in: Journal of Institutional Economics 12, 2016, S. 443-69.
With the beginning of the Napoleonic war at the turn of the 19th century, capitalist transformation in the German states and in the Habsburg Empire took different routes. The article analyses the political economy of both types of ‘defensive modernization’ from the viewpoint of institutional economics. We argue that initial reforms in German states gave way to a transformation process which drove a wedge between the interest of the monarchs and the landed nobility. Liberal reformers established a political bargain with the nobility which made capitalist institutions acceptable for the power holders. Later on, reformers established a ‘market preserving federalism’ which gave capitalism a further boost. By contrast, the dependence of the Austrian Emperor on the multiethnic nobility weakened the power of the central state. The transformation process in the Habsburg Empire remained dependent on the personal interests of the dominant coalition, which either delayed capitalism or sought to combine capitalism with protectionism on its own behalf. As a result, capitalist dynamics took up speed in Germany but were delayed in Austria.