Reaping the benefits of the technological revolution

Joseph Schumpeter, the great Austrian economist, wrote the following in 1942:

Queen Elizabeth [I] owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.

Since then technological progress has continued to erode privilege. The Green Revolution has helped to bring to tens of millions in Asia and elsewhere the food security previously familiar only in wealthy nations. More prosaically, the multimedia PCs being snapped up by middle-class families this Christmas offer computing power comparable to that used by rocket scientists three decades ago.

Schumpeter's vision brilliantly describes how the long sweep of capitalist development reduces inequality - eventually. Yet when innovations first appear, they can make life worse for poorer people, sometimes for decades. Some three centuries ago, the development of high-yield crops to feed livestock paved the way for massive increases in agricultural output, and this led to the population boom that accompanied the industrial revolution. Ultimately, this led to an increase in living standards beyond anyone's dreams, but the short-term impact was misery, as peasants could no longer graze their own animals on common or fallow land. Naturally, such changes are bitterly resisted.

We are all aware that we are in the midst of a new, information-based technological revolution. However, the most important aspect of this upheaval will probably turn out to be the revolution in the nature of pricing itself. It is becoming possible to charge for tiny increments of things, such as the use of each hundred metres of congested inner-city road, and to vary that pricing in almost any way, for example charging people more for electricity during the Cup Final.

Developments like this clearly have their drawbacks. They are complicated and they may be intrusive, and like other technological changes, they lead to a redistribution of income. Yet they also offer enormous advantages, including the ability to make polluters pay. In the long run, this pricing revolution will almost certainly make everyone much better off. As with Schumpeter's example of the stockings, poorer people should ultimately gain most.

Consider a specific case. When you buy a taxi ride, you get a bundle of services: privacy; door-to-door travel; choice as to when to travel. It is expensive compared to a bus journey, which is a basic ride without these three features. But the information revolution offers the opportunity for all three to be unbundled and sold individually. Pensioners might want door-to-door travel without wanting to pay for privacy or choice of time. Parents with small children might need door-to-door transit at a specified time, but be happy to share. A young person running a small business might need privacy at a precise time but be prepared to walk the last 500 yards. Their respective needs could easily be communicated in real time to minibus and taxi drivers, who would respond just as computer- operated taxis do at present. The current rigid distinction between bus and taxi would disappear. There would be fewer buses and taxis driving around with empty seats, so costs would fall and some fares might actually be lower than current bus fares, even as the service improves.

Consider a second case, that of automated money. This is now part of everyday life for many people, in the form of credit and debit cards, or as a direct debit from the bank account to pay the electricity bill. It brings numerous advantages, including security and convenience and, in the case of utility bills, often a lower tariff. Yet large numbers of people are excluded from these advantages - poorer people, the homeless, many people receiving social security benefits.

Meanwhile, the Government has a project under way to start paying welfare benefits via smartcards. There has been little public debate about this plan, the main aims of which are apparently to cut fraud and costs. These objectives are admirable but limited. Ideally, the welfare smartcard would be completely compatible with the cards already in use, allowing benefit recipients all the advantages of plastic money, including the ability to use cash machines. Even better, there would be a facility to create a kind of direct debit charged against the future flow of benefits, which would offer the electricity and gas companies security of payment and enable them to stop charging the poor more.

Very little information about this smartcard plan is available, so we do not know if it will meet these broader objectives. If it does not, then an excellent opportunity to spread the benefits of technology will have been missed, and the whole project may come under political attack as being too intrusive, putting at risk even the limited objectives of reducing costs and fraud.

A third case is electronic road tolls, which would make road users pay the full cost of the congestion and pollution they cause. Putting tolls on virtually every road in the country would be a massive project raising many uncertainties, and politicians have shied away from it, instead suggesting a number of half-baked schemes. These include putting tolls on motorways only - a clear non-starter because many drivers would use parallel roads - and placing a surcharge on petrol differing by region to fund each area's roads, which completely fails to penalise congestion since it charges urban users much the same as those on lanes in the surrounding countryside. Moreover, all these limited schemes impose charges indifferently on poor and rich road users.

By contrast, full-blown electronic tolls strike at the root of congestion, charging much higher rates during the rush hour and in the city centre. Wealthier people would be prepared to pay the premium rate, while less well off road users would tend to pay much lower charges by travelling off peak or avoiding the centre. Both would gain from the overall reduction in congestion that stems from the discouragement of unnecessary journeys. Toll revenues would also provide ample funds to lower taxes. Unfortunately, the present Government is still proposing half-baked schemes and the opposition seems to be moving against the whole idea of road-use tolls.

A new political programme is wanted, one that would encourage radical technological innovation but at the same time protect the groups that initially lose significantly. Very often, it is these people who stand to gain most from the ultimate results of innovation, as in the example of the cheap door-to-door transport offered by a different mix of buses and taxis. Therefore, the best way to protect them may be to make the change faster and more radical. This is surely better than yet more taxes and benefits.

Such a political programme is not yet on offer. On one side, the Conservative Government aims for Schumpeterian technical progress by freeing the market. However, the approach is rarely radical enough and so the plans inflict short-term losses on many people and lead to periodic, ad hoc retreats in the face of public outcry.

On the other side, we have a Labour opposition that claims to espouse the virtues of technical progress - for example, making its infobahn deal with BT. But across broad areas, its instinct seems to be to oppose change, whether in wanting bus re-regulation or opposing the principle of rail privatisation. In both cases, Labour has not really confronted the need to reconcile progress with protecting the potential losers. Let us abandon this sterile debate, accept that we are in an environment of rapid Schumpeterian change, and argue instead about the fastest way to get the benefits to those who need it most.

Giles Keating is chief economist at the investment bank CS First Boston.