Why Nations Fail

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
i n 
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

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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

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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.
The opposition to industry and steam railways stemmed
from Francis’s concern about the creative destruction that
accompanied the development of a modern economy. His
main priorities were ensuring the stability of the extractive
institutions over which he ruled and protecting the
advantages of the traditional elites who supported him. Not
only was there little to gain from industrialization, which
would undermine the feudal order by attracting labor from
the countryside to the cities, but Francis also recognized
the threat that major economic changes would pose to his
political power. As a consequence, he blocked industry and
economic progress, locking in economic backwardness,
which manifested itself in many ways. For instance, as late
as 1883, when 90 percent of world iron output was
produced using coal, more than half of the output in the
Habsburg territories still used much less efficient charcoal.
Similarly, right up to the First World War, when the empire

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collapsed, textile weaving was never fully mechanized but
still undertaken by hand.
Austria-Hungary was not alone in fearing industry.
Farther east, Russia had an equally absolutist set of
political institutions, forged by Peter the Great, as we saw
earlier in this chapter. Like Austria-Hungary, Russia’s
economic institutions were highly extractive, based on
serfdom, keeping at least half of the population tied to the
land. Serfs had to work for nothing three days a week on
the lands of their lords. They could not move, they lacked
freedom of occupation, and they could be sold at will by
their lord to another lord. The radical philosopher Peter
Kropotkin, one of the founders of modern anarchism, left a
vivid depiction of the way serfdom worked during the reign
of Tsar Nicholas I, who ruled Russia from 1825 until 1855.
He recalled from his childhood
stories of men and women torn from their
families and their villages and sold, lost in
gambling, or exchanged for a couple of
hunting dogs, and transported to some
remote part of Russia … of children taken
from their parents and sold to cruel or
dissolute masters; of flogging “in the stables,”
which occurred every day with unheard of
cruelty; of a girl who found her only salvation
in drowning herself; of an old man who had
grown grey-haired in his master’s service
and at last hanged himself under his master’s
window; and of revolts of serfs, which were
suppressed by Nicholas I’s generals by
flogging to death each tenth or fifth man taken
out of the ranks, and by laying waste the
village … As to the poverty which I saw during
our journeys in certain villages, especially in
those which belonged to the imperial family,
no words would be adequate to describe the
misery to readers who have not seen it.
Exactly as in Austria-Hungary, absolutism didn’t just
create a set of economic institutions that impeded the
prosperity of the society. There was a similar fear of

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creative destruction and a fear of industry and the railways.
At the heart of this during the reign of Nicholas I was Count
Egor Kankrin, who served as finance minister between
1823 and 1844 and played a key role in opposing the
changes in society necessary for promoting economic
prosperity.
Kankrin’s policies were aimed at strengthening the
traditional political pillars of the regime, particularly the
landed aristocracy, and keeping the society rural and
agrarian. Upon becoming minister of finance, Kankrin
quickly opposed and reversed a proposal by the previous
finance minister, Gurev, to develop a government-owned
Commercial Bank to lend to industry. Instead, Kankrin
reopened the State Loan Bank, which had been closed
during the Napoleonic Wars. This bank was originally
created to lend to large landowners at subsidized rates, a
policy Kankrin approved of. The loans required the
applicants to put up serfs as “security,” or collateral, so that
only feudal landowners could get such loans. To finance the
State Loan Bank, Kankrin transferred assets from the
Commercial Bank, killing two birds with one stone: there
would now be little money left for industry.
Kankrin’s attitudes were presciently shaped by the fear
that economic change would bring political change, and so
were those of Tsar Nicholas. Nicholas’s assumption of
power in December 1825 had been almost aborted by an
attempted coup by military officers, the so-called
Decembrists, who had a radical program of social change.
Nicholas wrote to Grand Duke Mikhail: “Revolution is on
Russia’s doorstep, but I swear that it will not penetrate the
country while there is breath in my body.”
Nicholas feared the social changes that creating a
modern economy would bring. As he put it in a speech he
made to a meeting of manufacturers at an industrial exhibit
in Moscow:
both the state and manufacturers must turn
their attention to a subject, without which the
very factories would become an evil rather
than a blessing; this is the care of the
workers who increase in number annually.
They 
need 
energetic 
and 
paternal

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supervision of their morals; without it this
mass of people will gradually be corrupted
and eventually turn into a class as miserable
as they are dangerous for their masters.
Just as with Francis I, Nicholas feared that the creative
destruction unleashed by a modern industrial economy
would undermine the political status quo in Russia. Urged
on by Nicholas, Kankrin took specific steps to slow the
potential for industry. He banned several industrial
exhibitions, which had previously been held periodically to
showcase new technology and facilitate technology
adoption.
In 1848 Europe was rocked by a series of revolutionary
outbursts. In response, A. A. Zakrevskii, the military
governor of Moscow, who was in charge of maintaining
public order, wrote to Nicholas: “For the preservation of
calm and prosperity, which at present time only Russia
enjoys, the government must not permit the gathering of
homeless and dissolute people, who will easily join every
movement, destroying social or private peace.” His advice
was brought before Nicholas’s ministers, and in 1849 a
new law was enacted that put severe limits on the number
of factories that could be opened in any part of Moscow. It
specifically forbade the opening of any new cotton or
woolen spinning mills and iron foundries. Other industries,
such as weaving and dyeing, had to petition the military
governor if they wanted to open new factories. Eventually
cotton spinning was explicitly banned. The law was
intended to stop any further concentration of potentially
rebellious workers in the city.
Opposition to railways accompanied opposition to
industry, exactly as in Austria-Hungary. Before 1842 there
was only one railway in Russia. This was the Tsarskoe Selo
Railway, which ran seventeen miles from Saint Petersburg
to the imperial residencies of Tsarskoe Selo and Pavlovsk.
Just as Kankrin opposed industry, he saw no reason to
promote railways, which he argued would bring a socially
dangerous mobility, noting that “railways do not always
result from natural necessity, but are more an object of
artificial need or luxury. They encourage unnecessary travel
from place to place, which is entirely typical of our time.”

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Kankrin turned down numerous bids to build railways,
and it was only in 1851 that a line was built linking Moscow
and Saint Petersburg. Kankrin’s policy was continued by
Count Kleinmichel, who was made head of the main
administration of Transport and Public Buildings. This
institution became the main arbiter of railway construction,
and Kleinmichel used it as a platform to discourage their
construction. After 1849 he even used his power to censor
discussion in the newspapers of railway development.
Map 13 (opposite) shows the consequences of this logic.
While Britain and most of northwest Europe was
crisscrossed with railways in 1870, very few penetrated the
vast territory of Russia. The policy against railways was
only reversed after Russia’s conclusive defeat by British,
French, and Ottoman forces in the Crimean War, 1853–
1856, when the backwardness of its transportation network
was understood to be a serious liability for Russian

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security. There was also little railway development in
Austria-Hungary outside of Austria and the western parts of
the empire, though the 1848 Revolutions had brought
change to these territories, particularly the abolition of
serfdom.