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

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 wereaimed 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.
    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 economicchanges would