followed a similar path to inclusive institutions, even if somewhat later and somewhat less noticed. Its citizens, just like those in England and the United States, had to fight to obtain inclusive institutions. Once these were in place, Australia would launch its own process of economic growth. Australia and the United States could industrialize and grow rapidly because their relatively inclusive institutions would not block new technologies, innovation, or creative destruction.