Chelsea Follett: Joining me today is Leandro Prados de la Escosura, who is an emeritus professor of economic history at Carlos III University in Spain. And he’s joining me from Madrid today where I understand it’s 90 degrees. He is the author of Spanish Economic Growth from 1850 to 2015, and many other works of scholarship. He is the editor of Exceptionalism and Industrialisation: Britain and Its European Rivals, 1688–1815, and the former editor of the Journal, Revista de Historia Económica, he holds a doctorate of philosophy from Oxford University and a PhD in economics.
He has taught at Georgetown University and University of California at San Diego. He has been honorary Madison Chair at the University of Groningen, the Leverhulme Professorial Fellow at the London School of Economics, the visiting fellow at All Souls College at Oxford University, and the Jean Monnet fellow at the European University Institute in Florence. He has served as the president of the European Historical Economics Society and at the Executive committee of the International Economic History Association, and there are too many other accolades to name, his current research interests are economic freedom as well as wellbeing and inequality in historical perspective, which he joins the podcast to discuss today. Leandro, how are you?
Leandro Prados de la Escosura: Fine, thank you very much. And let me just tell you a secret. When in an introduction, you, provide such a long list, the subliminal message you are conveying, the person you’re talking to is very old, which is my case. So, so I wish introductions were shorter because that would rejuvenate me.
Chelsea Follett: Well, maybe we’ll cut some of the introduction then make it shorter if you’d prefer, but it’s incredibly impressive all of the work you’ve done in so many different areas and that you’re still doing. So let’s talk about some of the findings and extensions of your latest book published last year in 2022, Human Development and the Path to Freedom. So tell me about the book. What is it about and what gave you the idea for it?
Leandro Prados de la Escosura: Well, it’s a long, well, it’s a short story, in fact. I have spent many years of my life working on economic performance in the long run. I started working on Spain, but I worked also in Africa and Latin America, and also on international comparisons. But, so I don’t have anything against GDP, but I was always uneasy with the idea of using GDP per head as a shortcut for wellbeing. In fact, as an economic historian, I tend to read old books. Some of my colleagues in the economics department suggests that you shouldn’t read anything that has been published more than five years ago.
On the contrary, I think sometimes it’s good to go and find out what the pioneers did. And if you read Simon Kuznets work in the early, around 1950, when he produced a new set of estimates for the US, he was very clear about the fact that GDP is a good indicator of what happens to output but is a very incomplete and deficient indicator of wellbeing.
So, but if you see what most economists do, it is basically to say, well, yeah, this is true, but it’s highly correlated with non-economic dimensions of wellbeing. There is an interesting paper by Jones and Klenow published a few years ago in the American Economic Review in which they produce something else, something, what they call a consumption equivalent welfare measure. But they say, well, in the end, this is correlated with GDP per person, and GDP per person is an informative indicator of welfare. So, I would say that most economists take the shortcut, and there are some… If I can add, something, I would say that there is a tendency now to, for instance, the OECD publishes How’s Life?, this kind of, I don’t know if you’re familiar with this kind of publication, in which what they produce is a dashboard of indicators. Something the authors wrote that is very interesting is “multidimensional wellbeing is useful for exposed assessments of economic development.”
So basically, you have GDP and then there’s some additional elements that help you to make a more nuanced sort of picture. So I was unhappy with that. And then I came across, I realized that, since the beginning of modern national accounts, that became popularized and widespread from the 1950s onwards, there has been attempts to produce alternative measures, from, the physical, index of quality of life, basic means, you name it. And more than 30 years ago, the United Nations Development Programme produced the Human Development Index. So I was very interested, but at the same time I was frustrated or surprised when I saw that countries with no freedom at all rank very highly in the index.
You are of one of the main producers of indicators of taking state freedom seriously. You have the Human Freedom Index so you understand what I mean. And just to give an example, in the first report in 1990, they had a kind of retrospect going back to 1975, and I found that Spain in 1975, and still under Franco’s, the general Franco’s dictatorship, rank very highly in terms of human development. How come? So then I decided there is something wrong here. I started working on that. It wasn’t satisfactory because you still got Franco, Spain or Cuba or any nasty dictatorship very highly. And then I was reading the literature that accompanies the human development report, which is very interesting story. And I found for instance, that in the human development report in 1990, they write the following, very candid assertion: “The purpose of human development is to increase people’s range of choices. If they are not free to make those choices, the entire process becomes a mockery.”
So, but so to make a long story short, what has happened is that they try once and again to introduce freedom, but they never managed to do it because it’s strong political opposition of country members of the program. So the advantage of being an independent scholar is that I decided, look, nobody is going to read it, but I have the freedom to introduce the freedom dimension. So I started working on wellbeing from a human development perspective. Let me tell you from the as an additional comment, that the difference, I think it’s an important difference, the difference between the usual shortcut of GDP per head or the, those studies that emphasize utility such as the Jones and Klenow study I mentioned before, or subjective wellbeing based on life satisfaction, happiness.
The difference with the human development approach is that it draws on the capabilities approach by Amartya Sen. And this is about enlarging people choices. So it’s a philosophically completely different approach. So it’s about enlarging people choices. So everything is a mean for an end, which is being freer. And this is what I’ve found very attractive. And I think this is important because it is, it what makes a difference with broader approaches by social scientists who use a dashboard of indicators, a dashboard indicators of, in which you can add you can do a shopping list of different indicators, but this is just a compliment for GDP per head. In the case of the capabilities approach, what you’re saying is, it’s not only about the achievements, it’s not about having access to knowledge.
It is not about just living longer. It is not about have a decent material standard of living. Because in fact, you can make the joke that this is something you can get in a high security prison in Norway where I was last week. Because in a high security prison in Norway, I’m sure they will feed you properly. So you will have a healthy, and long life. You have access to a good library, I’m sure, and you are going to have decent standard of living, but you cannot choose. So choosing between alternative ways of life is what makes the difference. So, and so I became fully persuaded by this approach when I found that, there was a nice surprise, that there was a possibility of getting enough reliable, empirical evidence to put together this indicator. You know, I decided to go ahead and do it. So this is a very long answer to a very short and precise question. So you have to be careful with me. [laughter]
Chelsea Follett: No, no, no. I preferred that getting more information that this is a wealth of knowledge. So that’s what inspired you to create the book. You wanted to fill in this gap and look into this alternative approach. Now, tell me about what you found and what that approach entailed.
Leandro Prados de la Escosura: Well, I, let me, I found many things because it takes you time and so I, perhaps what makes sense is to compare and to say what difference I got from what you would get on the basis of per capita income. So the first thing is that, the first interesting thing is that, is if you produce an indicator of wellbeing, people are going to tell you, well, come on, this is fine. You’ve done your homework, but tell me how much you change the picture if you do [chuckle], because perhaps you don’t. This is one of the conclusions you get in the Jones and Klenow paper and other papers along those lines. They basically conclude, in fact, in terms of per capita income, people are better off than in terms of broader, a broader picture, what they call consumption equivalent welfare. What I’ve found is the opposite. What I found is that in terms of wellbeing, people have been better off over the last 150 years. You know, ’cause in the book I end in 2015, as you mentioned, but I have extended now the estimate. So I have data for 1870, 2020.
So if you compare the two, I don’t know if it makes sense if I share with you some, I don’t know if we can do that, if I share with you a figure. What you see here is how over the last 150 years, human development, according to this broad definition I have, and per capita income evolved. And you can see that both of them, improve. The red one, the red line is per capita income in real terms, the dotted blue line is augmented human development, which is a combination, as in of. Indicators of health, education, a decent standard of living and civil and political freedom, so you could say what. How? What? Why so much fuss if at the end of the day you tell the same story? If you look closer, you realize that in fact there are differences in the sense that the slope differs across different periods. So that suggests that perhaps there is something else.
So if you move to growth rates and you look at different Significant periods, say the first globalization after World War I, the first part of the 20th century, the golden age, between the ’50s and ’70s, the last Three decades of the 20th century and the 20 Years of the new century, and then you realize that the two columns in orange is per capita income in blue is human development, the two of them evolve differently. Only the last one on your right hand side, which is the average for 1870, 2020, they’re very close. But, and then you could say, well, In the first globalization before 1913 and between 1970 and 2000, they are relatively close. But what about the rest? If you look at the last two decades, the difference is huge in favor of material living standards and measure by per capita income.
If you look at the golden age, 1950, 1970s, again, but if you look at the first part of the 20th century, you realize that is just the opposite. So this is, I think that’s interesting because that would make our friends in social science, particularly among economists, to think about it. So what to do next? Well, try to provide an explanation. And I went in two steps. One was saying, well, how, why this happens? What is the intuition? The intuition is basically, if you get richer, this means that you’re going to be able to get better fed. If you are better fed, that means that your immune system is going to be strengthened. If you’re richer, that means that you’re going to have better health. In Western Europe, with public health, but in any case, you are going to get better health. And the same for education.
So in fact, here you would face the dilemma that was raised in a debate years ago, about 10 years ago, between Jagdish Bhagwati, the famous international economist, and Amartya Sen. It was about India, but basically the discussion applies universally. It was, if you want to improve living standards and wellbeing of people what should you do? Should you just give priority to economic growth because it will provide automatically access to a healthier longer life, knowledge, freedom and so on or you have to focus your priorities on these dimensions of wellbeing independently of what happens to economic growth? Obviously without forgetting about economic growth. So in fact, the intuition would be that higher income is going to make you freer. This is the modernization theory. It’s going to make you healthier. It’s going to get you more educated. And why is that? Because we’re thinking in terms of, yes, think of a function in which, let me just move to a function. If you compare pairs of values, say in this cases, it’s just an example for life expectancy.
If you compare in the vertical axis, you have any dimension of wellbeing, say life expectancy. On the horizontal axis, you have per capita income in real terms and transformed in logs. And basically, the idea is if you move to the right, it means you’re richer. You’re going to get higher levels of life expectancy. So basically, either you think in terms of health function, education function, freedom function, the intuition what most economists have in mind is that the richer you are, the higher you’re going to get on the vertical axis. But is this the whole story? It is not. In fact, what I found is that, and I can give you some examples if you have the time, otherwise I close.
Chelsea Follett: Absolutely.
Leandro Prados de la Escosura: What you find is that, and this is the final conclusion, is that you can put it to in two different ways, you could say that for any level of income, you can have different levels of wellbeing. So, not necessarily a given level of income gives you a given level of wellbeing. You can have different, and that’s why different policies from the point of view of wellbeing battle. But the most important finding from a historical perspective is that for any point of income over time, you get higher wellbeing. So at any income level now, you get higher wellbeing than in the past either in terms of freedom, in terms of health, in terms of education, over the long run. Of course there are ups and downs. So basically what’s the story I’m trying to tell is not that there are only movements along the function as you see here, but you can see for instance, this is what happens if you compare 1870, which was the first function, I’ll show you here, was this comparison.
It was for 1870. Okay? If you move to 1913, then you see that for most of the income levels, you get the same association between health and income, but at high levels of income, you get higher levels of health. Why is that? I can tell you later. Okay. But it’s basically because improvements in health techniques and medical knowledge were restricted to the most advanced countries. But if you go and look at the ’50s, this is 1950, you can see my point. In 1950, at any income level, at the same income level, than in 1870 or in 1913, you can see that the function has shifted upwards. So that means that for this any income level, for the same income level, you get higher levels of health. Okay. So, and you find this for health, for education, and for freedom. Of course there are reversals. I mean the same way the function moves upwards here could move downwards. I mean, for instance, look at what happens in 1970 in terms of how is a green line. The green line, this shows that in fact, for 1950 to 1970, there is not a shift in the function. Basically what it means is that improvements in health are go hand in hand with improvements in income.
I can tell you why this happens, but to finish the story, if you move to 2000, the blue line or to 2020, you can see that there is another upper shift, and this is the bottom line that you can replicate. If we had the time to other indicators is basically that for any level of income, you get higher levels of wellbeing. And let me see how I will stop sharing and I’m going to show you the final thing for human development as a whole. Okay? So you see, this is for human development, which is a combination. These are the same cross-sections from 1870, 1913, 1950, 1970, 2000, 2007. This is the summary of the story. You can see that there has been different functions relating, or the function has different levels relating wellbeing on the vertical axis to per capita income.
Initially you had movements along the function, and then at some point in 1970, for instance, the green line, there is a downward shift. Why was that? That was basically for two things is when in 1970, what happens is that the improvements associated to the epidemiological transition, which allows an increase in life expectancy, because people discover how infectious disease is transmitted and there are policies of prevention, and then policies of combating infectious disease as a main cause of death. But it’s also a movement towards authoritarian regimes, the spread of socialism, and also of other regimes, right wing regimes, authoritarian regimes in the world. So there was a downward shift in the function, but, so this was a backlash, but over the long run, and this is the optimistic message, and you get, in this red line, which is in 2020. What you get is that for any income level, whether you are rich or poor, nowadays you have higher wellbeing. And this is a summary, as I told you of health, education, decent standard of living and freedom. So you get higher levels, but basically actually income is not included. So it’s health, education and liberties, political and civil liberties.
Chelsea Follett: Those findings are fascinating. What would you say is the biggest implication of what you found this dramatic difference between GDP or income alone and a broader multidimensional conception of wellbeing. Is the implication that in development, we should focus more on freedom rather than helping dictatorships boost their GDP a little bit more. But what are the implications?
Leandro Prados de la Escosura: Well, obviously my comparative advantage is looking at the numbers over the long run and focusing on the past. I think economic historians are… I don’t know if you have the same word in English, but it’s forensics. I’m a forensic economist, so I don’t forecast, I forecast the past, not the future. And even though I make mistakes, so I wouldn’t dare to talk about the implications, but just describing what I show you, I would say here firstly, stating the facts. The first thing is that wellbeing broadly defined has expanded worldwide rather more steadily than per capita income. Secondly, the phases in which we conventionally associate improvements in wellbeing are not necessarily the same as those in which actual wellbeing has improved. So, which means that, for instance, there was an important improvement.
I know this is counterintuitive in the so-called interwar period, even though there was no economic growth, was a stagnation. And you have the case that in, for instance, in colonial Sub-Saharan Africa, or in before 1960, there had been in the first part of the 20th century, a remarkable improvement in terms of health in Sub-Saharan Africa. I can tell you later if you want why this happens, or colonial India. We know from Tirthankar Roy, detailed studies that colonial India in the 20th century, before 1947 independence had its average income in real terms, stagnant. However, in terms of health, there had been a remarkable improvement. In Jamaica in the interwar period, just to give you a case of a poor country, colonial country, or in the 1940s after the Spanish Civil War and fascist dictatorship suffering international isolation, there was an improvement. Why is that? Because of the implications of a scientific advance. That was a discovery of the germ theory of disease as transmission of infectious disease. And that triggered the response of the most visible one or new drugs the antibiotics.
But they were unaffordable. So the interesting thing is that the major improvement in health takes place before people have access to modern antibiotics. How is that? Because they learn how to prevent the spread of diseases through very simple practices, just like washing your hands before eating, not sleeping where animals do, or for women to rest after deliveries, things like that reduce maternal and infant mortality, remarkably. So you have some counterintuitive results.
And then I think freedom makes also a great deal of difference because if you don’t have, I mean, of course you could say this is ideological, I guess everything is ideological, but if for you having the opportunity to choose between alternative options is an important value, then it makes a difference whether you have material improvements under an authoritarian regime than if you do it in a democratic, not only in terms of positive freedoms, freedom for, but in terms of also civil liberties, in freedom from interference and coercion, which is an important element that I also include in the index.
So on the one hand, what you have is that trends do not match. The second thing is that there, this paradox that in that time of globalization backlash, like the first part of the 20th century, you have a kind of globalization of educational and health practices that improve people’s living standards. And the other thing that we tend to forget, that the association between wellbeing and per capita income is not a fixed one. So we move along a function, but that there are movements along the function. This is for sure: if you are richer, other things being equal, ceteris paribus as economists say, you’re going to be healthier, more educated, freer.
But this is not the whole story. What you can see is that there are upward shifts and downward shifts, unfortunately sometimes in the relationship between wellbeing dimensions, and not all of them behave similarly. That’s why it’s important to use a single index. Okay? Because most economists will tell you, this is why you need to have a dashboard, but you’re going to get contradictory results because one is going up, the other one is going down. So at the end of the day, you could define wellbeing as a latent variable, which is elusive. And for which you don’t have, you cannot observe that directly. So you have to use other dimensions in order to get to the final one. So, and the third important finding. The most important finding, I would say is, and you can see it. In a more negative or in a positive way, you can say that it is in our hands to have different levels of wellbeing for the same level of material development, for GDP.
Or if you put it in a positive way, you can say that for any level of income, you can get higher wellbeing. So the end of the story is that wellbeing has improved more, and has affected people’s life more favorably than per capita income. But this is one part of the story. The other part that perhaps you want to talk later is about to what extent this well averages, because in the end, I’m using population. I mean, you just produced this fantastic, this awesome paper, I’m very envious, I must confess, in which you agonize about whether to use unweighted averages or population weighted average, but I think population weighted average, ideally we would need information not only about our country’s average, but also about individuals.
But we don’t have this information. So you can either use countries averages without giving them any weight. So Luxembourg is going to be as large as China [laughter] in relative terms, or if you weight by population, well, you are getting a lower bound of what happens globally because you’re giving more importance to those parts of the world where more populated, okay? So the thing I would like, perhaps we could move and because it’s related to what [0:34:44.3] ____ did, is to see, to look at to what extent these averages we discuss and are so convenient are, mean anything? Because you could say, look, these averages mean very little because in fact, the wellbeing like income has been very unevenly distributed. So I don’t know if you want to go…
Chelsea Follett: No, I mean we can certainly, so in the paper you’re talking about, we ended up as you know, publishing both the weighted and the unweighted, so people can draw their own conclusions. We should get into that in a moment, into inequality and how widely shared these gains are and how meaningful the averages are. But something that you said was very interesting. You said that you can get different levels of wellbeing for the same amount of income. And that is, I think the implications of that or the lesson of that historically, is in part to give us that perspective that a king, the richest man on earth hundreds of years ago was in many ways worse off than an everyday person today. There is not the same level of medical understanding, knowledge, human knowledge, technology, and political liberty. So many things have changed over time. Would you say that’s one of the main lessons to take away from this?
Leandro Prados de la Escosura: Yes. This is, you know, when I was telling you that on the one hand you could say that for any income level you can get different levels of wellbeing. I’m saying that in the sense that you can be in a cross-section at the same point in time, you can be with the same level, have higher and lower levels of wellbeing. So this is one interesting thing. When you look at in a dynamic perspective, dimension, you can be worse off or better off. For instance, in 1970, in terms of wellbeing, the world was comparatively better off than in 1950 for the same income levels. How come? It’s not that they were poorer in 1970, the world citizens were richer. But if you take into account the reduction in freedom from the perspective of wellbeing defined as human development, they were not worse off, they were more or less the same, okay? Or for instance, you could say that in terms of freedom in 2020, we are worse off than we were 20 years ago. Okay. I haven’t shown you the story in terms of freedom. Maybe we should look at it in a minute because it’s a very interesting story. It’s quite counterintuitive, shall we see that?
Chelsea Follett: Sure. That no, I know your latest research.
Leandro Prados de la Escosura: My answer to the question is the, I know you at Cato like positive messages and as an economic historian, I cannot be other thing than an optimist because history is very optimistic. So you could say that we are over the long run, and this is important thing, over the long run, we are better off in terms of wellbeing and in terms of different dimensions of wellbeing. So this is a great message and in fact what I’m doing is normalize it by income. So it says at the same, as you were saying, the same person with the same level of income, today is better off than the same person with the same level of income in the past. Not all the time. There have been backlashes. I mean, let me just show you, this is a bit confusing, but there are different colors. Yes. For instance, look at the red line. This is 2020, okay? Look at the blue line. This is 2000. So you can see in 2000 practically, above a certain level of income, you’re always above the red line, which means that people were freer at the same income level. This doesn’t mean that people were richer 20 years ago. This is not true, we’re richer now. But for the same income level, 20 years ago, people were freer than we are now. So, there has been a decline in freedom because illiberal democracies and, if you want, also populism, this is something worrying.
But if you compare over time, if you compare with 1870, with 1970, look at 1970, which is the green line. Nowadays the red line is much higher. So the message, even though there are contradictions, I mean there are different improvements and declines. So you could say there are upward and downward shifts. But even in the case of civil liberties here the spread of ideas, ideas in favor of freedom, ideas that restrict freedom, such as fascist and socialist ideas, they have restricted the level of freedom for the same income level.
So it’s not just what happens within the boundaries of a country, but also what happens in terms of your politics, also in terms of the spread, the diffusion and the success of ideas. So you could say here that the bottle is, if you compare 2000 and 2020, you could say the bottle is half empty because we have had a backlash.
But if you compare to any other cross section in time, in 2020, we are better off than in any other period of time. When you add indices of civil liberties or political liberties to indices of health, to indices of education, the final result you get is that still in 2020, on the aggregate you’re better off. Okay?
Chelsea Follett: So it’s a nuanced picture. On the one hand overall, things are becoming better, but there are also these worrying trends about declines in freedom.
Leandro Prados de la Escosura: Exactly. So there is no a kind of relaxing messaging which you say we are better off and this is for good. No, there have been for instance, in terms of health, we are now in a… There was a stagnation after the diffusion of the epidemiological transition. There was a major improvement between the 1920s and the 1950s, but it started getting exhausted in the 1960s even though there were a lot of new independent countries that had very activist policies in favor of health and education. But the fact is that they reach the frontier in terms of scientific knowledge. So you had to wait until what I would dare to call a second health transition that so far is restricted to the advanced world which is fighting cardiovascular respiratory diseases. And this is so far restricted as it was 100 years ago, 150 years ago. Advances in medicine connected to the germ theory of disease.
The so called epidemiological transition up to the 1920s affected basically the rich countries because they had the social capital, the human capital and they’re rich, they’re wealthy enough to afford these changes. And we are now living to some extent a period that have some similarities in terms of a different impact of major advances in medical knowledge. So this is also important when you look at well distribution.
So I think the picture I would say is how I see it is we’re better off in terms of wellbeing. Over the long run, there has been across the board improvement in wellbeing. So for any income, not only we are richer, but we are more than proportionally better off in terms of wellbeing than in terms of per capita income. But there were ups and downs, less volatile, of course, than GDP per head. And it’s a much more optimistic picture. But still there have been some backlashes.
And that’s why I think it’s important to complete the picture, to look at what happens in terms of distribution as you do in your paper. And since you’re looking at the average, and you’re looking at… You can look at inequality also in terms of averages, not the average in terms of the aggregate, or you can look at what happens to different percentiles in the distribution. And I think that also add some nuance to the picture. Anyway, I’m talking too much…
Chelsea Follett: No, no. And thank you for all of your advice on that paper, by the way. And it is, of course, inspired by your work, taking into account more dimensions of wellbeing than any other index than the one Vincent and I put out. And you also used Gini index and mean log deviation, all the same measures. Can you talk about inequality and why it’s important to look at the distribution and how those gains are shared and how much weight can we give to an average when we’re judging how wellbeing has changed over time?
Leandro Prados de la Escosura: Yeah, I think we share the interest to provide a convincing answer. Because as you remember a few years ago, economists would say, “Why you care about inequality?” This is interesting because again, if you look at the long run and you remember the preface of On the Principles of Political Economy by David Ricardo, he has a very interesting sentence in which he says, Basically, that how income is distributed between the owners of different production factors is at the core of political economy. That was the way they call what we nowadays call Economics. So for Classical Economics, looking at the distribution was important because they associated distribution to what we would call nowadays Personal Income Distribution to what we call Functional Distribution of Income.
So I think that probably has to do with the fact that they had in mind a society in which most workers have a low income level. So inequality didn’t come, didn’t derive from the dispersion of incomes of workers incomes, but from the gap between the average incomes of proprietors either capitalist or landowners and workers. So for us, the functional distribution of income to say what is, how large is the share of capital in national income is informative, but it’s not decisive to tell us what happens to a Personal Income Distribution because you have to take into account what happens with the dispersion of proprietors income and what happened.
Just in a very oversimplified world in which workers are not proprietors and proprietors don’t work, but societies are so complex nowadays that you cannot do this oversimplification, okay? But Ricardo had that interest. We have now that interest, but for many years, people didn’t have this interest. So You can have, you can care about inequality, for instance, because I remember that paper by Alesina and Perotti 30 years ago, in which they were saying, look, inequality creates uncertainty. It might provoke social conflicts. This is bad for investment and even for innovation. So that’s going to affect growth negatively. So this is one good way of approaching it. But in this case, I have a more technical answer is when you teach undergraduates, the first classes of economics or even a statistic is you tell them, look, this average, is fine provided there is no much dispersion. There is a lot of dispersion, then this average means nothing, okay? Because it’s not representative. So if you allow me to share again with you a figure, I hope we can see them properly.
This is the darker, the higher the level. This is why in 1870 human development was distributed across the world. So you can see darker areas are in Australia or North America and Canada, Canada and the US, or Western Europe. And sub-Saharan Africa was quite pale, a very light gray. But if you do that again for 2015, because human development was higher in 2015 than in 2020, it’s interestingly if you look at the long run, there had been four moments in time in which the progression, the positive progression of human development had been either a stop or decline. One was the Great Depression.
The second one was during the Great Leap Forward at the end of the ’50s, early ’60s, because of this Maoist decision to introduce, to send people to the countryside and to have a sort of agricultural revolution that failed, obviously. Then there was the oil shocks in the early ’70s, but the most damaging one has been COVID. COVID is the first period in which wellbeing measured in terms of augmented human development has declined. In these three other events I mentioned, there was stagnation, basically. So what happens if we replicate this map for 2015? You see? We still get everything is darker, so we are better off. But still there is striking differences in the darkness of the areas. So this casts some, at least a shadow of doubt on what I have told you so far, because you could say what, what said, what you were having saying is it’s to some extent, meaningless. Okay. So again, we can look at, maybe I should just look at the average for, instead of looking at different components, okay? This is how, inequality has evolved in terms of augmented human development. So you can see that what you get here is, this is measured in terms of, not of the Gini, but the way you have the Gini estimates and many other measures of inequality. So if you want them to, to compare it to your own results, they’re available.
But I didn’t include them in the book because the book was already full of tables. So that’s, but here, you see, you can see that the levels, I mean the higher the line is on the vertical axis, the higher the level of inequality. So you can see that in 1870, inequality was high, it increased up to the end of the century, it went down. But because of World War I increased again. But from the late 1920s to the present with the reversal of World War II, as you can see here, there has been more or less steady decline in inequality. So this is good news. In fact, you could compare this with what happens quickly. We’ll get back. This is something you have to ignore now, but you can compare it to per capita income. Here in dotted blue, you have the same picture I show you, okay, about human, augmented human development. Although here I’m excluding the income dimension, and in continuous red line, what you get is per capita income.
This is the sort of information that, for instance, Branko Milanovic has published. This is what he would call inequality too, in the sense that is population weighted inequality, the average of each country weighted by population, is not global inequality in the sense of taking into account the distribution between countries and within countries. But you could say, considering, Milanovic estimates that this is a lower bar, but basically the profile, the shape is the same. So here you can see that in the case of per capita income, until the very end of the 20th century, until 1980, inequality has been increasing. And only after 1990 inequality has been declining. In the case of wellbeing, inequality has been declining from the late 1920s. So in other words, this means that our findings for wellbeing, these averages I was giving you are at least from the 1920 somewhere are reliable. So basically this tells you the story I’ve been telling you is not completely mistaken, okay?
Chelsea Follett: Right. So not only have people become better off over time, to the point where now a child in Sub-Saharan Africa has a better chance of survival than a Victorian English child. There’s been an incredible improvement over time of those graphs you showed with the different colors of gray, you saw many, of the poorer countries today actually at the same or a higher level of development than the richest countries once were. But also those gaps are starting to close, and we’re seeing as everyone becomes better off, international inequality actually declining.
Leandro Prados de la Escosura: Yes, I entirely agree, but let me tell you some… Because I would like to do two things. One is, this is the good news. Let me tell you some…
Chelsea Follett: Bad news too?
Leandro Prados de la Escosura: The good news, okay?
Chelsea Follett: Okay.
Leandro Prados de la Escosura: I drop this, here you get a complimentary picture.
Chelsea Follett: Hmm.
Leandro Prados de la Escosura: The dotted, no sorry, the continuous blue line is the one I already show you, is human development, inequality of human development. But we always deal with inequality in terms of what I would call relative inequality because it’s relative to the mean. So that means that if we increase by 10% our wealth or our life expectancy across the world countries, inequality in relative terms doesn’t change. But there are people who are a bit more picky or, and think that, well, if my income increases at 10% and my income is 100, I get 110. If your income is 1000, your 10% is, 1100. So now the distance is not 900 is more, okay? So the distance is what matters from the point of view of absolute inequality. So in terms of relative inequality, per capita income, as I show you, just show you, has increased over time up to 1980 and has declined from 1990. But if you look at absolute inequality, the distance, inequality and per capita income in the world continues growing. The distance between rich and poor continues growing.
And now I give you the good, the bad and the good news. The bad news is that you can see that from 1920 onwards, the continuous blue line declines. But what happens if you look at absolute inequality in terms of wellbeing, it goes up and up. There is a decline in… Because of after…
Chelsea Follett: The world wars…
Leandro Prados de la Escosura: On the depression, but then there is a recovery. So the up to 1960, up to this point here, the distance has been increasing. So that means that in absolute terms, inequality and wellbeing has been increasing. This is the bad news. So even though in relative terms, from 1920 to 1960, inequality in relative terms has been declining, the distance in absolute terms, for those who think that what matters is absolute inequality, inequality continue deteriorating. But what happens, the good news is that from 1960, you can see that there is steady decline in absolute inequality.
So absolute inequality nowadays is similar to the inequality you would find in 1938 or in 1913 or in 1900. So the good news is that even though in absolute terms, inequality is higher now than it was in 1870 is similar to 1900 or 1913. But relative inequality at the same time has been declining over time. So, this is part of the story. And now I stopped, but I have something else to show you that I think is interesting because completes the picture. So question…
Chelsea Follett: Absolutely. So I think you and I both agree that while it’s important to look at how these gains are distributed for various reasons, absolute levels of living standards still matter more than relative ones. More important than decreasing inequality in and of itself is decreasing poverty and other things that harm human wellbeing. I know that you have pivoted recently in your research to a measure of wellbeing, freedom specifically, you’re looking at different kinds of freedom, and that’s your current focus. Could you tell me a little bit about that?
Leandro Prados de la Escosura: Yeah. But before that.
Chelsea Follett: Yes.
Leandro Prados de la Escosura: Let me add something that I think we should consider.
Chelsea Follett: Yes.
Leandro Prados de la Escosura: Although I’m not perhaps I shouldn’t give you more figures and we can talk about different kinds of freedom, but I think it’s important for future research. I try to do it in my book and I have some slides, but I think it’s important also because, to go beyond this aggregate estimates, so looking at what happens to different percentiles in the distribution is the next challenge. Because that is informative. I mean in… Let’s see… Let’s think in terms of who are the winners and who are the losers. If you look at different percentiles we see that there has been a decline in inequality. But who were the winners? Was the middle class of the world, or were the lower classes of the world?
Okay. Who… So in each case, you get a different story. Okay. So I’m just, I cannot refrain myself from showing you what happens to human development. When you look at percentile by percentile. Here in the continuous blue line, you have a comparison between the distribution in 1870, and the distribution in 2015. Okay? And in the horizontal axis on your left, what you have is the growth rate of each percentile. So you can see that those at the middle are those who are higher. This means that what you would call… We could call in a very oversimplifying way, the middle class of the world got better off.
And then the lower classes and those at the top won relatively less. And this is consistent with the overtime decline. If you look at absolute, which is on the right hand side axis, if you look at the dotted red line, which is absolute gains, what you can see is that in fact, those who were higher level of wellbeing are those who in absolute terms had got more. So that… And you can replicate this for countries or if you have the information, but certainly for different dimensions, and you get for instance an interesting message. Those at the bottom, won more were the main winners in terms of education. Those at the middle were those were the main winners in terms of health. So, and this allows you, when you were saying what are the implications? Well, if you want to have policies targeting things. I mean, you could say that education is going to get those at the bottom better off, or this is the story so far.
Health has, the middle class in the world are the main winners in terms of health. In political terms the distribution is quite more widespread, even though the middle class improve remarkably. So this is something I think we need to explore both Vincent and you in your work and in my own experience. So let me go back to the question you were putting, because I guess we’ve been talking for a long time. Oh, the thing is I think we talked about that some other time. The ultimate reason why I was interested in human development was because reading Amartya Sen. Amartya Sen is not obviously a libertarian. He’s more, I would say, a classical liberal, more Stuart Mill, sort of. And he emphasizes a lot of what Isaiah Berlin would call positive freedom. Freedom to.
But also he emphasizes negative freedom, freedom from, the absence of coercion and interference. And I thought this is interesting because most people will, obviously we think in the short run and implicitly most people think there is a trade off between negative and positive freedom. I mean, the idea is let’s assume that everybody’s in favor of increasing people’s wellbeing and freedom. There are those who think just let the market work, for instance, in the economic terms and things are going to get better. And there are those who also aim at having more wellbeing but are less skeptical of human nature perhaps. And they are socialists, and they think, well, we need to reduce some freedoms in the sense that we need to overtax you in order to provide for those who have less. So the idea is you need positive freedom. You can see it like allowing people to have access to those resources that allow them to enjoy their negative freedom.
So at the end of the day, everybody wants to have negative freedom, but there are those who think negative freedom has nothing to do with income that would be Hayek. And those who think negative freedom can only be reached as a second stage once you provide for those who don’t have access. So the idea is for some, positive freedom is a socialist lie to reduce freedom, negative freedom. Other people think that the two of them are two faces or two parts of the same coin. And as an economic historian, even though between us, and now that nobody’s listening, I’m a liberal. Probably more closer to a 19th century liberal than a libertarian, but I’m obviously for my own country, I would, I’m much more of a libertarian than a socialist certainly.
So as a historian, I said, well, I have my own preferences. But this is an interesting topic for research. If you look at the world, and this is something that comes out from your Human Freedom of the World, these volumes Cato publishes, you can see that those countries that are at the top in terms of negative freedom, measured, for instance, in terms of economic freedom, are also those who are at the top in terms of positive freedom. And those things that you assume are the consequence of redistribution. Okay? For instance, you take Denmark and Denmark is going to be top of the list in terms of economic freedom, but also in terms of education and health. And many people assume that this is the consequence of redistribution.
It’s not necessarily that, but you could say, well, redistribution might help. So if you look at just are the two indicators, there’s a UNDP, human development index, and Cato or Fraser, economic freedom of the world, you realize that those at the top are usually the same. So my concern, and then when you, my question was, well, maybe this trade-off is only a short run phenomenon. Maybe if you look at the long run, the trade-off doesn’t hold or holds for a certain period of time. So why not constructing two alternative sets of estimates, one for positive freedom and the other one for negative freedom. So that’s why I started working on human development.
The problem is that when I started adding freedom, I found these indicators coming from V-Dem, variety of democracy, in which they combine, because I realized you use Polity5, but Polity5 was not available at my time. And I wanted something that was more encompassing, encompassing positive and negative freedom. So actually, my human, my augmented human development index combines positive and negative freedom. But if you eliminate the negative freedom from the index, you can compare it to measures of civil liberties and economic freedom. And this is what I’m trying to do now, okay?
And that’s why I had a first round of estimates as Vincent and you also very kindly has used and cited. And I am grateful for that. But I found firstly that those estimates could be improved. And this is what I just have done. And I just released, this month, new estimates for OECD countries, but I want to expand it to more countries. And this goes for 1850. It’s not 150, it’s 170 years. And there’s some interesting findings. Firstly, there has been a remarkable improvement for OECD countries, it would say for the advanced countries or rich countries club in the world, but this percolates through the rest of the world because the rich countries have an economic impact way beyond their boundaries.
So there has been a major improvement. In economic freedom in the world. And this is the good news. The bad news is that it has been quite unsteady, unlike what we got for wellbeing. So you have an improvement until World War I and a major collapse that only in the ’50s, in the 1950s, recovers. So there was quite of the recovery is just reconstruction, it is just recovering what was lost. But I would say that out of the possible maximum improvement in, or gain in economic freedom, the rich countries have got so far 60% or about three-fifths of its potential maximum so again is, you can say the bottle is half full and is not half empty, but there is a long way to go.
And if you look closer, you realize that there are different dimensions. In fact, I’m using a kind of reduction form of the Fraser Institute indicator with one exception that I will mention later, which is the size of government. And this is something I have discussed at some length with Ian Vazquez, for instance and with some libertarian friends of mine. But the interesting thing is that if you just focus on four dimensions, regulation, freedom from regulation, international openness, or freedom to trade internationally, sound money or price stability, legal system and property rights. The main driver, even though all dimensions contribute in different ways, is international openness.
But the other interesting thing is that for instance, I mean, just to give you two counterintuitive results. One is, Scandinavian countries behave particularly well. And the US is never at the top, even the UK. So, I have friends who tell me good economists who would say, well, Europe is much less free in terms of economic negative freedom, in terms of economic freedom, that Western Europe and Scandinavian countries are rotten socialists. Well, it’s not, it’s not the case. It’s very interesting. I don’t know if, I would be… I don’t think I have any slides, but I have data here with me. And I can tell you, for instance, that in 2016, 2020, Denmark is number one, then Switzerland, New Zealand, Germany, Norway, Sweden, and then you have Canada, Australia, and only in the lower part of the table is the US, the UK, and the usual suspects: Latin countries, Southern European countries, and so on.
And the other thing that I found interesting is that there is this view that common law countries tend to be, there’s a lot of institutional literature in economics, stressing how important common law countries are compared to civil law countries in terms of freedom, in terms of negative freedom. And it’s not the case, again, common law countries, Australia, New Zealand, Canada, the US are better off than say France, Italy, that’s for sure. But they are not as high in the rank as Scandinavian countries. So there are some interesting, and this is why after having produced our first round of estimates, now that I got access, because fortunately there are a lot of people doing research and you can rely on secondary sources. With a much more nuanced index, I found some interesting results. And obviously there is the issue, although things, the ranking doesn’t change, and I don’t think the story changes very much, but my main discrepancy from the conventional Fraser index is taking on board the size of government. I know this is a contentious issue because the people who would say this, the larger the government, the size of government, the lower the room for private initiative. At a point in time, this is true. And if you look at similarly developed countries, this is true.
But even if you take a cross section at the point in time, you can see that there are countries in which the size of government is much, much smaller that are not necessarily freer in economy, in terms of absence of coercion and interference, than countries in which the size of government is large. Look at, for instance, Latin American countries, Sub-Saharan African countries. Think of Somalia. Think of most countries in Latin America, the size of government is very small. Or think of my own country under Franco. It was a kind of right wing, but in many aspects, very socialist kind of dictatorship in which government was everywhere. But through regulation, The size of government was very small. There was no such thing as a welfare state like happens in Latin America or in most countries in Sub-Saharan Africa because they don’t have a middle class. There is no income tax doesn’t exist or plays a minor role. Just to give you an example in 1980, you know what was the percentage that the income tax contributed to the revenues of the central government in Spain? Give me a figure. You would say 40%?
Chelsea Follett: Sure, 40%.
Leandro Prados de la Escosura: 2%.
Chelsea Follett: 2%?
Leandro Prados de la Escosura: 2%.
Chelsea Follett: Wow.
Leandro Prados de la Escosura: Nobody paid income tax. So there was no redistribution. If you look at the Gini of income distribution in 1970, before and after taxes and transfers in that developed country, in any country today, there’s a huge difference in Spain. The pre… What you would call the market Gini before taxes and transfers would now be between naught point 5 and naught point 55. After taxes and transfers is about naught point 32, 31. In 1970 was practically the same… Was maybe 40. But after taxes, it didn’t change. That happens in Mexico, it happens in Turkey, it happens in Brazil, but it doesn’t happen in our countries. I’m moving too far away, but my point is that the size of government is not what matters, it’s the nature of government, rather than… And let me just give you a good example. Hayek, someone that we all respect, said, what matters is freedom under the law, not the absence of government action.
So it’s the nature of the government action, rather than the size. Ideally, for the same country to take Denmark, perhaps they would have more economic freedom with less government. But if you compare Denmark to other countries, you can see that even though the size of government is larger there, the degree of economic freedom is higher. Why? Because the nature of government action is different, is not It doesn’t interfere as much as another government that is less intrusive in quantitative terms is much more intrusive in qualitative terms. And this is what you get in Latin America, what you get in Sub-Saharan Africa, what you get in Southern Europe. You don’t need to have a huge government to have a deleterious impact of government action.
Chelsea Follett: That’s a really good point, that distinction between merely having government action, which could be something like enforcing the rule of law, enforcing property rights, and so on, as opposed to other kinds of government actions that can decrease the sphere of freedom, such as over-regulation, an extremely high tax burden, and so forth. And so I think that is a very important distinction to make.
Leandro Prados de la Escosura: As a historian. I mean, when you talk to people who deal with these matters, or usually historians don’t care about, or don’t, do research on other topics. So it makes sense that if you are looking at a point in time nowadays you just do this rule of thumb. The larger the government, the lower the economic freedom. Because, in fact, you are not only thinking about the present but you’re thinking about advanced countries. So you could say, well, mutatis mutandis, if a country, a rich country nowadays, have a lower government, a lower size government, this country is going to be more free. Okay? So that is true. But the thing is, if you get closer, you realize that the action of government varies from one case to another, just within the European Union. In all countries, you could say more or less they are social democrats.
I mean, they are what you call in the US liberals. Not liberal in the sense that as a European, I call liberal as a free market person. But in the US you call liberal what I would call a social democrat. So governments across Western Europe are practically all of them, in different degrees, social democrats. Okay? But even these social democrats, even if they call themselves socialists or Christian democrats or conservative, they are social democrats from our conceptual point of view, the action of government varies. In Spain, there has been a decline in economic freedom or stagnation in recent times. I don’t think the, so-called socialist government, we have at the time is very, very different from previous conservative government. They all love taxes and they love interfering and so on.
But it is the kind of faction, what matters. So they’re interest in difference in terms of freedom within countries that think from the outside, all of them look socialist. Very important difference. And then the most remarkable thing for me to find was that, the US or Canada or Australia, that on paper look freer. Of course, you have to look at different dimensions of economic freedom and then things might be slightly different. Not that much, not that much. But on the whole, you get that the US in the last five years is in the lower or in around the middle of the ranking is below Ireland and slightly above Netherlands and Belgium and the UK and Spain, but way behind Switzerland or Denmark or even Germany.
Chelsea Follett: Right, and in the Human Freedom Index we produce at Cato also the US and the world as a whole, unfortunately, have been declining in freedom recently. This has been a really fascinating and wide-ranging discussion. Thank you so much for joining me, Leandro.
Leandro Prados de la Escosura: Oh. Thank you very much. I’m Sorry. Now you have to give me your postal address so I can send you a batch of the ibuprofen for your headache after this long interview.