1. Introduction
Recent research in New Institutional Economics shifts the theoretical interest toward the interdependence of economic and political institutions as the causal factor for economic development. Expanding on the well-known claim that ‘institutions matter’ for economic performance, this research concentrates on the dependency of economic institutions on the political order. Succinctly, New Institutional Economics emphasizes that a competitive economic order is only possible and sustainable if political power is attained by political competition. At present, this is realized in most Western democracies which temporarily bestow a ‘monopoly of legitimate coercive power’ (Weber) for the duration of a legislative period. By contrast, if an autocrat or a small group depending on him can wield political power without elections, the autocrat will make use of his power in order to create rents for his supporting group. Rent-creation, in turn, is at variance with free-market capitalism because market entry is controlled by politics and competition cannot unfold. By implication, free-market capitalism without political participation is a fragile arrangement and is unlikely to arise in full form. Otherwise, power holders would have to refrain from using their political power for rent creation, which would be an unreliable and ‘irrational’ self-restriction in autocratic polities. A key distinction is made between a competitive order and a non-competitive order based on privileges, which revises former distinctions between a market economy and a planned order; this well-known theoretical distinction seems inappropriate to describe the economy of the 18th century which did not coordinate the economy by central planning but lacked a free market order.
Acemoglu and Robinson (Reference Acemoglu and Robinson2012) and North et al. (Reference North, Wallis and Weingast2009) advocate different versions of the idea that economic institutions depend on political institutions. Their prime examples of a concomitant liberalization of both politics and the economy are Britain, France and the US in the 18th and 19th century. They argue that these countries established universal rights, both in politics and in the economy, at an early stage. Over a long period, steps toward more economic freedom are claimed to be accompanied by more political freedom and vice versa, occasional discontinuities notwithstanding (ibid.: 2; North and Weingast, Reference North and Weingast1989).
Taking a closer look, Acemoglu and Robinson (Reference Acemoglu and Robinson2012) and North et al. (Reference North, Wallis and Weingast2009) delineate an idealized version of British, French and American history respectively (which the authors partly concede). This rules out many obvious elements which do not fit into the story of universal human rights, among them slavery in the US until the late 1860s. Nevertheless, good reasons are given for the theoretical idea of a ‘double balance’ between the political and economic system (see the following subsection). In order to broaden our understanding for the conditions necessary to develop a market society, we analyze two cases that are mostly neglected in New Institutional Economics or undergo inaccurate interpretation.
In the sections that follow, the successful capitalist transformation in Germany and the retarded transformation in Austria in the nineteenth century will be under consideration. Within a few decades after 1800, Germany was developing from an economic laggard into a high performer. The Habsburg Empire, by contrast, failed to catch up with the high performing centers of European capitalism throughout the 19th century. According to Maddison's estimation, British GDP was approximately 40 percent higher than German GDP in 1820, while the German economy outperformed the British economy after 1908 as far as the total GDP is concerned.Footnote 1 At the end of the 19th century, the economy of the German Empire (existing since 1871) underwent a period of rapid and intense industrialization, high economic growth, highest growth of population in the world, and technological progress which jointly contributed to this GDP-performance. By comparison, the economic development of the Habsburg Empire was more sluggish and ‘never experienced a great spurt in industrialization’ (Gerschenkron, Reference Gerschenkron1977: 52). According to Maddison (Reference Maddison1995), per capita GDP in Germany grew by 1.1 percent on average per annum between 1820 and 1870 as compared to 0.7 percent in Austria. From 1870–1913, average per capita GDP growth rates per annum were 1.63 percent in Germany and 1.15 percent in the Habsburg Empire (1.02 percent in modern day Austria; Schulze, Reference Schulze2000: 324).
Strikingly, the political orders in both countries did not differ very much. Political participation and even a constitution which constrained the power of the monarch was absent in Prussia just as it was in the Habsburg Empire before 1848. In either country, the nobility remained in power and enjoyed political and economic privileges. While the political orders were rather similar at least in the first half of the nineteenth century, economic institutions and therefore economic development took a different route. This fact challenges the view of New Institutional Economics according to which economic and political institutions are closely linked to each other. In the following, we try to solve this puzzle by presenting an alternative explanatory framework. We reject Acemoglu's and Robinson's (Reference Acemoglu and Robinson2012) conception of a hierarchy of political and economic institutions and expand on North et al's (2009) explanatory scheme. In the remainder of this section, we first briefly reconsider the theoretical conception (Section 1). In Section 2, we describe the institutional status quo ante around 1,800 before the capitalist transformation took place. In reaction to the military defeat of Prussia and Austria by Napoleon, institutional reforms followed different directions, notwithstanding that the nobility remained the ruling class in both political orders. While entrepreneurship independent from the nobility could develop in Germany (Section 3), Austrian capitalism remained an annex of the estate-based society and was very reluctant to form a new type of societal order (Section 4). In Sections 3 and 4, we offer refinements to the theory that will broaden our understanding of capitalist transformation processes. Section 5 concludes.
Recent literature on the dependence of economic and political institutions
Acemoglu and Robinson (Reference Acemoglu and Robinson2012) as well as North et al. (2009) argue that competition set up by ‘inclusive’ institutions is the defining element of capitalism. The equality before the law becomes the key institution for modern capitalism. By contrast, to the extent that the prevailing economic institutions exclude groups or even the majority of the population from economic opportunities competition is restricted and free-market capitalism cannot evolve.
Accordingly, Acemoglu and Robinson (Reference Acemoglu and Robinson2012) speak of inclusive as opposed to exclusive institutions, which resembles North et al.'s (2009) distinction between ‘open access orders’ as opposed to ‘limited access orders’. The idealized version of this conception reads as follows: ‘Inclusive economic institutions create inclusive markets, which not only give people freedom to pursue the vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so. Those who have good ideas will be able to start businesses, workers will tend to go to activities where their productivity is greater, and less efficient firms can be replaced by more efficient ones’ (Acemoglu and Robinson, Reference Acemoglu and Robinson2012: 76–77). As an unintended consequence of such open markets, economic agents constantly challenge incumbent market positions, e.g. in terms of creative destruction. This gives rise to a conflict if the incumbents have access to political power. But privileges are alien to a competitive order. By contrast, exclusive (or extractive) institutions ‘enrich the same elites, and their economic wealth and power help consolidate their political dominance’ (ibid.: 81). These elites obstruct capitalist institutions because ‘the spread of industries, factories, and towns took resources away from the land, reduced land rents, and increased the wages that land-owners had to pay their workers. These elites also saw the emergence of new businessmen and merchants eroding their trading privileges. All in all, they were the clear economic losers from industrialization’ (ibid.: 85).
As a consequence, elite groups in pre-capitalist societies are viewed a genuine interest in opposing capitalist transformation. Accordingly, they would also defy pluralist political institutions, as Acemoglu and Robinson (Reference Acemoglu and Robinson2012) point out with respect to elites in absolutist regimes (ibid.: 86). This argument echoes what North et al. (Reference North, Wallis and Weingast2009) term a ‘double balance’ between limited access in politics and economics. But unlike North et al. (Reference North, Wallis and Weingast2009), Acemoglu and Robinson (Reference Acemoglu and Robinson2012) consider political institutions as key for the economy, which implies that capitalist transformation must take its starting point from politics: ‘The only way to change these political institutions is to force the elite to create more pluralistic institutions’ (ibid.: 87). Acemoglu et al. (Reference Acemoglu, Cantoni, Johnson and Robinson2011) apply this one-way causality from political power to economic institutions. They interpret the sweeping change of economic institutions in Germany after the French occupation by Napoleon's troop as a top-down institutional change and argue that Napoleon imported the French Revolution to the German territories. By contrast, the defensive modernization of Prussia would have yielded inferior economic results; according to Acemoglu's et al. (Reference Acemoglu, Cantoni, Johnson and Robinson2011) results, a difference is measurable only 80 years after the end of the French occupation of the Rhine-territories. This re-interpretation of economic history is at variance with consent among historians that Napoleon's rule was opportunistic rather than consistent as far as the ideals of the French Revolution are concerned.Footnote 2 Acemoglu and Robinson (Reference Acemoglu and Robinson2012) downgrade the institutional reforms instigated in Prussia and claim that a top-down institutional change, e.g. administered by a military occupation or a revolution, would be more effective than a transformation ‘from within’ (Acemoglu et al., Reference Acemoglu, Cantoni, Johnson and Robinson2011). Some external force or a revolution is claimed to be essential because otherwise extant elite groups would have a genuine interest in defying capitalist transformation.
The problem with this top-down approach is that any external imposition of institutional change or a revolution in society cannot instantaneously create a middle class which could stabilize a market economy. Such a bourgeoisie or civil society is the long-term outcome of capitalist development but is likely to be too weak to defend an imposed institutional change when the occupying power has gone. Likewise, even a revolution or an imposition from above has to face a restoration period because the former elite group still commands economic resources or possesses its social status. A successful institutional transformation is hardly possible without the support of at least parts of the former elite group. Research in economic history led to a more skeptical view of the track record of revolution and suggests that successful capitalist transformation in both economic and political terms was often a gradual process taking its lead from the prevailing political order (Allen, Reference Allen2009; Borchardt, Reference Borchardt, Cipolla and Borchardt1977; Deane, Reference Deanne, Cipolla and Borchardt1977; Kopsidis and Bromley Reference Kopsidis and Bromley2015; North et al., Reference North, Wallis and Weingast2009: 188; Reckendrees, Reference Reckendrees, Gilgen, Kopper and Leutzsch2010).
North et al. (Reference North, Wallis and Weingast2009) do not claim a hierarchy between political and economic institutions. But they mention the German capitalist transformation only in passing and apparently interpret the 19th century development form the viewpoint of the Nazi-period in the 1930s, which gives the impression that capitalist institutions were imposed after WWII. In fact, a gradual but profound capitalist transformation started 140 years earlier. This period requires an explanation of its own. A retrospective view of German economic history in the 19th century from the angle of Nazi–Germany is likely to produce a multitude of misguided interpretations and obscures our understanding of institutional change in the 19th century.
2. The point of departure for capitalist transformation
We share Acemoglu's and Robinson's (Reference Acemoglu and Robinson2012) and North et al.'s (Reference North, Wallis and Weingast2009) view of capitalism which considers competition rather than profit making or unconstrained prices as its distinguishing feature. Pre-capitalist economies exhibited market coordination in many economic sectors but restricted competition due to constraints on economic freedom of larger parts, if not the majority, of society. In many – but not in all – cases these restrictions served the interests of the power holders, which is why economic institutions corresponded to political institutions.
If we concentrate on the economic institutions which make up a capitalist economy, the following institutions matter:
(1) the security of property rights,
(2) the freedom of contract,
(3) the freedom of occupation and profession,
(4) the freedom of movement (right of abode),
(5) the freedom of trade and industry,
(6) the freedom of association.
Commonly considered to be of particular importance is the security of property rights, as Acemoglu and Robinson (Reference Acemoglu and Robinson2012) and North et al. (Reference North, Wallis and Weingast2009) (but also many other scholars of New Institutional Economics) repeatedly emphasize. Interestingly, this was the only institutional element which was already established before capitalism emerged in the German states and in the Austrian Empire. The Prussian General Common Law (Allgemeines Landrecht) guaranteed the property of all subjects formally. Even though formal economic rights of the subjects within an absolutist monarchy can only mean a self-commitment of the state, confiscation of private property by the monarch or the elite group could and was challenged legally. For that reason alone a comparison with pre-capitalist societies, e.g. in 18th century Africa or Asia (as in Acemoglu and Robinson, Reference Acemoglu and Robinson2012), is misleading. Rather, it was the remaining elements of capitalist institutions and institutional guarantees in late absolutism (‘enlightened absolutism’) which were lacking. But also here economic historians stress that prior to the formal introduction of capitalist institutions (the formal introduction of the freedom of occupation in 1810 in Prussia), a strong tendency toward economic freedom was present in the German states and the Austrian empire in the end of the 18th century (Kaufhold, Reference Kaufhold1982). Economic freedom was always a matter of degree rather than of kind. Specifically, capitalism took its point of departure within the estate-based society (Ständegesellschaft) of late-absolutism (Reckendrees, Reference Reckendrees, Gilgen, Kopper and Leutzsch2010). The degree of openness of economic institutions varied considerably from region to region. As a rule of thumb, the economic institutions in the Western parts of the German states as well as in the Austrian Empire can be considered as more inclusive than those in the respective Eastern parts.
Roughly speaking, late-absolutist economic order in the 18th century constrained economic freedom in three areas corresponding to the distribution of political power:
(1) In the rural areas, peasants were subjects of the lord of the manor and the freedom of movement. The manorial system (Gutsherrschaft) was the most restrictive economic system while the seigneurial system (Grundherrschaft) was far less restrictive and came closer to an agro-capitalist system. In the manor, dependent peasants were paid in kind instead of money wages and thus bore further constraints of economic freedom. Peasants (including their children) had to fulfill service obligations for the lord of the manor – e.g. unpaid horse and cart work – who could decide on the kind, the time and the duration of working hours. The personal subordination of the peasants was aggravated by patrimonial courts carried out by the lord of the manor. However, the personal property of peasants was protected. Land ownership, including the right to bequeath land, was the privilege of the nobility. Hence, for peasants the use of land was largely separated from property. Land property of the nobility could be prevented from entering a real estate market through entail (Fideikommiss). The personal dependence of peasants on the lord of the manor in Prussia was less severe than serfdom performed in the Eastern parts of the Habsburg Empire, particularly the Ukraine under the Polish nobility (not to speak of Russia), which at times caused riots until the mid-19th century. As a rule, the personal dependence under the rule of the manor was common in the Eastern parts of Prussia as well as the Central part of the Habsburg Empire. In the central and Western parts of both the German states and the Habsburg Empire (that is present-day Austria) the strict rule of the nobility was replaced by a more impersonal dependency of the peasants within the seigneurial system (Grundherrschaft). Here the nobility was not economically active but received rents for the use of land.
A further restriction of economic freedom in the rural area concerned the freedom of occupation and profession. According to the mercantilist doctrine as regards the regional division of labor, the craft sector was reserved for the cities. Only few exemptions were made, namely for the homework sector. This restriction reduced the exploitation of comparative advantages in the rural area, even though workers – often successfully – attempted to circumvent this restriction (Kaufhold, Reference Kaufhold1982: 82).
(2) In the cities, craftsmen and tradesmen were organized in guilds. Guilds were both a kind of political self-organization and a constraint to the access to labor markets.Footnote 3 In contrast to modern interest groups, medieval (and late-absolutist) guilds held the right to sanction violations of their rules. Furthermore, cities controlled the influx of workers in order to stabilize the municipal economic order. Social obligations to assist needy people also played a role for the exclusiveness of cities. When the period of capitalist transformation took its point of departure after the ‘October Edict’ in 1807, the privileges of the cities turned out to be the major source of conflict with the Prussian state (Fehrenbach, Reference Fehrenbach1993; Koselleck, Reference Koselleck1989; Nolte, Reference Nolte1990; Wehler, Reference Wehler2008).
(3) Running manufactories required licenses of the dukes or monarchs. They bestowed privileges to businessmen which then held a monopoly, e.g. for producing porcelain or textile goods. However, at least in the German states, rulers tended to grant these rights more generously in the second half of the 18th century, which gradually undermined monopolies. After 1786, monopolies for manufactories expired (Kaufhold, Reference Kaufhold1982: 84). Likewise, German political economists of mercantilism took a more positive view on competition (Volckart, Reference Volkart and Theurl2012). The willingness of the authorities to grant licenses of running manufactories was crucial for the establishing of capitalism. In Austria the practice of licensing manufactories remained more restrictive and preserved monopolies for a longer time than in the German states, foremost in the first decades of the 19th century (Matis, Reference Matis1972: 62).
In accordance with Acemoglu and Robinson (Reference Acemoglu and Robinson2012) and North et al. (Reference North, Wallis and Weingast2009), economic constraints were corresponding to constraints to politics. With emphasis to exceptions, NWW speak of limited access in politics and the economy. Generally, absolutist rule consisted of monarchs (Kings, Dukes, Grand Dukes, Imperial free knights, Archbishops, among others) in the German jurisdictions still integrated into the Holy Roman Empire and formally led by the Austrian Emperor. While the 340 independent German jurisdictions, some of which were as tiny as counties, were largely independent, the Austrian crown lands were under the rule of the Emperor. Nevertheless, a monopoly of coercive power of the state did not exist. In the Habsburg Empire, the power of the state was split and carried out by the regional higher and lower nobility on which the Emperor depended. Similarly, the Prussian state was ruled by a dominant coalition (in terms of North et al. (Reference North, Wallis and Weingast2009)) which performed state functions such as local jurisdiction by patrimonial courts. However, the extent to which the power of the state was centralized varied between the states. In Prussia, the political strength of the nobility remained significant throughout the 18th century, especially after Frederick II re-strengthened its power. In the Habsburg Empire, the high nobility (foremost in the Habsburg part of the Polish territory, in Western Ukraine and Hungary) demonstrated its political power when it obstructed and delayed social reforms instigated by the open-minded emperor Joseph II (Fehrenbach, Reference Fehrenbach1993: 55; Good, Reference Good1986: 38).Footnote 4 These reforms softened the control and mastery of the landed nobility over its peasants. Namely the use of land now had to be re-paid in terms of rents whereas labor duties were constrained, which made the mastery of the landed nobility more impersonal (Good, Reference Good1986: 37). In the Eastern part of the Habsburg Empire, however, the Polish and the Magyar nobility reversed some of these reforms after the death of Joseph II (up to the mid-19th century this institutional reversion provoked riots by Ukrainian peasants against the Polish nobility). This attests to the fact that absolutist rule rested on the dominant coalition rather than representing a single-actor state.
A main obstacle toward capitalist development was the lack of a common market, which had both political and economic reasons. The German territories levied custom duties, often even within greater territories such as Prussia. The Rhine River was intercepted by numerous duties and staple rights by cities such as Cologne, which is why the interregional division of labor was restricted. The Austrian Empire was likewise split into regional markets as a result of custom duties even though the unity of the Empire would have facilitated the establishment of an internal market compared to the German states. Yet, ideas for the abolishment of custom duties had been rejected in 1762.
Regarding the economic backwardness of the German states and the Habsburg Empire, it is tempting to compare these regions around 1,800 with present-day developing countries as it is done by North et al. (Reference North, Wallis and Weingast2009) and Acemoglu and Robinson (Reference Acemoglu and Robinson2012).Footnote 5 For the following reasons, such a comparison is inaccurate: (1) the restriction of economic freedom was selective rather than comprehensive. Property rights besides land were secure; the distribution of land was far more an issue than the security of property rights as such. The use of land became better protected from confiscation by noble land owners in the case of defaults on payment. The main restrictions concerned the freedom of contract regarding land, the freedom of occupation and the freedom of running a business; (2) notwithstanding these restrictions, the late-absolutist economic order gradually eroded and gave way to more economic freedom; hence, the economic order was dynamic rather than static;Footnote 6 (3) the level of elite culture was extraordinary and set the standards of that time, encompassing sciences as well as fine arts. Multiple sovereignty and competition between the states which included cultural affairs contributed to this fact. Already in the 18th century, universities became aligned with the ideas of enlightenment and reformed universities (Halle, Göttingen, Jena) in German states put emphasis on sciences as well as on the humanities. Leading intellectual figures (Kant, Schiller, Lessing, Schlözer, Wilhelm v. Humboldt) forcefully advocated the ideas of enlightenment without regard of the absolutist political order; (4) illiteracy was low and declining. In the German states and in the Western parts of Austria, compulsory schooling existed which was increasingly supervised by skilled authorities (Block, Reference Block1996; Bruckmüller, Reference Bruckmüller2001: 187–189); (5) at least in Prussia and the Protestant German states the state was also sufficiently separated from the church. In the Habsburg Empire this separation was incomplete but even here the state made efforts to restrict the influence of the church in some realms; and (6) important steps toward the rule of law were undertaken in the 18th century; the equality before the law represented a key value benchmark which was accepted – and often outwardly advocated – by monarchs in order to legitimize their rule (Frederick II in Prussia, Joseph II. in Austria). Public administration became more effective since the rule of Frederick II in Prussia and Empress Maria Theresia in Austria.
For reasons to be discussed below, the Austrian authorities kept markedly stronger restrictions against the new economic order than the authorities in the German states, which is why Austrian economic development was delayed. The key conditions for a capitalist transformation nevertheless existed in either political order and did not depend on a political revolution or a ‘big bang’ as Acemoglu et al. (2009) suggest. Rather, the relaxation of binding institutional constraints – sometimes silently carried out by an attentive public administration – became more important than comprehensive ‘blue-print’ reforms or legal announcements which appeared to be revolutionary but took many decades to become effective.Footnote 7 The economic rise of Saxony, which was to become a center of German industry, represented an example of effective gradual capitalist transformation by public administration without high-sounding singular turning points of institutional change (for a detailed description see Kiesewetter, Reference Kiesewetter2007).
Methodologically, it is a particular task for economics to disentangle the ‘objective’ or allegedly given economic interests of agents who pursue institutional change from their own interpretation of their interests. Moreover, long-term conceptions or visions for future society are not necessarily congruent with economic interests; particularly the German capitalist transformation cannot be understood without the role of political ideas (‘beliefs’ or ‘ideology’ in terms of Douglass North) of mostly noble agents in public administration. As in the French Revolution, noble reformers in Prussia took initiative to pave the way for a liberal order which was not in line with the narrow interest of their peers. Similar reforms were also established in other German middle states but lacked the consistency and rigor in Prussia. Importantly, competition among the states – specifically among the German middle states – had changed the interests of the monarchs who tended to adopt a ‘public interest’-perspective. This reorientation, in turn, opened up opportunities for liberal reformers to instigate institutional changes toward capitalism. The interest of the state encompassed revenues, sometimes military advantages which depend on revenues, and in all cases the economic attractiveness for the citizens in order to prevent them from emigration; the size of population was considered as a criterion for the importance of a state.
3. Reforms in Prussia and in the German states
The French Revolution caused different reactions in Prussia and in Austria: At least the first ‘civilized’ period of the French Revolution until 1792 found a quite positive resonance among open minded administrators in Prussia, who committed themselves to the ideas of Enlightenment (see the opening remarks of Hardenberg`s Riga memorandum in: Hardenberg, Reference Hardenberg1807). In contrast to Austria, Prussian administrators made a distinction between the ideals of the French Revolution and its Jacobin aberrances for which reason the fourth Coalition War was not interpreted as a battle of ideas.
The military defeat affected the German states and the Habsburg Empire in different ways, which can also explain alternative reactions of the elite groups (dominant coalition) in either regime. Prussia escaped its dissolution only narrowly in the Treaty of Tilsit in 1807 and had to cede half of its territory in the West to France. Heavy contributions were imposed which overtaxed the prevalent economic system. The country suffered from the Continental System and had to open its economy for French imports while the French export market – as well as the British market – remained closed until Napoleon's defeat. The Western territories, which were to come to Prussia after the Vienna Congress, suffered similar burdens in addition to the requirement to contribute troops for Napoleon. There was a consensus among Prussian state officials that the state required profound reforms in order to survive (see Hardenberg's Riga Memorandum in: Hardenberg, Reference Hardenberg1807). These officials embraced the ideas of the French Revolution and were inspired by Kant's political philosophy, particularly the equality before the law. Now, this group of (mostly noble) reformers took initiative and instigated reforms which strengthened the monopoly of coercive power of the state and established key institutions which were to constitute capitalism (see below).
After the military defeat and the ongoing threat by Napoleon's troops, former reforms undertaken in the end of the 18th century were resumed and gained considerable momentum. Now the strengthening of the economy and the increase of legitimation through the rule of law was also seen as a ‘weapon’ against Napoleon. However, there were also economic needs to raise contributions imposed by Napoleon and to prevent the Prussian economy from its collapse. Official accounts of the Prussian authorities came to the conclusion that Napoleon's contributions require a substantial rise in productivity of the economy.Footnote 8 As Koselleck argued:
‘Public administration in Prussia deliberately opted for Adam Smith against Napoleon in order to dispel the latter by means of the former. It took up the challenge of instigating an industrial revolution in order to avoid a French revolution but nonetheless realize its ambitions’. (Koselleck, Reference Koselleck1989, 14, my own translation).
The key problem, however, was that the reformers could not afford to compromise the economic interests of the landed nobility, at least for two reasons: First, the Prussian state had to take out loans from the landed nobility in order to pay contributions to Napoleon (according to Napoleon's strategy that ‘the war nourishes the war’). Second, the fabric of society in many parts of Prussia still lacked a middle class which could have supported and stabilized the bourgeois society. As long as capitalism was in the making, the new capitalist institutions required political support by the extant elite group, which largely consisted of the aristocracy and the nobility. But even an emerging capitalist class will not necessarily support a competitive economic order since proto-capitalists have an interest to protect their pioneer advantages. This problem of a lack of political support due to economic underdevelopment is apparently a common feature of any capitalist transformation process.
Under the given distribution of political power, open minded ministers, such as Hardenberg, organized a political bargain: They introduced capitalist institutions while respecting the assets and some privileges of the dominant coalition, the landed nobility, as far as necessary. The ambition of the compromise was the comprehensive establishment of capitalist institutions and the monopoly of coercive power of the state, which was to be constrained by a constitution. This constitution was designed to abolish the estate-based society (as compared to the 17 articles of the French National Assembly), which implied that the nobility had to give up state functions such as patrimonial jurisdiction on behalf of the state. For this reduction of political power, the aristocracy should be compensated by favorable redemption rules. They concerned the manorial (Gutswirtschaft) as well as the seigneurial system (Grundherrschaft). In the latter case, land use rights were transformed into property rights. In the former case, peasants became formally free and now enjoyed the freedom of movement. The relief from work obligations and the transfer of land use rights into property rights required repayments (if possible) in terms of rents and also in terms of land. Commons became transformed into property rights. The nobility opposed to the commercialization of land which challenged its inherited social status. However, the initial effect of capitalist transformation in the countryside was the proletarization of those peasants who became free but lacked land ownership.
Even though the reforms were not as radical as Hardenberg had intended – a constitution was not introduced in Prussia before 1848 and reactionary aristocrats made efforts to undermine his reforms after his death in 1822 – recent historical research confirms that the key elements of the institutional change were kept in place during the early decades of the 19th century, which is why the term ‘restoration period’ does not fit very well (Harnisch, Reference Harnisch, Ullmann and Zimmermann1996). Instead, capitalist transformation took on a life of its own, temporary delay and regional imbalance notwithstanding. Now land property was integrated into the market economy: Land property owned by the nobility could no longer be excluded from markets and commoners had the right to own and to bequeath land. Changes in possession of land became a common practice as a result of the newly established real estate market (Harnisch, Reference Harnisch, Ullmann and Zimmermann1996: 172; Wehler, Reference Wehler2008, Vol. I: 427).Footnote 9 Generous compensation rules notwithstanding, the landed nobility, as part of the dominant coalition, became under pressure by capitalist institutions but also by an emerging bourgeoisie (Harnisch, Reference Harnisch, Ullmann and Zimmermann1996: 170–171). While the monarchist government made some concession to the landed nobility until 1848 and preserved vestiges of political rights (exerted in the local provincial estates), it was mindful that the monopoly of coercive power of the state was not challenged. Complaints of the conservative nobility about the new ‘impersonal political order’ abounded (Berding, Reference Berding, Ullmann and Zimmermann1996: 24).
The new political influence of the public administration and progressive reformers also rested on the competition among the German states (Berding, Reference Berding, Ullmann and Zimmermann1996: 17–24). After the Vienna Congress and the establishment of the German federation (of which Austria remained a so-called guarantee power), monarchs in Prussia but also in the consolidated smaller South German states were aware that states were competing with each other economically (ibid.). The German Confederation was Austrian in design and intended to maintain the balance of power. The unintended consequence, however, was the effort of the ‘Third Germany’ to keep strong enough in order to avoid its incorporation into one of the larger states (Prussia, Austria). A prospering economy and fiscal revenues were now considered essential to retain the independence of the state.
The key effect of the Prussian reforms was the fact that former dominant coalitions gradually lost control over the power to set rules for the economy. Inspired by Adam Smith's political economy, the Prussian reformers abolished internal tariffs and introduced the freedom of occupation as well as the freedom of trade and industry (Wehler, Reference Wehler2008, Vol. I: 429).Footnote 10 The guilds in the cities were abolished and a craft sector was permitted in rural areas; before, it was a privilege of the cities. Licenses required for manufactories were given under formal rules without discretion. That was the first step for general economic freedom in the industry. Political opposition of guilds and merchants in the cities which stuck to their guild privileges was ignored. Here, the state took no consideration of local political power and imposed capitalist institutions. However, the new economic order became more acceptable for local power holders as far as they could benefit from their wealth accumulated in the old economic order.
In line with Adam Smith's political economy, Prussian reformers rejected tariffs and abolished the Continental System imposed by Napoleon. The liberal reformer Hardenberg and state officials such as Kunth and Maaßen stuck to the free trade regime and emphasized that the free trade doctrine ‘requires explanation but cannot be called into question’ (Koselleck, Reference Koselleck1989: 320–321). This policy was supported by the East Prussian landowners who were major grain exporters and had a stake in freer commerce. Because they were not engaged in the industrial sector, public administration could ignore protectionist interests. As a result, nascent capitalism in Germany lacked protected tariffs, which turned out to be a major difference to capitalism in Austria and the Habsburg Empire.
In the other German states, the public administration made a similar, at least implicit, decision toward capitalism. In the South German states (and in the Rhenish territories which became part of Prussia after the Vienna Congress), the political influence of the nobility was far less marked. Public administration was not in need to show consideration of the nobility. Instead it could concentrate on the interest of the state which encompassed two areas: (1) the monopolization of coercive power and modern state building as the consequence of the consolidation of the states (so-called mediatization after 1805); and (2) the promotion of the economy in order to compete with other German states for public revenues, which was considered crucial for political survival (Berding, Reference Berding, Ullmann and Zimmermann1996). Delayed reforms regarding the dissolution of guilds, e.g. in Bavaria or in Saxony, defy a straightforward interpretation as rent-seeking. The fear of long-lasting pauperism as a result of industrialization was a major issue at that time for which reason some governments did not dare to promote the creative destruction of the craft sector if new job opportunities in the small industrial sector were still lacking.Footnote 11
Of key importance was the joint decision to establish a tariff union among several German states (including Luxemburg) without introducing prohibitive tariffs.Footnote 12 In fact, the tariffs of the Zollverein (‘Customs Union’) were the lowest in Europe.Footnote 13 It economized the total cost of tariff collection and allowed for low tariffs while revenues were high. The early period of industrialization before the Zollverein lacked protection by high tariffs or import bans. With few exceptions, industrial policy focused on the provision of public goods such as infrastructure and technical schools.Footnote 14 Hence, the Zollverein set the course for market integration and removed trade barriers for the industry as well as for agriculture (Dipper, Reference Dipper, Ullmann and Zimmermann1996). The prevailing political order facilitated such a radical decision toward capitalist institutions for two reasons: (1) neither the monarchs nor the nobility (namely in Prussia) were engaged in the industrial sector, which distinguishes German from Austrian transformation. Besides some exceptions (distillery, coal mining and banking in Silesia), the nobility (if it was economically active at all) confined its economic activities to the agricultural sector. Apart from the fact that industrial engagement of the nobility was socially unacceptable in the first decades of the 19th century, and at that time even formally prohibited, the incentive for such engagement was low considering the economic home territory of the East-Elbian nobility in the agricultural sector. Here, the nobility was politically most powerful. Therefore, the nobility had no interest in setting the rules for the industrial sector on its own behalf in order to create rents or to prevent bourgeois outsiders from market entry; and (2) industrial capitalists lacked political influence in order to protect industry. Even petitions to the king for retaliatory tariffs against Britain were declined.Footnote 15 As a consequence, industrial capitalists as well as the landed nobility became subject to capitalist institutions and cross-border competition within the Zollverein. Indeed, regional price differentials seem to have declined in the course of the early 19th century which suggests that the nobility could no longer escape the pressure of competition (O’Rourke and Williamson, Reference O’Rourke and Williamson1999: 44–45). The separation of noble power from the authority of market rules turned out to be the major reason for the gradual disentanglement of politics from the economy which prepared the ground for capitalist transformation in Germany.Footnote 16
Furthermore, the profound change of society was neither a predictable nor a yet worrying outcome for the nobility. Despite some warnings about a looming scarcity of labor as a result of industrialization and a long-term change of society, the agricultural sector still benefited from the increasing population growth and gradually rising wages leading to a higher demand for agricultural products (Pfister et al., Reference Pfister, Riedel and Uebele2012).Footnote 17 In short, the nobility was temporarily a winner of industrialization up to the late 19th century and adapted to rising wages through the promotion of productivity growth by heavy investment in land and machinery.Footnote 18 That way the nobility became subject to capitalist institutions and could not arrest capitalist transformation in order to create rents. A new class of successful entrepreneurs outside of the former dominant coalition shaped the economy. It had no ambition to become part of the nobility and integrate into the former order. In this respect, the German capitalist transformation differed remarkably from the Habsburg state where the nobility held political power and was a stakeholder in the economy (see below). Even the introduction of tariffs for wheat in Germany in the late 1870s reminds of rent-seeking in a modern democracy rather than pre-capitalist rent creation.Footnote 19 Despite numerous opponents and dissenters within the nobility, capitalism became irreversibly established.
Weingast (Reference Weingast1995) views federalism as a key condition for preserving markets. Its features are (1) the authority of lower level governments as to economic institutions; (2) a common market for goods, services, capital and labor as well as no (or only limited) fiscal transfers between the jurisdictions; and (3) limited borrowing of the lower jurisdictions, i.e. hard budget constraints including no bail out for lower jurisdiction. Since the states were independent during the German Confederation (which ended in 1866 and was replaced by the North-German Federation), all these conditions were present except for the existence of a central state. Two currencies coexisted in Prussia including Hanover and South-Germany. Hence, the Zollverein represented an economic integration whereas the member states remained economically and politically autonomous. In order to strengthen their economic position, the states made strong efforts to create budget surpluses or, as in case of Prussia, at least strongly diminish public debts, and painfully studied the fiscal policy of their rivals (Ullmann, Reference Ullmann, Ullmann and Zimmermann1996: 99–109).Footnote 20 Public expenditures focused on infrastructure and education and thus were largely an investment in economic growth.Footnote 21 Competition among the states encompassed the economic development and the financial strength of the state (Berding, Reference Berding, Ullmann and Zimmermann1996: 17–24). In addition, the educational system including culture – especially after 1871 – became a field of rivalry among the German states by which the monarchs made strong efforts to increase the attractiveness of their jurisdictions (Kroll, Reference Kroll2013: 119–136).
The Kaiserreich founded in 1871 fulfills Weingast's conception of market preserving federalism nearly perfectly. The legal authority of the newly created central state concerning economic institutions was limited. Income taxes, including corporate taxes, were entirely decentralized whereas custom tariffs and indirect taxes remained the critical source of revenue for the federal state. Even within the Kingdoms, Grand Duchies and Duchies income taxes were not altogether harmonized (for instance, the Kingdom of Hanover, whose dynasty ruled England since the 17th century, stuck to an English tax system after its annexation by Prussia). The Bundesrat, the representation of the states, ensured that the central government did not transgress the autonomy of the states as laid down in the constitution.
Taken together, the economic as well as the political institutions set capitalist dynamics in motion, which set incentives for entrepreneurship, innovation and a civil society. The bourgeoisie grew up to a significant class which laid claim to political influence. Its earlier denial was one of the driving forces behind the Revolution in 1848. This revolution failed to establish a universal suffrage or parliamentary rule based on popular sovereignty. Whereas literature points to this failure of democratic revolution and speculates on its long-term effects on German democracy, the subsequent institutional change is often overlooked. The Prussian constitution encompassed major civil rights: the freedom of assembly, the inviolability of the house, the freedom of press and speech, formal guarantees for the independence of the judiciary and the opening of court proceedings to the public. Dispute settlements between firms or between firms and employees became the matter of newly established local civil courts rather than the matter of public authorities. The liberal model of the state, regarding its economic institutions, was largely pushed through in the period from 1840–1860 and was finalized by the enactment of new commercial codes in the 1860s (Wichermann and Nieberding, Reference Wischermann and Nieberding2004: 152).
The existence of the nobility which still held political power in the East-Elbian territories of Prussia did not interfere with the emergence of capitalism. Rather, the former dominant coalition was compensated with economic benefits resulting from its transformation into an agrarian capitalist class but had to come to terms with the monopoly of coercive power of the state by which it lost its role as a power holder. Besides, it still enjoyed tax privileges. To conclude so far, the lack of democracy was not an impediment for the development of capitalism in the early decades of the 19th century. At the onset of reforms, it was sufficient to instigate capitalist development no matter whether the reforms met some ideal of capitalism. In the subsequent period, the ‘paternalist model’ of economic policy turned out to be a binding constraint until it was removed by the new constitutions in 1848. Referring to Rodrik's (2007) criticism of the blue print conception of present day emerging economies, the defensive modernization abandoned institutional constraints for economic development without imposing capitalist institutions from above. That way it became feasible from the perspective of political economy.
4. Withheld capitalism in the Habsburg empire
Capitalist transformation took a completely different route in the Habsburg Empire including its Western part (modern Austria). Whereas liberal members of the elite group in Prussia only became estranged from the eruption of violence in the second stage of the French Revolution, the Austrian dominant coalition (above all the Emperor Franz II/I) rebuffed even its political ideals.Footnote 22 Emperor Franz II/I revised liberal reforms of his predecessor Joseph II, who had committed himself to the ideas of Enlightenment. These reforms concerned reducing or eliminating of labor duties of the peasants (robot) and redistributions of the risks of bad crops to the benefit of the dependent peasants (Good, Reference Good1986: 38; Bruckmüller, Reference Bruckmüller2001: 205). The Polish and the Hungarian nobility opposed those reforms and succeeded to annul them under Joseph's successor Franz II/I. Only the freedom to choose an occupation and the freedom of marriage survived these revisions. The multiethnic Habsburg Empire strengthened the political power of the nobility. Efforts to monopolize the power of the state to the detriment of the local dominant coalition were likely to instigate national conflicts in the Hungarian crownlands where the local nobility (namely in the later decades of the 19th century) could exploit national resentments for its own economic interests; for that reason the distribution of power was much more balanced between the emperor and the aristocratic dominant coalition. For the same reason, the monopolization of the power of the state was far more advanced in the West-Austrian part of the Empire (modern Austria, Bohemia, Moravia, Carniola) than in the Hungarian territories (Hungaria, Croatia and Slavonia).
Unlike the German states, where an independent bureaucracy started to take up public administration and set the course of political strategies, the monarch and the aristocracy determined daily politics in Austria (Butschek, Reference Butschek2012: 104). Chancellor Metternich was intent on fending off any public disagreement with the estate-based society and advocated what he called the ‘legitimacy principle’, under which he meant the unconstrained power of the monarch. Censorship and suppression of any critical association or clubs became the notorious feature of that period until 1848, notwithstanding its relaxed implementation by Austrian bureaucracy (Butschek, Reference Butschek2012: 104). Besides the aristocracy, the Catholic Church re-established its role as a pillar of the state, which Joseph II had challenged two decades before, and resumed its former state functions. The religious homogeneity and the insufficient separation of the Church significantly delayed the formation of an open access order. Primary schools and Latin Schools were run by the Church or by Catholic orders and thus exposed to the anti-liberal stance of the Church which sought to preserve the estate order. Education was not seen as an instrument to open up opportunities for the lower classes but to maintain the prevalent order. Accordingly, the state made efforts to reduce higher schooling (effectively by re-introducing fees; Sandgruber, Reference Sandgruber1995: 152). In contrast to the German states, where reformed universities (which were in fierce competition with one another for students and professors) became oriented to the requirements of scientific research, the scientific level of the Austrian universities was reported to remain inferior until the mid-nineteenth century (Bruckmüller, Reference Bruckmüller2001: 239). The lack of economic resources, which were likewise or even more limited in the German states after the Napoleonic wars, cannot explain the underinvestment in human capital in the Habsburg Empire. It rather followed from the political order and the intention of the dominant coalition to prevent upward social mobility, which would have challenged the estate-based society.
Strikingly, the Austrian monarch was hardly aware that the economy could become crucial for competition among the states and foremost for the rivalry among the Great Powers in Europe. Nor did he, and Metternich as the leading figure, foresee that economic development in the German states could change the balance of power in favor of Prussia. The Austrian monarch himself held the reigns which is why the political strategies were fare more submitted to his personal preferences and idiosyncrasies. As a result, the development of the economy became neglected and a liberalizing agenda did not exist. For instance, Franz I intended to prohibit the establishment of businesses in Vienna and other large cities. Although senior officials managed to convince him of the importance of manufactories for the economy, they were unable to revise disincentives for emerging capitalism. Throughout the 19th century, higher taxes in the cities bypassed their comparative advantage for business enterprises (Butschek, Reference Butschek2012: 97; Sandgruber, Reference Sandgruber1995: 225). Remarkably, not before the Austrian defeat in the battle of Solferino in 1859 and the loss of its Italian territories did reflections about the importance of the economy for the strength of the state gain ground (Bruck, Reference von Bruck1860, see below).
Despite this Austrian double balance of limited access in politics and the economy, a constrained version of capitalism nevertheless developed in the Metternich period. In the beginning, it was designed as an annex of the estate-based society without changing its political institutions and the agricultural economic structure. Its distinguishing feature, as compared to Germany, was the dependency on the crown and the selective practice of giving concessions for firms. Nor was capitalism the exclusive domain of a bourgeois civil society. The nobility was in many ways engaged in capitalist activities besides the agricultural sector and made use of its political power in order to shape the rules (see below). One result was that the Austrian economy became protected by prohibitive tariffs and import bans in order to protect powerful stakeholders in the system. That is why it did not integrate into the gradually prospering German economy or the other parts of Europe. Import bans for 200 goods (reduced to 91 goods in 1835) were introduced and later on supplanted by high tariffs (Sangruber, Reference Sandgruber1995: 241). Thus, protectionism became a pervasive feature of Austrian economic policy. According to Bairosch, the Austrian economy made up only 5.8 percent of total European exports in 1850 (14.6 percent in Germany) and fell to 5.6 percent in 1910 (20.4 percent in Germany; Good, Reference Good1986: 100). Tariffs for important semi-finished products such as pig iron reached 40 percent (Butschek, Reference Butschek2012: 161). When the German states formed a common market and abolished internal tariffs, Metternich, who anticipated the political consequences of a united Germany without Austria, made only half-hearted efforts to join the Zollverein. These efforts were revived in the 1850s. However, the Austrian dominant coalition did not back Metternich in order to avoid competition with German enterprises as long as it was not accompanied by higher tariff rates in the Zollverein. Prussia rejected these demands and stuck to free trade, which resulted in the disintegration of the Austrian economy from Germany.
The greater weakness of the central state in the Habsburg Empire, as compared to the single German states, was the obvious reason for this uncommonly excessive protectionism. Throughout the nineteenth century, the Austrian state depended on the noble dominant coalition which itself sought to protect its regional markets. Until 1848, the state took consideration of the Magyar elite groups in Hungary and did not create a common market between the Austrian and the Hungarian half of the Habsburg Empire; the tariff border was maintained. The tardiness of railway construction, of which the first horse-drawn (!) railway between the industrial towns of Budweis and Linz in the late 1820s became a charming symbol, can also be attributed to local economic interests. Austrian political rule could not override regional economic interests if the aristocracy itself was economically engaged or had a non-German ethnic origin. Under such circumstances, an ethnic conflict added to the already contested claim of the state to monopolize coercive power but also to economic conflicts between groups. Steps toward an integrated economy remained unfinished. The fixed-term removal of internal trade barriers after 1848 was not sufficient to create a common market in the Habsburg Empire. Even in the final quarter of the 19th century, local elite groups found ways to protect their agricultural markets from competition from other ethnic territories within the Habsburg Empire, as price differentials for agricultural products confirm (Schulze and Wolf, Reference Schulze and Wolf2009). Public administration was wise enough to leave these internal obstacles to free trade intact; otherwise, it would have challenged the rents of ethnic elite groups in the non-German parts of the Empire. Hence, establishing the monopoly of coercive power of the state in order to set up capitalist institutions and interregional competition was not an option.
Unlike Prussia, a constitution was not established after 1848. Instead, a neo-absolutist period under Emperor Franz-Joseph began. Not until 1867 did a constitution (December Constitution) come into force which secured basic rights for citizens comparable to the Prussian constitution in 1848. Because of relaxations of institutional constraints for capitalists (concerning concessions) and reductions of tariffs, the period after 1848 is frequently termed as the ‘liberalization period’, notwithstanding its mixed record. On the one hand, the guild system was removed and the freedom of running a business became, at least formally, guaranteed in 1860 (Matis, Reference Matis1972: 49). On the other hand, the dismissed minister of finance von Bruck pointed to the still existing institutional deficiencies of Austria which he held responsible for its economic and political backwardness (Bruck, Reference von Bruck1860). The diagnosis of his memorandum (‘Austria's Agenda’) fits well into the NWW-framework concerning economic institutions required for capitalist advancement (ibid.: 43). According to Bruck, the Austrian state still suffered from general rules concerning concessions for businesses, which furthered corruption in public administration (ibid.: 43). Furthermore, the lack of local civil courts was seen as an impediment for capitalism because entrepreneurs were unable to enforce outstanding debts (ibid.: 45). Bruck viewed the disentanglement of the Catholic Church from the state a necessary condition for economic progress, e.g. to attract protestant and Jewish entrepreneurs from Germany. Above all, he emphasized that the Austrian state must rest on a middle class society instead of a privileged nobility in order to regain its political power (ibid.: 49). As Bruck was in charge of financing wars (e.g. against Venetia), he was confronted with the economic backwardness of the Austrian Empire for which he sought a long-term solution and focused on institutional changes necessary to strengthen the economy (ibid.: 64–65). However, Bruck's agenda was thwarted by the elite group.
The Habsburg Empire lacked central features of an emerging open access order as far as the 19th century is concerned. Politically, the first constitution which became effective was the December constitution of 1867. It established a census suffrage which preserved the political power of the nobility and the Catholic Church (‘iron ring’; Good, Reference Good1986: 201) and fell behind the monarchical constitutionalism of the German Kaiserreich. Unlike the German Kaiser, the Austrian Emperor had a veto right against the parliament until 1914, which became more important as the suffrage was gradually opened to broader parts of society until WWI. In economic terms, the Austrian type of capitalism exhibited many features of an estate-based-capitalism which transformed the nobility into capitalists while sticking to its inherited social status. The banking sector but also industrial joint stock companies became new fields of privileged economic activity for the aristocracy. Members of important noble families (e.g. Chlumecky, Hardegg, Andrássy, Palvacini, Thurn und Taxis, Auersperg) were CEOs of important banks in Vienna. In the Hungarian half of the Empire, as reported by Good, 88 Earls and 64 Barons were CEOs or members of the board of directors of joint stock companies in the industrial, railway and banking sector (Butschek, Reference Butschek2012: 131; Good, Reference Good1986: 203). Due to their privileged access to the Imperial Court, the aristocracy could shape the rules of capitalism in accordance with their own interests. An indication of the widely-reported anti-competitive stance of aristocratic entrepreneurs are the chosen rules of capitalism, which closed the economy against domestic and foreign competition. The growing influence of the banking sector in the industry combined with a growing number of cartels to keep domestic competition at bay (Good, Reference Good1986: 189–196; Matis, Reference Matis1972: 80–81). Because the economy was smaller than the German one and enjoyed far more protection from tariffs, the impact on economic growth and prosperity was negative. Market power added up to the social status inherited in the pre-capitalist society. Never did the Austrian economy become strictly independent from the estate-based society and form a counterweight which overturned the vestiges of late absolutism.
Thus, some characteristics which gave German capitalism a boost were absent in Austria: Economic policy was settled in Vienna instead of a variety of capital cities which was the case in Germany before and after the unification; due to its imperial position, the Austrian state largely ignored its dependency on the economy as a necessary condition of its power; related to this fact was that an independent bureaucracy which forcefully stuck to an liberal agenda lacked influence comparable to Hardenberg in Prussia, some farsighted ministers notwithstanding. Due to growing national conflicts, which the Hungarian nobility fueled and exploited for its own interests, the power of the central state was constrained; unlike the German states, the Austrian monarch and his administration had to respect the economic interests of regional power holders and could not push through the rules of capitalism. Preserving and satisfying the interests of the nobility became the glue for the multiethnic state. The protection of regional markets from international and interregional competition was the consequence of this political order. The self-reinforcing tendencies of capitalism were too weak to supplant the former economic order.
Specifically, the Habsburg Empire lacked key elements of a market preserving, not to speak of market fostering, federalism comparable to Imperial Germany. Even though it comprised a multitude of ethnical groups, it could not make use of this variety in terms of economic progress. Especially in the Hungarian crownlands (‘Transleithanien’), regional elite groups found ways to protect their local markets against competition even after the abolishment of internal tariffs in the 1850s (Schulze and Wolf, Reference Schulze and Wolf2009); here, the landed nobility (‘dzsentry’) defended its rural privileges against the rising urban (in many cases Jewish) bourgeois class and took on a conservative, anti-capitalist stance. The freedom of movement was restricted for commoners until 1857 (Bruckmüller, Reference Bruckmüller2001: 280; Sandgruber, Reference Sandgruber1995: 230). The freedom of business became established rather late in 1859. Afterwards, restrictions were imposed which aimed at social protection for craftsmen and small enterprises (Butschek, Reference Butschek2012: 150). In Austria, a common market for goods, services, capital and labor, which is key for a market preserving federalism, was late in coming and never fully developed. Complementary to internal market restrictions protection against foreign competition became necessary. A potential compromise would have been the partial integration of the Austrian half of the Habsburg Empire where industry was more developed than in the Hungarian crownlands into the German Zollverein. However, such partial integration was politically not feasible because it would have contributed to the disintegration of the Empire. As a result, the economically advanced regions lacked competition from outside.
5. Conclusion
After 1814, reformers in Prussia were able to install the economic institutions of capitalism to a considerable extent. In the other German states, public administrations further developed the inherited institutions in order to create more economic freedom for businesses. Such a push toward liberal reforms was absent in Austria where reactionary rulers obstructed and revised reforms which had already begun some decades earlier within absolutism. The comparison between the German states and the Habsburg Empire makes clear that reforms were not forced by the military defeat but resulted from intentional efforts of an administrative elite. A difference between German and Austrian transformation was the fact that in many parts of the German Confederation the nobility was less influential (Rhine territory, Westphalia, Wuerttemberg, Baden, Bavaria). The same holds true for the dominant coalition in the cities. After the central bureaucracy gained ground in Prussia and in the South German states, it was easier to pursue a liberal agenda. The emerging capitalist class was yet politically powerless so that ministers such as Hardenberg could ignore their interests in protectionism. Those elite group which exerted more political power, that is the land owning nobility (namely in the Eastern parts of Prussia), became compensated by land in exchange for the redemption of peasants. This was not a perfect – much less a politically neutral – establishment of market rules but it worked sufficiently to instigate capitalist dynamics which took on a life of its own. Supportive to this development was the fact that large landowners had a commercial interest in free trade. The process of capitalist transformation became increasingly ‘impersonal’ and independent of the will of the monarchs. The Customs Union institutionalized this transformation process and changed the economic environment for economic policy. The monarchs of the German federation were set under competitive pressure to improve the economic institutions of their own territory. Privileges of the nobility and vestiges of the guild system were accepted to the extent that the road to capitalism was not blocked. This lead to a more ‘rational’ economic policy which became disconnected from the interests of the former dominant coalition. Hence, a nascent capitalist sector in industry developed along with a transformed market oriented agricultural sector. As a result of the revolution in 1848, the Prussian state conceded a formal constitution and guaranteed further rights which explicitly separated the individual sphere from the state. In the following decade, the establishment of a liberal economic order was finalized. Of key importance was the creation of free trade within the German Confederation. In contrast to a popular view referring to List's infant industry argument, the Union established only moderate tariffs which were the lowest at that time in Europe (Dedinger, Reference Dedinger, Dormois and Lains2006: 231, Fig. 11.4).
A distinguishing feature of Austria's way toward capitalism was the far more powerful role of the high aristocracy and local nobility in the multiethnical Habsburg Empire. Liberal and reform-oriented ministers lacked political influence in the federal state and in the Austrian and Hungarian crownlands. Never could they take up an independent role as in Prussia, Baden, Wuerttemberg or Bavaria. Due to its political weakness, the central bureaucracy had to acknowledge the interests of local power holders and the high aristocracy. Throughout the 19th century until World War I, in neither half of the Austrian Empire was the process of capitalist development ‘impersonal’. Rather, capitalist development remained under control of the dominant coalition which also looked for investment opportunities in the new order. The blending of the 18th century estate based society with capitalism formed a particular type of Austrian cartelized capitalism.
On the eve of World War I, the German economy became an economic and technological vanguard which was on par with the economy of Britain and the United States. Despite its non-democratic vestiges, the political order sufficed to guarantee open access in the economy and, with delay, also in politics.Footnote 23 Above all, the rule of law, which Hayek considers to be of major importance for a spontaneous order, was guaranteed. This prevalence of the rule of law did not exclude pioneer measures in social policy which became a characteristic of German capitalism before WWI. After WWI, these measures took up speed in correspondence with the change of political power. Capitalist transformation in Germany and in Austria confirms that the intensity of capitalist dynamics depends on the extent of independence from old elite groups. Nevertheless, it would be premature to consider a fully-fledged democracy as a safeguard for universal economic freedom, which is suggested by the one-way causal relationship between political and economic institutions claimed by Acemoglu's et al. (2009. In both countries, the surge of democratization after World War I and the change of political power gave way to a new economic order. Apart from further steps in social policy, this new economic order was characterized by cartelization, monopolization, unsystematic experimentation with socialism, interventionism and, in general, the interlacing of politics and the economy.Footnote 24 When the aristocratic groups lost all their political and economic privileges in both countries and full political participation supplanted the old political order, the maintenance of open access in the economy was no longer on the political agenda.
Acknowledgements
For detailed comments of an earlier version, I wish to thank two anonymous referees.
