Hamish McRae: Don't despair – technology still has the power to save the world

Harsher times may actually speed up the application of new technologies

This week's news of the development in India of an ultra-cheap laptop will do more for human welfare than all these economic packages that are supposed to boost the world economy.

True? Well not quite, because it is comparing apples with pears: advances in technology make a completely different contribution to the world economy from macro-economic policies. But it is true in the sense that on any sort of medium-term perspective it is technology that transforms our daily lives and not taxes, public spending and interest rates.

Moreover, not only does technology continue to advance irrespective of the economic cycle; harsher times may actually speed up its application. As a result, amidst the general economic gloom, there has been a surge in interest in the ways in which technology is driving forward and the possible consequences on our lives.

Of course it is not clear what the new laptop, which is being developed by the Indian Institute of Science and other publicly funded bodies, will actually retail for (some reports put it at $10, others at $20). You might say, too, that all that is happening here is an incremental advance in what is now well-established technology. But we do know from history that incremental advances such as this will over time have a transformational effect on living standards. Nice to be cutting edge and more about that in a moment. Meanwhile, it is worth recognising but you don't need cutting-edge kit to change people's lives for the better.

The world is now at the stage when the full benefits of the communications revolution are being felt. There is a normal pattern. A set of new technologies are developed, but it always takes several years to figure out quite how these should be applied and then develop the infrastructure that permits these applications. Just as it took 30 years from the development of the motor car for it to become a popular consumer item, it has taken the best part of a generation for the developments in communications technology to move into every home.

The parallel is close. For the motor revolution to sweep across the world there had to be advances in technology (in particular Henry Ford's moving production line), advances in infrastructure (in particular proper road networks), and advances in human competence (we had to learn to drive).

For the communications revolution to transform the world there had to be advances in both hardware and software (faster computers, email, Google, etc), advances in infrastructure (routers, broadband, etc) and competence (we are still learning how to use the stuff).

The world is now at the maximum speed of advance in communications technologies, equivalent to the motor industry in the 1920s and 1930s. You can catch this in the news that comes out every day. Quite aside from this Indian venture, there has just been the commitment that the UK should have 100 per cent access to broadband. There has been the scheme whereby the mobile phone companies give away a notebook computer as part of the contract to access their broadband networks.

There have been figures showing that China now has more internet connections than the US (even if some of the stuff coming through is still censored). Last year the 10 largest markets for new mobile phone sales were all in the emerging economies: there were more mobile phones sold in Bangladesh than in Germany.

The point about all this is that the new technologies are not just an item of consumption, they are an item of production. They make the whole production system, particularly the production of services, more efficient in much the same way that the moving production line made all manufacturing more efficient.

There is huge prize out there that we have yet to grasp fully but it is absolutely vital that we do. It is to find some way of achieving similar increases in productivity in the service industries as we have in manufacturing.

In round numbers, it has been possible to achieve about 3 per cent a year increases in productivity in manufacturing. As a result, virtually all manufactured products are much cheaper now in real terms than they were a generation ago. But in all advanced economies, manufacturing accounts for a declining proportion of output, and thanks to this higher productivity, more particularly of employment. Quality has improved too: cars don't break down as often as they used to.

By contrast it has proved much harder to achieve increases in productivity in services. If you are lucky and invest wisely you might increase this by 1 per cent a year; if unlucky, productivity actually falls, as we have discovered in the National Health Service.

As we move from a manufacturing economy to a service one it becomes much harder to increase living standards, unless that is, we can figure out how to use the new technologies to boost service productivity much faster. That is tough. One of the great challenges is to improve the efficiency of government services, not just here but everywhere. This can only come through the application of new technology. But, as has been highlighted in the past few days, the UK has been particularly bad at this: we waste billions on government IT projects that don't work.

So it is a challenge. Increasing living standards over the next decade will be really tough. It will be tough partly because of the increased public debt burden incurred during this downturn. The UK will double its national debt; other countries will not be far behind. In all probability taxes will have to rise, leaving less for people to spend on consumption.

But it will also be tough because of longer-term trends, in particular the ageing of the population throughout the developed world and the decline in the size of the workforce in most countries. The principal weapon to meet the challenge is technology, and in particular, technology that is already known but not yet properly applied.

What of new technology? We can see here is a vast array of stuff just around the corner but what we can't know is which bits of that will prove winners in the sense that they have applications that transform our lives.

In another 20 years' time it would be sensible to expect radical changes in our energy provision and use. We will probably know which technologies will help us replace the oil-driven economy of the 20th century. We will have found practical applications for nano-technology. The whole stem-cell area will be bringing results that will improve our welfare. We can't see the detail because you can never see the detail but we can dream.

We should not however trust our dreams. One of the top items yesterday on the wires (what an outdated expression!) was that Google and Nasa were combining to found an institution near Google's headquarters called the "Singularity University". It will offer courses on bio-technology, nano-technology and artificial intelligence, and is based on the presumption that, in another half century, computers will be cleverer than people.

Well, that's as maybe. I would meanwhile prefer to back 1.1 billion Indians (or Chinese or whoever) armed with cheap laptops to figure out ways of improving the human condition and nudge us towards a more sustainable future.

h.mcrae@independent.co.uk