The dance of the modern bureaucrat is algorithmic performance art. Dutifully executing protocols, they moves pulpy packets of information between fleshy nodes, up and down interlocking hierarchies. Opaque and resistant to adaptation, they represent the lowest of the low hanging fruit in an era of disruptive innovation. Software may be eating the world, but some things are simply harder to digest.

Yet the time will come. In the early 1990s, falling transaction costs in the form of rapid innovations in information technology lead to a wave of corporate outsourcing and downsizing. This trend trickled up to shape public-sector reforms worldwide, from major acts of deregulation to increased subcontracting of government services (though still within a lumbering and easily corrupted analog medium).

It wasn’t until the early 2000s that the internet and spread of personal computers inspired a “first wave” of e-government initiatives, like early web portals for e-procurement, again following corporate’s lead. Today, software driven information systems and ad hoc contracting have become the private sector norm, automating significant administrative and logistical functions in ways that increasingly use artificial intelligence (sometimes called “autonomics”) to adapt in real time.

Some IT vendors are even anticipating personnel reductions of 30 to 40 percent in certain areas, brought on by these advances. As a result, we seem to be entering the twilight of 20th century corporate bureaucracy. This raises the question: Is government next?

My view is yes, and that it will happen sooner than many realize. The next wave of e-government reforms promises to be a tsunami, opening the highest levels of the state apparatus to technological disruption. Here’s how it will happen.

Data Standards

Technology won’t disrupt the state until bureaucracy speaks a language computers can understand. That is, data structures between government departments need to be machine readable, easy to use, search and exchange with high levels of encryption. In a word, we need an X-Road.

X-Road is a critical component of Estonia’s e-government

X-Road is best known as the data exchange layer in Estonia’s e-government stack. X-Road works like an intranet that allows decentralized servers and public key holders to exchange data quickly and securely.

More than a piece of technology, X-Road embodies a set of interoperability standards: common encoding schemes, data formats, and so on. The United States is well on its way to meeting this prerequisite step. In 2014 the DATA Act was signed into law, requiring government-wide data standards for all expenditures. Reporting under these standards is mandated by 2018, at which point all government spending and financial data will be searchable using USASpending.gov. These requirements extend to recipients of Federal money, including private contractors, which is predicted to create significant automation of the current manual compliance system.

The MADOFF Transparency Act, which has yet to be voted on, will do the same for the big nine financial regulators. This would mean the Treasury Department, SEC, FDIC, Federal Reserve, and others would effectively go paperless. Even PDFs would be eschewed, unless merely reproducing information available somewhere in an XML file, or on a web page generated via one.

As the country which still employs 600 paper pushing bureaucrats in an abandoned Pennsylvania mine, these reforms are both long overdue and come with a learning curve. Yet while the rhetoric of both these bills has focused on openness and transparency, this buries the lede. With any dramatic drop in information and transaction costs comes pressure for substantial downsizing, outsourcing and process innovation.

Estonia’s lean, paper-free bureaucracy was made possible due to a unique hacker ethic and lack of legacy structure, no doubt. Yet achieving government-wide data standards is nine-tenths the battle. From there, the interoperability and scalability of X-Road makes it relatively easy to import. Indeed, of 26 interested countries, Estonia and the company that built X-Road are currently assisting around a half a dozen to implement their own versions in a wide variety of contexts, from Finland to Haiti.

Opening the Platform

Once data standards and platforms are in place, the next step will be to open the platform using APIs or Application Programing Interfaces. APIs let third parties pull down data or functionality from a host according to the host’s own terms, permitting the development of new applications. This dramatically lowers transaction costs, in essence allowing multiple combinations of “firms” or web apps to instantly transfer, communicate and contract over bits. Think of how registration systems have been outsourced with OpenID, comment sections with Disqus, or live customer support with Olark. The list goes on.

“Just like for mobile apps, one size need not fit all. Instead of one dysfunctional HealthCare.gov or US Census site, there could be many interfaces to choose from in competition for your download.”

A number of apps to interface with the US government already exist on Data.gov, but they’re still very basic. In Estonia, over 2500 digital services have been built to harness X-Road, including many by private third parties like the banking sector, enabling electronic tax filing, business and land registration, pharmacy ordering, e-voting, transit payment, direct cash transfers, a searchable regulatory code, and e-citizenship. In turn, Estonia’s bureaucracy is being rapidly eliminated through automation. But this is just the beginning. Estonian and Finnish developers are currently integrating REST for X-Road version 6 (X-Road is built on a dated SOAP standard), which will allow public sector APIs to bloom.

Consider Tim O’Reilly’s concept of Government as a Platform (GaaP). The vast majority of services for platform technologies like Android or iOS are developed by private third parties in competition. GaaP is pointing toward the same for government services. Just like for mobile apps, one size need not fit all. Instead of one dysfunctional HealthCare.gov or US Census site, there could be many interfaces to choose from in competition for your download.

A Path to the Blockchain

As should be obvious, what’s considered standard for exchanging data or accessing web services today is sure to change in ten or twenty years. One can even imagine X-Road as a step down the path to fully decentralized governance structures built on the blockchain and the cloud.

Once again, Estonia is ahead of the curve, through GuardTime, the developer of a keyless signature infrastructure (KSI) built using blockchain technology.

BitNation has also released their own blockchain based universal ID system

Digital government won’t get off the ground without a reliable way to authenticate identities and sign electronic document. Similar to bitcoin, a KSI allows digital signatures that come with a time-stamp which is then permanently stored in a ledger to maintain the fidelity of distributed records. There’s been rumbling that a KSI system ought to replace the basis of Estonia’s e-ID, which uses more conventional public key encryption methods. And in other contexts, Estonia’s largest independent bank, LHV, is actively investing in blockchain based fintech.

Nonetheless, GuardTime is already working with US Federal agencies to adopt a KSI in light of the Snowden and OPM breaches. (The same company also announced BLT in May, a blockchain-based alternative to RSA encryption, that is attracting a lot of attention.) Thus while skeptics point to America’s burdensome regulatory and legal barriers to suggest comprehensive e-government won’t come to these shores anytime soon, the security opportunity costs are substantial and will drive legal recognition of blockchain based signature systems.

Put secure data exchange, APIs and KSIs together and the possibility for algorithmic self-governance are huge. This is a foundation on which decision markets and smart contracts can be built, such that even higher level managerial roles can be decentralized, as well.

Uber for Governance

A lot of ink has been spilled commenting on how companies like Uber skirt conventional regulation. The irony is that Uber and the others like Uber are primarily in the business of selling private governance, i.e. their own opt-in breed of regulation. Uber’s innovation was to develop a multi-sided platform (MSP) technology that reduces transaction costs for both sides of the market, replacing analog monitoring with a customer rating system, responsive pricing algorithm, and preauthorized payments.

“Consider that all rental units may one day list on something akin to AirBnB, rendering local tenancy acts as obsolete and archaic as taxi industry regulations.”

To understand why MSPs act as agents of good governance, consider the market itself. Markets exist in virtue of a legal system which assigns rights, enforces contracts, records property titles, and manages dispute resolution. That is, market-creating legal institutions are the multi-sided platform technology par excellence, as has been rediscovered by platforms like Ebay and Amazon.

Yet as Coase famously argued, the dual-sided nature of externalities makes the assignment of rights ambiguous in the abstract: Good and effective laws are ones that approximate the assignment of rights that will minimize social cost. Precisely because they derive profit by taking a fraction of the bargaining surplus, this makes MSPs adept at assigning and enforcing these rights efficiently. That is, since MSPs succeed by maximizing gains from trade, they are not just a bit better at governance — they potentially meet the economic definition of an ideal “public interest” regulator.

Consider that all rental units may one day list on something akin to AirBnB, effectively rendering local tenancy acts as obsolete and archaic as taxi industry regulations. Only instead of privileging the interests of renters or landlords at the other’s expense, rental regulations, to the extent that they exist, will have to effectively balance the interests of both sides in order to grow the platform in the first place. Even as MSPs grow large thanks to network externalities, they are kept in check by the tug of war between the multiple parties they must appeal to at once. This is all the more true in a digital medium, where switching costs are at their lowest.

Smart grids are another example of how IT is enabling radical decentralization

Even classic “natural monopolies” like power utilities are now capable of being fully decentralized, given the right IT enabled model. Take Japan’s power industry, which is in the process of being deregulated. As regional electricity monopolies are broken up, smart grid technologies like smart meters, p2p protocols and advanced control theory (including quasi price-mechanisms) will replace centralized network operators (the true men of system). This is in essence creating an Uber-like role for platform intermediaries to compete over producers and consumers.

The point of this digression is to suggest that, once “government as a platform” has relegated the bulk of service provision and creation to a competitive private market, privatization of the platform itself will become an on-going possibility.

In his book Private Governance, the economist Edward Stringham points out that this was all once taken for granted. Long before public securities regulation, for example, stock exchanges operated as voluntary clubs that traders joined for the benefit of having mutually beneficial rules and reputational oversight. Even ancient (and not so ancient) bazaars functioned as literal trading platforms, bringing a nexus of buyers and sellers under one tent to help reduce search and policing costs.

As societies and markets grew larger and more complex, rising transaction costs generated the growth of the bureaucratic regulatory state. Now technology has caught up. In the first instance, e-government will “merely” make existing governing more efficient, lower compliance costs, reduce rent seeking, and shrink public sector employment. But in the medium to longer run, it will also put transition back to that earlier state of affairs in the feasible set, so to speak.

A disrupted bureaucracy is therefore the first step toward a return to private, competitive governance. And it’s coming sooner than you think.