Economic Crisis, Elite Conflict and Institutional Change in Empires

Chapter 1 Introduction

This book offers an innovative theory of institutional change, drawing on historical evidence from the Ottoman and Habsburg Empires. Even though these two empires shaped the economic and political structures of contemporary states across a vast geopolitical space,¹ they have received limited comparative attention from economists, sociologists, and political scientists.² Historical, in-depth studies on the Ottomans and the Habsburgs are certainly rich yet they are rarely comparative. The lack of a comparative methodological approach has limited our ability to explicate the causal dynamics of macro-structural change in imperial contexts. This book seeks to fill this gap by offering a comparative-historical study of the fiscal institutions of the Habsburgs and Ottomans from the seventeenth to the nineteenth century.

1. The Puzzle: The Reversal of Fortunes

The Habsburg and Ottoman Empires shared several common traits. They were large, agrarian, and multi-ethnic dynastic monarchies with remarkably parallel life cycles. Both states were established in the late thirteenth century (the Habsburg Empire in 1284 and the Ottoman Empire in 1299), reached their imperial boundaries in the early sixteenth century, and survived until after the First World War. Yet, the developmental paths of the Habsburg and Ottoman states diverged during the seventeenth-century economic crisis, an external shock that initiated institutional transformations in Europe and beyond. Even though the ruling elites of both states were facing a common challenge, they responded to it in opposite ways: the Habsburg rulers gradually centralized resource extraction, whereas the Ottoman elites’ post-crisis strategy involved decentralization of taxation.

My argument explains why the ruling elites in these two states acted differently in the face of strikingly similar economic problems. In addition to accounting for the variation in post-crisis strategies, my theory also sets out to explicate how these initial differences put these two states on divergent developmental paths that proved remarkably resilient in the long run.³ These two path-dependent trajectories would eventually take the Habsburg and Ottomans to outcomes that contrasted sharply with their initial sets of institutions. I call this puzzle the reversal of fortunes.⁴

Here is the reversal: before the seventeenth century, the Habsburg state had a decentralized administration and low infrastructural capacity. The state depended on the cooperation of local intermediaries, a well-entrenched class of nobility, to collect taxes, administer distant localities, and provide for the military. Yet, by the mid-nineteenth century, the Habsburgs had managed to centralize the fiscal apparatus with much higher infrastructural capacity. The Habsburg elites then deployed this capacity to reform agricultural relations, remove barriers to trade, and facilitate industrial development thereby promoting steady economic growth throughout the empire in the nineteenth century.5

Even though the Ottoman state started with a centralized fiscal and administrative apparatus, better economic resources, and higher infrastructural capacity, it ended up with a decentralized fiscal state and lower infrastructural power. Furthermore, the Ottoman ruling elites, unable to overcome the fiscal troubles, adopted a predatory economic policy to extract resources from society. These predatory economic policies delayed industrialization and facilitated the peripheralization of the Ottoman economy.⁶ Consequently, even though both ←15 | 16→empires ultimately collapsed under nationalist pressures and military decay, they left contrasting institutional and economic legacies to their successors.7

2. Theory, Data, and Methodology

In explaining the reversal of fortunes in the Habsburg and Ottoman cases, I draw on and seek to contribute to the literature on European state formation. Scholars of empires typically contend that the deeper socio-structural conditions of institutional change in empires are so dissimilar to those of the Western European states that it would be misleading to look at imperial transformations through the European lens. While there are indeed differences between the two contexts, I contend that they do not necessarily rule out the relevance of the causal dynamics and processes of European state formation for empires.

My goal in bridging the study of Western European state formation and imperial institutional transformations is not to construct a one-size-fits-all explanation but rather to identify the key causal mechanisms that are neutral with respect to the antecedent conditions. If we can identify such causal mechanisms, we can combine them with a textured analysis of the antecedent conditions of each case and thereby construct highly tailored explanations of individual instances while still achieving a certain degree of generalization.⁸

I identify the key causal dynamic of the emergence of modern states in Western Europe and imperial transformations as the intra-elite conflict over the distribution of economic resources. Elite fractions (e.g., ruling families, big landowners, lesser nobility, church, etc.) engaged in constant conflict and bargaining with each other and the institutional configurations across Europe reflected the outcomes of these conflicts.

Placing intra-elite conflict at the core of the explanatory framework,9 I show that the coalitional choices made by the Habsburg and Ottoman elites in the aftermath of the crisis put these two states onto two different path-dependent courses. I construct a causal model linking the differences in the structure of intra-elite conflict to institutional outcomes by way of political coalitions among elites with shared institutional interests.

I offer two abstract causal mechanisms to explain how such distributional conflicts produce the variation in institutional outcomes: balancing against threat and redistributive institution building. The first mechanism suggests that in their effort to fortify their relative position vis-à-vis their rivals, ruling elites engage in balancing behavior and form coalitions with those social sectors whom they consider the least threatening to their capacity to extract resources. The second mechanism posits that the same strategic rationale drives the elites to forge institutions that would (a) provide side payments or payoffs to their new coalition partners and (b) undermine their rivals by rechanneling access to economic resources. In other words, while the first mechanism links distributional conflict to coalitions, the second mechanism causally connects coalitions to institutional outcomes.

The primary finding of my research is that the incorporation of urban capital holders by the elites into the ruling political coalition was essential for the formation of centralized fiscal structures (Habsburg case), while the exclusion of the capital holders from the coalition due to strategic reasons resulted in fiscal decentralization (Ottoman case).

I use comparative-historical analysis10 and process tracing¹¹ to demonstrate how differences in the structure of the intra-elite conflict, particularly the distribution of power and perceptions of threat among competing elite fractions, shaped elite preferences regarding capital incorporation. Rather than imputing preferences from outcomes, I focus on the formation of interests and provide direct evidence, whenever possible, regarding the revealed preferences of actors.¹² I systematically analyze the formation of the preferences of the main actors in each case (ruler, capital, and nobility), the political coalitions these actors formed, and how each coalitional configuration produced the variation in fiscal structures.

Using comparative-historical analysis to produce causal explanations raises two methodological challenges: achieving external validity and managing potential selection bias. I consider the internal validity of arguments as a requisite of explanatory adequacy¹³ and aim to explain the phenomena at a high level of specificity, paying particular attention to the context of the Habsburg and Ottoman cases. However, internal validity is of limited value in the complete absence of external validity.¹⁴ To maximize internal validity without sacrificing the generalizability of my findings, I follow an approach that combines detailed ←18 | 19→comparative-historical analysis of individual cases with an emphasis on abstract and portable causal mechanisms.

By causal mechanisms, I mean the essentially unobservable units with a capacity to change entities and generate outcomes. They allow us to transcend the empiricist equation of covariation with causality by providing a systematic set of statements that provide a plausible account of how and why two phenomena are associated. This of course contrasts sharply with the “black box explanations” common but not limited to deductive models where the link between explanans and explanandum is assumed to be devoid of structure, and reduced to a regression coefficient.15 Causal mechanisms are the “cogs and wheels,” linking independent and dependent variables.¹⁶ In principle, such mechanisms are abstract; they can travel across time and space, while outcomes remain sensitive to historically contingent conditions.

Causal mechanisms allow us to account for the similarity in processes and divergence in outcomes across cases. As Elster argues, the “distinctive feature of a mechanism is not that it can be universally applied to predict and control social events but that it embodies a causal chain that is sufficiently general and precise to enable us to locate it in widely different settings.”¹⁷ Thus, identifying the causal mechanisms involved in intra-elite conflicts and combining them with detailed analyses of specific conditions of each case allow me to construct an explanation that is internally valid and generalizable given the scope conditions of my theory.

This methodology differs from the traditional comparative case studies: instead of comparing cases that are similar in all but one aspect, I engage in a ←19 | 20→paired comparison of uncommon cases. The goal is to identify the fundamental causal mechanisms and explore how they combine differently with antecedent conditions to generate diverse outcomes.18

The second limitation of comparative-historical research is selection bias in choosing from multiple historical accounts of the same event or phenomenon.¹⁹ Discussions on selection bias in comparative research typically focus on the implications of selecting cases on the dependent variable and other forms of selectivity.²⁰ Comparative-historical analyses, however, might also commit a second type of bias if they draw selectively on a few historical accounts ignoring competing historical theories and interpretations.

I follow several strategies to deal with this problem. First, in explaining various aspects of the Habsburg and Ottoman cases, I “triangulate” using the different interpretations and claims from multiple historiographical schools. I seek to provide a balanced interpretation of historical facts by covering a broad spectrum of research published in German, Turkish²¹, and English. Second, whenever available, I use primary sources (memoirs, government reports, and imperial decrees) to adjudicate among competing historical explanations and theories. Third, I use what Lustick called “explicit triage.”²² If I favor an explanation or interpretation over others, I explicitly note alternative interpretations and address why I consider them inferior.

3. Contributions

This book offers two main contributions. First, it adds to coalitional theories in state formation literature by bridging the gap between the demand- and ←20 | 21→supply-side approaches. Coalitional approaches explain institutional outcomes as consequences of the distributional conflicts among coalitions of social actors. I differentiate between two types of political coalitional theories: demand-side (bottom-up) explanations and supply-side (top-down) explanations.

By providing a causal explanation of the divergence of developmental paths of these two states, and the reversal of their fortunes, this book sheds new light onto the age-old question of why and how the trajectory of the East got differentiated from that of the West. My explanation ultimately dovetails with the Weberian argument that multiple centers of power were initially more conducive to the ←21 | 22→emergence of the modern state and capitalism.23 However, by focusing on the relations among elites and explicating the mechanisms governing the intra-elite conflict, I provide the micro-foundations of macro-level processes of economic and political change.

The book is structured as follows: