The economics of government 2.0

{This is the original version of an article that appeared from Dec to February in two installments in the Canberra Times}

Australia has an official policy, pursued by the Ministry of Finance and Deregulation, on the relationship between government and the web that attempts to outline how the government will take advantage of the ‘opportunities’ opened up by the web. Similar undertakings are in progressin many countries where governments are struggling to come to terms with the role of government in the online age. ‘Our’ policy, which is still under construction, has been kicked off by accepting 12 of the 13 recommendations of the ‘Gov 2.0 taskforce’ led by Nicholas Gruen.

In this blog I will attempt to sketch the political economy of the enterprise so that it might become clearer, to those schooled in the language of markets and incentives, what is going on. The three main tenets of gov 2.0 as I see it are to put lots of documentation online, to tap into the free lunch of online volunteerism, and to make money from the government’s unique ability to identify you and tax you. Apart from talking you through these three main tenets, I will also try to dispel some particularly confusing myths doing the rounds about gov 2.0, in particular the idea that gov 2.0 will lead to more ‘participatory democracy’.


Online documentation

The main economically relevant idea of the Gov 2.0 taskforce is to put a lot of information that the government has online, under the philosophy that the information produced by the government is owned by the public at large. An added reason given for this by the taskforce is to encourage all kinds of good things (participatory democracy, open government, etc.). The economic use of this information would be to allow consumers to more quickly find out what the regulations are and where to find government services. Of course, the most relevant information (tax rules, penal codes, health advice) is already online.

The political economy of putting more information out is clear: you will need armies of additional bureaucrats to put everything online and to maintain a web presence. The wholehearted support of all departments to this part of Gov 2.0 is thus only natural.
Will all information be put online, including the privacy-sensitive information and the potentially politically embarrassing stuff? We will have to wait and see, but probably not. On the whole, the online documentation part of Gov 2.0 is a straightforward expanse of the bureaucracy without much clear benefit to the community. Will I as a researcher for instance get access to the unit census data? No way, because people are promised confidentiality when filling in their census form. Will the government publish the data that allows us to look at which hospitals have higher mortality rates? Don’t hold your breath. Will the internal deliberations be made public concerning sensitive areas, like defence contracts or Aboriginal affairs? Again, don’t count on it. The one thing you can be sure of is that we will get an avalanche of online information that will cost a lot.

The free lunch
The free lunch that the internet, quite to the amazement of classically schooled economists, has unearthed is in the willingness of tens of thousands of volunteers to provide pure public goods to the world community at zero cost. Retired house mums write brilliant entries into Wikipedia. Unemployed layabouts generate free code for the Linux operating system that anyone can download anywhere for free. Bored civil servants sift through millions of lines of old documents in online state libraries and correct the spelling mistakes.
The free lunch provides everybody, including government, with the opportunity of getting something for nothing. Government is particularly well placed though to get something for nothing because it has already taken up the mantle of working ‘for the good of all’. Hence the thinking is that it should be easier for the government to get volunteers to do work for them than other organisations.
Online volunteerism has particular characteristics that one has to look out for when tapping into it. For one, it is very sensitive to the illusion of autonomy: give your volunteers too many rules and guidelines and they will walk away. Also, the volunteers seem to be attracted to the idea of working on something universal that will last for a long time. Lastly, the volunteers seem to need extraordinarily little recognition.
Gov 2.0 is thus partially about getting that free lunch, but it will have to adapt to the rules of the online game in order to get it. In particular, they have to be somewhat relaxed about control and trust more in peer-review self-correction mechanisms as opposed to bureaucratic criteria. Old habits die hard of course, so a lot of gov 2.0 is about trying to school parts of the bureaucracy in being relaxed.
Where can the government use that free lunch? The usual examples bandied around are in terms of having its documents checked and improved. And the government has many documents that need improving, ranging from information as to how laws should be interpreted (where the advantage of tapping into outside expertise would seem great) to local council websites (which outsiders are probably far better at improving than insiders) to self-help for questions about regulation.

The free lunch however can also be used to generate information that does not yet exist, information that both governments and the electorate would want to know. An easy example is to have a website where constituents can alert their local council to potholes in their street, faulty streetlamps, drug-pushing neighbours, and loud parties. More complicated systems could include feed-back systems on the quality of hospitals and GPs, which is something of great interest to departments and patients alike, but where the information gathered via official channels is deliberately manipulated and hence quite inaccurate. Peer-ratings of medical services can potentially do what scores of government statisticians cannot, if only because volunteers are not hindered by the demands of a bureaucracy to take official documents seriously. What goes for hospitals also goes for schools, army units, police stations, etc. Since volunteerism has given us damned good online encyclopaedias and rating systems for movies and books, it might also be useful in rating government services.

The political economy of this part of gov 2.0 should now also come into greater focus: relying on volunteerism might be a free lunch, but of course also means a reduction in the power of current insiders. The power of judgment will then shift to the designers of the online systems, to the amorphous mass of outside volunteers, and to the inevitable gangs of manipulators that would form as soon as real money starts to hinge on these systems. This disenfranchises the incumbents and creates opportunities for others and will thus be bitterly resisted by the incumbents whilst only lukewarmly supported by those who think they might gain. This part of gov 2.0 will be a long slog. It is hence not that surprising that the one recommendation of the 13 in the Gov 2.0 report that was not taken up by the government was the recommendation on ‘e-philanthropy’ .

The market for online government services

Government is the natural monopoly of violence. It is the only institution in our society that has the power to find and punish you, a power it uses for taxation and the enforcement of laws. Any other organisation that would try to mimic this power is guilty of treason and subject to the highest form of punishment our societies are willing to administer.
The monopoly of violence comes with several unique bits of information: who you are, what your tax record has been in the past, what your medical record has been, what your criminal record has been, what property you own, and what liabilities you have acquired (divorce, kids, etc.). No other organisation has that information and is allowed to use it openly.
This information is worth something in the online world where many people deliberately misinform others of their identity and their track record in order to sell something (often themselves). Being able to credibly signal your past and your identity is then worth something in all situations where reputation is important, such as when significant amounts of money or pleasure are at stake. The internet thus creates a new market for the comparative advantage of the government.

The simplest product a government can sell to the internet is an identification technology: the means for you to prove you are who you say you are. Governments have the power to invent that technology and to use its coercive powers to prevent others from abusing it.
This basic product can also be used in conjunction with other activities, such as the volunteerism market. Governments can use their identity technology to make sure that only Australian citizens whose children go to a local school are able to peer-rate that local school. Governments can ensure only ex-patients and their families can rate a hospital. In short, governments can enhance reputation mechanisms on the net and will often be able to charge for it (bona fide sellers and buyers on ebay would probably be willing to pay a percentage to be able to signal their identities).

The political economy of this aspect of gov 2.0 is much less fraught with difficulties than tapping into volunteerism: we are here talking about an expansion of government into new markets for its services, something that does not require insiders to give up power but rather something that allows insiders to expand their power. It does require a bit more of an entrepreneurial spirit than is usual in government, but governments have in the past been involved in setting up new businesses and know how to do it when they have to (eg. set up state companies and partnerships).

Red herrings

A couple of red herrings keep occurring in the discussions around gov 2.0. It is useful to list a couple of the most frequently encountered ones:

1. The internet has changed the rules of the game of public goods provision. Look at google and twitter, which are global public goods provided by private companies. Government too must become more like google. The fallacy here is to fail to see the actual business model of the googles and twitters of this world. They run on the same business model that radio, television, and newspapers have run on for more than a century: they run on advertising, including ‘sponsored links’. Advertising is rivalrous and excludable, which is why google and twitter can charge for it. The reason that the public goods of the search engine and the social chat-rooms are provided in google and twitter is because they create such enormous traffic that the small bits of the surplus that can be siphoned off are worth enough to produce them. There is nothing new about this phenomenon. It has been the same story with radio, newspapers, and television ever since their inception: for those three services too, the business model was always that they never charged directly for what they produced but rather that they charged private companies for access to the traffic they created. The basic business model of the internet is thus centuries old. Just as the advent of newspapers did not change the business model of the government (which is to identify a population and tax them under the philosophy of doing the taxed a favour), neither will the internet. Public goods that create enough surplus to be socially desirable but that do not create enough traffic to warrant their private provision by those who can only siphon off a small part of the surplus will still have to be provided by government.

2. The internet has created a new market for reputations that should be used by government, i.e. people who make their reputation in blog-land should be hired as top civil servants. I am afraid this is wishful thinking. Again, the analogy with radio and television should make it clear that the reputations that can now be earned by activities on the web will not translate themselves into reputations inside bureaucracies. The internet is simply a new way to become famous. Whilst fame is convertible into political capital and thus useful in elections, it has not proven to be convertible in bureaucratic capital. Have brilliant writers and actors made it as politicians? Yes they have, and good examples are Churchill and Reagan. Have they been put on government selected committees? Sure they have. But have they been able to break into the career development paths of bureaucrats? No way. The one avenue I see becoming possible is that internet reputation might be convertible into academic reputation in the form of honorary doctorates and the like. This has happened to famous writers in the past and I wouldn’t be surprised if some universities specialise in the accreditation of internet fame at some point. Academic capital has some traction inside bureaucracies.

3. The internet has changed the way science is done in that any clearly defined puzzle can now be opened up to the world community. Examples of this then include companies that run prediction competitions and invite solutions from around the world. The basic thing to note here is that the internet has greatly reduced the search costs of finding people to do work for you. You can hence suddenly find people in Kenya to solve your chess problems or unemployed Russian mathematicians to set up a peer-review system for movies. In essence this is not a departure from normal market economics but a move towards it: over time this will simply lead to a convergence in prices asked for such solution activities. Whilst firms who are first onto this market will find bargains and will be able to get a lot for almost nothing, this is not a viable long-term business model for science and even for most problems. It only works for very well-defined problems with limited cultural idiosyncrasies, and is only cheaper than other channels in the short-run whilst market prices adjust to the lower costs of finding alternative suppliers.

4. The internet has opened up a new medium that will revolutionise our democracy. Armies of volunteers will scrutinise government decisions online, hold local councillors to account for their decisions, alert departments to the crime and traffic problems they have yet to solve, and will be the new forum where politicians engage with the citizenry. Again, most of this has to be put into the realm of fantasy land. Is the internet now a place where politicians have to find constituents and explain themselves? Undoubtedly yes. Has democracy changed in the sense of populations wanting to feel closer contact with their politicians? Probably yes again and this now means politicians are always campaigning. But are governments now under greater scrutiny and has this been for the better? There is no evidence whatsoever for that kind of statement. The tea-rooms and debating societies of old that discussed the actions of government have simply gone online. ‘He said, she said’ journalism dominates the policy discussions, whilst the real policy discussions are firmly kept behind closed doors. Television and radio did not lead public servants to become television personalities, but instead lead to rules preventing them from using that medium to talk to the public. Did the advent of email lead to ‘sharing information and engaging with citizens to determine better ways of doing things’ ()? Of course not. To expect anything else with the internet is naive in the extreme.

In short, government 2.0 has little to do with google, twitter, kaggle, blogs, facebook, and ‘participatory democracy’. It has to do with hiring more bureaucrats to put the less interesting documents online; tapping into the free lunch of volunteerism; and opening up new markets for the basic products that governments generate. And I expect the first and the last of these to be pursued with much more enthusiasm by the departments than the volunteerism bit.
Does this mean that one shouldn’t expect any increase in participatory democracy due to the web? That is a different matter: interested citizens use the technologies available to try and influence politics and the web opens up new possibilities for them. The web makes it easier to organise people for a common cause and the web also makes it easier to keep tabs on politicians and public services. Perhaps most importantly, the web makes it easier to get expert opinions on almost anything (health, the economy, etc.) which in turn erodes the information advantage of the bureaucracy. There is hence quite a lot of scope for citizens to expand their sphere of influence.
The point about participatory democracy is that it is naive to expect the government and the bureaucracy to be instrumental in more participatory democracy. Greater influence by concerned and knowledgeable citizens has to be earned before it can be acknowledged and taken into account by government. Just like the International Red Cross and Amnesty International had to secure their own power base in the absence of (too much) help from governments, so too will new initiatives have to prove themselves outside of government.
A good example of the impossibility of government to set up its own competitor in the citizen sphere is wikileaks. Undoubtedly, wikileaks is an expansion of the power of the citizenry and an attempt to hold governments more to account. At the moment, it is a force towards greater participatory democracy. But could it ever have been set up by governments? Of course not: it has to wrestle power from governments which are kicking and screaming in protest. If successful , and the jury is still out whether that kind of initiative will take off, then of course governments will start to embrace it and learn to live with it as governments have embraced the Red Cross and Amnesty International.
Hence the web most certainly can influence government, but to expect governments and bureaucracies to be able to organise that process via policies is not realistic.

To see comments on the government’s response to the taskforce’s recommendation see here.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

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