P. Drucker in his article “The Next Information Revolution” (Forbes ASAP, August 24, 1998) noted that: “The dissatisfaction of top management with the data provided by information technology has triggered a new, subsequent information revolution.The text for translation: ».
It is precisely the bureaucratic elite that is currently the main client for information services. This trend is also spreading to government bureaucracy. Everyone is now talking about e-government, electronic document management systems, unified databases, and electronic registries.
Of course, in order to stop being “agents of limited rationality,” in terms of institutional economics, those in power have always required a lot of reliable information for their needs. Also, due to what institutional economics refers to as “transaction costs,” those in power could not have complete information for making various decisions. At the same time, it is the information revolution that allows us to say that transaction costs can be reduced to a negligible level. Now, those in power have access to sources of comprehensive information on almost any issue. And they like it.
At the same time, by ordering information services, the authorities, in fact, like Snow White, trustingly take a poisoned apple from the hands of the witch. Or rather, four apples in total.
- Reduction of the need for public goods;
- Transition to business processes;
- Loss of market control with asymmetric information;
- Loss of monopoly on information
Table of Contents
Reducing the need for public goods
Authorities, one way or another, need to explain their value to society. Otherwise, society simply will not tolerate an outright kleptocrat, and there are numerous examples from history to illustrate this. The government can create value by managing the provision of public goods and encouraging society to finance them. If there were no incentivizing function of the government, there would always be “free riders,” who would make up the overwhelming majority and would not want to pay for the installation of beacons, the construction of roads, and border security. Societies that failed to realize the need for a ruler to collect tribute or taxes simply disappeared from the face of the Earth.
The ruler understood that taxes could be spent not only on a lighthouse or a road but also on himself personally. The question of how much he could appropriate for himself was determined solely by the tolerance of the people and the actual costs incurred. If the lighthouse cost 1,000 coins and the people tolerated a loss of 50% of their contributions, then to extract more money from the populace, it was necessary, of course, to build a road or better equip the army. In that case, the expenses would amount to, say, 5,000 coins, from which the ruler would take 2,500 instead of 500 in the first scenario.
In order to be able to spend more, the ruler needed to create or invent new public goods. This is the direction in which all “civilized” societies developed. “Free” healthcare, “free” education, “free” pensions, and other “free” things are essentially inventions of the bureaucratic elite, which demanded more and more tribute for themselves.
Now let’s take, for example, a public good like pensions. Until recently, this good looked like this: The ruling elite forcibly took a portion of citizens’ income and spent it on paying pensions to the elderly. In return, the elite promised citizens that they would pay them pensions in the future, funded by the contributions of future generations. This financial pyramid was very convenient for those in power, as the population was constantly growing, and it was possible to pay out much less in the future than could be collected in the future.
Moreover, the authorities, shamelessly exploiting the asymmetry of information, used certain “fair” methods for calculating pension payments, which, in reality, no one was satisfied with except for former officials, of course. In other words, the authorities were truly robbing people while cloaking it in the guise of public good – a secure old age for everyone.
As soon as population growth came to a halt, while the appetites of bureaucracy did not diminish, the so-called “pension system crisis” emerged. Fortunately, by that time, information technology had developed to such an extent that it was practically costless (compared to the 19th century) to calculate and account for each citizen’s contribution to the pension fund in order to pay each citizen the pension they had actually earned.
But then the question arose both among citizens (why do we need a state then) and among the state itself (why should I manage a fund where I can’t steal without consequences). All of this led to what is now called pension reform and to the state losing its monopoly on one of its public goods. This became possible precisely because of the information revolution. It is worth looking at the pension legislation of countries that have undergone pension reform to understand that even the texts of the laws operate with concepts such as “database,” “information system,” “backup,” and so on.
A similar metamorphosis is happening, and has already occurred in developed countries, with medicine.
If we look at another public good, such as road construction, we will find that the corresponding level of development in information technology and comprehensive tracking, which would allow us to monitor which vehicle used which road, could eliminate yet another source of theft—the transportation tax. This tax is supposedly collected in a “fair” manner, but in reality, it is either tied to fuel consumption or engine size, rather than the actual mileage on the actual road. As a result, “government” roads are maintained in perfect condition, while the most heavily trafficked ones are neglected.
Yes, there are already toll roads. And yes, the costs of collecting fees and monitoring usage are constantly being minimized. In the past, you had to buy a “standard ticket” just to enter a toll road. Now, license plate recognition systems and advanced credit systems allow for tracking road usage down to the meter and issuing corresponding bills.
Tomorrow, navigation trackers, video surveillance systems, and video analytics will be able to monitor the actual usage of roads by vehicles. As a result, it will become possible to issue a specific bill for the actual use of a particular road instead of a transportation tax.
It won’t be long before it becomes unclear a) why we should pay a transport tax to a crook and a thief, and b) why a crook and a thief should administer transport fees if they can no longer steal part of the money. Ultimately, the state will lose the ability to reap benefits from yet another public good. The maintenance of roads will be taken over by those who actually build and service them.
One can examine literally every public good, including law enforcement agencies, which, in the form of private security firms, are already operating outside the realm of the state, which continues to collect taxes “for maintaining law and order.”
The total accounting of the use of public goods can be applied almost everywhere. In Kherson, there are “paid” elevators in apartment buildings that actually cost residents less than the “free” ones provided by the housing and utilities services. People use the elevator with electronic keys, and based on usage statistics, they receive bills. This is fairer. But this has also become possible thanks to IT.
Of course, total accounting cannot cover all areas. Yes, some public goods are often no longer needed, such as lighthouses. They are replaced by “private” navigators, the owners of which automatically sponsor the satellite infrastructure upon purchase. At the same time, there are goods for which total accounting of people’s contributions is difficult or even pointless. For example, the military. One could certainly speculate about a bright peaceful future. But that is not the purpose of this article.
The main point is that, thanks to the development of IT, the state is increasingly losing control over public goods that it used to manage. The bureaucratic elite has access to fewer financial streams from which they could extract their profits. This signifies a loss of power for the bureaucracy over society. Sooner or later, the authority of the bureaucracy will be limited to those public goods from which it will no longer be interesting to extract profits. Sidewalks, for example.
Transition to business processes
Any authority, including the bureaucratic elite, needs its legitimization. Legitimization involves not only conferring “legitimacy” to the method of seizing power (regardless of whether it is a monarchy or “democracy”), but also referring to the idea of hierarchy as a natural form of social organization. It is taken for granted that someone must be “in charge.”
Legislation actively supports this myth by stating that a company must have a director with signing authority, and any structure must have a head or chairperson. However, the hierarchical management model is not the only or the most optimal organizational system. In theory, organizations can be viewed as falling into two extreme types: “market” and “hierarchical.” A market organization is spontaneous and is not truly an organization. Hierarchical structures, on the other hand, seem “natural.” At the same time, many organizations are gradually transitioning to various intermediate forms that are characterized not by hierarchy, but by a system of contracts or agreements.
There can be asymmetrical agreements, such as a franchising scheme. There are monopolistic arrangements, like a holding company where services, including accounting or HR, are only procured from companies within that holding. There are also wiki organizations based on equal cooperation. At the same time, the main form of documentation regulating relationships in such organizations is not a “regulation on organizational structure,” but rather a set of contracts.
Such organizations consider the business process, which has clients and is itself a client of another process, as the indivisible unit rather than a function performed by someone. In the modern world, there is a shift in organizational paradigms from a functional to a process-oriented approach, which saves the company’s resources that were previously spent on the transactional costs of maintaining a hierarchical structure. Yes, nominal directors with signing authority still exist, as laws still operate within hierarchies; however, the director, as a role within business processes, becomes a client of others, such as an accountant or an IT specialist, and the director also has their own clients, such as salespeople or HR personnel. The concept of “who is more important” becomes blurred.
But what happens when a bureaucratic structure commissions an IT company to automate its operations, for example, to automate document management? It turns out that the IT company, and especially the software being implemented, doesn’t care who is in charge. What matters to the IT company is understanding the business processes within the organization and the roles of individuals in those processes. Consequently, as part of the implementation of its services, the IT company describes the business processes, roles, and clients. The result of this development is that not only can the head of the organization demand something from others, but other members of the organization also start to demand things from the head (with the help of smart software): decisions to be made, signatures to be provided, participation in meetings, taking on responsibilities, and so on. Now, the leader of the organization can no longer ask “why wasn’t this done?” because that “why” involves their own processes and their execution or non-execution.
It turns out that the informatization of bureaucratic structures leads to the erosion of hierarchy within these structures, and in the long run, to the erosion of the entire state apparatus as a hierarchical structure. Considering that, from the perspective of processes and roles, it is essentially indifferent whether the performers are inside or outside the structure, the time is not far off when state structures will outsource almost all functions that are not related to their purpose for existing.
It is even more important that the very principle of outsourcing, meaning the delegation of organizational functions beyond its boundaries, has become possible thanks to information technology. Previously, it was more convenient (that is, with lower transaction costs) for everyone to be in one office and pass papers to each other, but now this necessity has disappeared, and the focus has shifted to the transaction costs of gathering people in one office. It has become cheaper, more profitable, and more convenient for everyone to work outside the office, manage documentation electronically, and hold meetings via video conference.
Loss of market control with asymmetric information
One of the important public goods provided by the bureaucratic elite is the control of markets with asymmetric information. The bureaucracy strives to demonstrate its usefulness by implementing institutions for certification, licensing, inspections, and other regulatory measures.
Of course, markets with asymmetric information are prone to collapse. In such markets, it is advantageous for suppliers to be dishonest. It’s cheaper to sell a pig in a poke when there is no pig in the poke or when the pig is dead. At the same time, suppliers are not eager to be transparent simply because a unilateral declaration of transparency from one supplier could harm them due to the disclosure of certain trade secrets. Of course, there are no real secrets left, but another latent activity of the bureaucratic elite emerges here – the promotion of the myth of the necessity to hide. But that’s not what we’re discussing.
In conditions where suppliers are not disclosed and are not monitored by a third-party intermediary, markets with asymmetric information collapse. Consumers stop purchasing goods or services in that market, while producers offer increasingly lower-quality products, replacing quality with propaganda.
A practical example of a “collapsed” market can be found in the insurance market of Ukraine as of 2011. Clients are unsure whether they will receive compensation for their insurance claims. Insurers are only selling themselves and paper with empty promises. The penetration of voluntary insurance types is less than 4% of GDP, and insurers rely on mandatory types and those where information asymmetry occurs on the part of the insured—when the insurer, in turn, does not know what exactly the client is insuring. For example, auto insurance. In the absence of complete information about the vehicle’s mileage, the driver’s qualifications, and the claims history, the insurer is equally asymmetrical in relation to the insured: the former does not know what exactly he is insuring, while the latter does not know what compensation he will receive.
As a practical example of a supported market, we can refer to the pharmaceutical market in Ukraine as of 2011, where, thanks to the efforts of the state drug inspection, we can be somewhat confident that what we are taking is not a counterfeit, but rather tablets containing the active substance, while homeopathic “remedies” are clearly labeled.
So, government regulatory agencies strive to intensify control, and their useful function is not only to ensure that consumers in asymmetric markets are satisfied with the quality of services, but also to make sure that all market participants are confident that the products available are of high quality. The public good of maintaining market stability is hard to overstate, and the bureaucratic elite will seek to create work for themselves in any markets where there is even a hint of asymmetry. This includes licenses, certificates, agencies like sanitary-epidemiological services or fire departments, and so on.
The state is once again aided by information technology, and even now, in the pharmaceutical market of several developed countries, individual labeling of medications has been introduced down to the smallest packaging. Projects are being implemented where it will technically be impossible to sell a drug in a pharmacy if its origin is unknown or if a drug with that number has already been sold or recalled from circulation. The state will consume IT services for the purposes of control.
At the same time, there is a trend in the world that F. Kotler described in his book “Chaotics” as the “Empowerment of the Consumer.” Thanks to information technology, any advertising or propaganda campaign by a supplier in an asymmetric market can be neutralized by a single post from a user on a blog or social media. Cameras in mobile phones allow for instant photographs of criticized phenomena, which can then be spread worldwide in an instant. It has become more advantageous for producers to be transparent, and the functions of market control in situations of asymmetric information are shifting to a cloud of mass consumer collaboration, where individuals exchange information directly with one another. The state is losing yet another function that once seemed untouchable.
Loss of monopoly on information
Jared Diamond in his book “Guns, Germs, and Steel: The Fates of Human Societies” rightly pointed out that the state emerged when egalitarianism……yielded to a singular centralized authority that made all important decisions and held a monopoly on crucial information (for example, about the threats expressed in a private conversation by a neighboring leader or what harvest the gods supposedly promised to send this year).“The monopoly on information was indeed the most crucial source of power for all rulers. Even the monopoly on the use of force, which is inherent to any state, pales in comparison to the monopoly on information. After all, to apply force, one must know how, against whom, and to what extent it should be used.”
However, information technologies that are permeating all levels of governance are, in one way or another, increasing the transparency of their operations. Now, thanks to e-government systems and laws like the “Public Data Act,” it costs citizens almost nothing to access the information that previously required fruitless correspondence or long waits in archives.
It is also important to understand that information has a tendency to leak all at once. Despite any measures taken to protect it, over an infinitely long period of time, there will always be someone who manages to steal all of it at once, thanks to databases created with information technology, and then publish it. Every day, we hear more stories about security breaches, information leaks, hacker attacks, the “Melnychenko tapes,” and WikiLeaks.
The state, having equipped itself with databases, has practically handed a suitcase with a handle to spies or well-meaning individuals, which, once picked up, can be easily taken away. While archives used to be paper-based and cumbersome, they can now fit in the palm of your hand or be easily sent via email.
In other words, it is precisely because of information technology that the state is losing its monopoly on information, and its activities are either becoming transparent or the officials are forced to act as if all their actions will eventually be revealed. The loss of the monopoly on information signifies a loss of power from this perspective.
Resume
We are currently experiencing a very interesting phase in society’s life that can be called a revolution. Government and corporate officials, ordering information technology services that they interestingly can no longer live without, ultimately receive a Trojan horse, which serves as a set of prerequisites for the disappearance or collapse of the bureaucratic elite.