This is also a good way for groups of people to learn as well, especially when we’re doing it together.

When I was working on the Legacy Leadership Lab during the COVID lockdowns I had a bit of an itch to get my hands dirty and do some of the social acquisition work we had been studying and watched other folks undertake. I’ve been working with folks in my community to pull together threads here from succession, to cooperative ownership, and local investment.

I’ll have more details this fall, but think of this as a bit of a preview plus a reading list if you want to get a sense of where it is coming from.

The core issue I’ve often summarized as this: it is easier to invest in a diamond mine halfway around the world than in my own corner store. This is both a market failure and a regulatory failure, and the result blocks mutual aid and community self-governance at exactly the scale where they matter most.

The values underneath the approach we’re taking to change this aren’t new, and the seven cooperative principles

• voluntary and open membership,

• democratic member control,

• member economic participation,

• autonomy and independence,

• education, training and information,

• cooperation among cooperatives, and

• concern for community

are core to the work. These, alongside two additional values

• sustainability and

• inclusion

are guiding our work.

This fall we will open up to new members and will be looking for local businesses we can build a portfolio of social acquisitions from. We’re looking to not just build out our local social innovation ecosystem, but to do so in a way which provides a community-driven approach to managing the Silver Tsunami as it washes over Waterloo Region.

More information to come - subscribe to keep up to date.

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Related reading

Trash and treasure — Carol’s Cakes and the scale of the succession wave

Showing up for the lemonade stand — the succession numbers, and who’s watching

The decision not to decide — the Legacy Leadership Lab and picking priorities with a community

The hundred-mile investment — the diversification math behind local ownership

The cafe, the mine, and stamp collecting — Ontario’s cooperative regulatory bind

Product-Market-Governance fit — matching who creates value to who governs

Who are you — holding governance uncertainty deliberately

Are we richer than we think — the messiness of pooling capital from non-accredited neighbours

Where impact investing could (and if it should) be transformative — the retail gap this project is trying to close

My starting point is to think about how people learn, and the literature on high-impact practices is fairly consistent about what actually deepens learning: meaningful interaction among peers, structured opportunities to reflect and integrate ideas, and substantive enough challenges for learners to engage with.

What isn’t so important is the teacher. At least, not one who stands in front of the room and gifts knowledge to their passive students.

Back when I was a grad student I met with a small group of fellow PhD students from different departments and we started to organize a conference focused on a broad topic: What is the responsibility of intellectuals in the 21st century?

The conference didn’t end up happening, but the part I was responsible for did. My task was to convene an unconference that would bring participants together to debrief and discuss what they’d learned throughout the more formal sessions. Those formal sessions didn’t happen, but the question still seemed rich enough to try holding the unconference anyway.

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The event was fun and I ended up running it as a series called Academic Alternatives, and after a few iterations the format evolved into a fairly simple model that I’d encourage anyone to use.

Developing the format was a bit of a design challenge: build the simplest, most easily replicable model possible for an open-ended peer-learning community. No instructor, syllabus, or institution needed. Instead what was needed was a simple set of instructions, a place, some people, a topic, pens, and paper.

The result is a learning space that sits outside the usual top-down, expert-driven classroom or seminar. It’s built for activists and academics alike, on the premise that peer-based reflection is just as powerful a tool for praxis as any lecture or reading list.

It is also just as easy to manage as a lecture, so as a baseline when I’m preparing my teaching I start with the assumption that the students in one of my courses have what they need to learn together as long as they have a reason to do so. Turns out some simple instructions and a question are all that’s needed.

A starting question

Each Academic Alternatives session starts with a question and when I’ve run this process in a workshop the starting one I usually use is

Additional questions we used during the first run included:

• How does your research change you, and how does your identity change your research?

• What is the role of post-secondary education in society?

• How do we break down the barriers between theory and practice?

These shouldn’t all be the core arc of questions if it is a self-organizing group, as part of the process of a session is built to generate future questions for the group to discuss.

How a session works

The mechanics of Academic Alternatives are deliberately simple and repeatable, laid out as a one-page model with three phases: before, during, and after each session. Indeed, during the workshop I would usually print out all of these instructions

Before the session

1. Send out a first email/invite that includes:

   1. A request to vote on the best meeting date, from at least four options the organizer can attend.

   2. A request for topic questions.

   3. A deadline for both.

2. Once that deadline passes, book a venue and confirm the most popular date is actually available.

3. Send out a second email/invite that includes:

   1. The date of the upcoming meeting.

   2. A list of candidate questions, pulled from email responses, suggestions generated at the previous meeting, and the two highest-scoring questions from the meeting before that which didn’t end up being chosen.

   3. A link to a ballot or survey where each question is rated 1–5; the highest average score becomes the discussion question.

   4. A deadline for the vote.

4. Once the voting deadline passes, send a final email/invite with:

   1. The date and location of the discussion group.

   2. The discussion topic.

   3. The planned agenda.

   4. Encouragement to forward the invite to others.

During the session

1. Arrange the room into a series of small tables surrounded by chairs, plus one table left without chairs — the “Sorting Table.” Put a stack of sticky notes on each table, and set out an “Email Sign-Up” sheet and a “Next Question” sheet.

2. Open with a brief introduction of yourself, an overview of the agenda, and a thank-you to the venue and any sponsors.

3. Have participants introduce themselves — either around the circle, or by tossing a ball or toy around the room.

4. Explain the steps below to participants before starting.

5. Read, and then re-read, the discussion question.

6. Have participants write a response to the question on a sticky note — one idea per note, and as many notes as they like.

7. Collect the sticky notes and randomly arrange them on the Sorting Table.

8. Bring all participants up to the Sorting Table to group similarly themed ideas together.

9. Ask participants to name each theme, using a different colour sticky note for each.

10. Once themes are named, move each theme and its ideas to a different small table, and read out which theme is at each table.

11. Let participants move to whichever table interests them most — and encourage them to keep moving between tables as the discussion evolves.

12. Circulate the a physical Sign-Up and Next Question sheet throughout the discussion or a QR code that links to an equivalent intake form.

After the session

1. Clean up, following whatever the venue or host requests.

2. Collect the Email Sign-Up and Next Question sheet (if a physical one was used) and pass them on to the next facilitator.

That’s the whole model. No permanent leadership, no fixed curriculum, just a repeatable process for a group to keep generating its own questions and its own conversations.

One thing I’ve been finding really useful in Substack is scheduling my posts in advance. What it lets me do is give myself a rough roadmap of where my writing is going to go and how the flow of my pieces will fit together. Sometimes I follow that schedule, usually I don’t.

I also don’t ever let what is in the queue publish automatically when it is scheduled to go out. That is, until last night.

If you are a subscriber to this Substack you would’ve seen two “bonus” posts in your inbox this morning.

Neither was really ready to see daylight. Each was still primarily an AI-generated draft/outline, with some commentary that I had already slipped in (ex. “this opening is so wrong!!!”), placeholders for links, and a few editorial notes at the end to try to align this with my emerging house style.

Hopefully if you got one of these you noted that it reads a bit differently since I rewrite every post from top to bottom, usually with the difference between what I send out and what it finally looks like being quite substantive. I hope at this point there’s still daylight between me and the machines.

Ciao

When I started this back in February, I set out to write two posts a week, and other than when I was at a cottage and hit with a blackout a few weeks ago, every Tuesday and Thursday I’ve managed to make that work.

I also started with a queue of over a dozen posts ready to go in case I couldn’t think of anything to write in a particular week. Six months in and I can say that for pretty much every time I’ve drawn down one of those posts in the queue, I also came up with a new post to throw into the mix.

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This is one of those things where every time you draw on those creative flows, it activates them to keep continuing.

I’m not pulling Stephen King’s 2,000 words per day every day, but I get how the regular flow of words leads not just to more words, but to more better words. I also know for myself that making commitments to other people helps with my own follow-through. This channel isn’t really a firm public commitment, but it helps.

That said, for the next month, posts are going to slow down. I still love you all, but summer vacation needs some room to breathe, and something has to give for that to happen.

I’m also clearing time for something a bit bigger this fall. I’m a professor, and I’ll be teaching both undergraduate and graduate courses in the Fall and Winter terms. For a number of reasons, which will probably be worth their own post once I’ve sorted through them properly, my courses are leaning much more heavily into a flipped classroom model this year. This is a natural extension of and complement to other pedagogical approaches I’ve taken, so it isn’t really a break per se.

However, it does mean putting a lot more course material online, in advance of class, for students to work through on their own time. Going back to the first post here, I’ve held the view that the public goods I create as an academic are too inaccessible. Making more of that content available online is one concrete way to act on that, and it’s going to be the focus of my writing for the next few months.

That will probably mean a bit of a shift in tone and style for a bit too. Learning can’t be confined to the walls of a classroom, nor should it be. I’m playing my part by learning in public, and presumably that’s why you’re here.

With that, my fellow co-learners, I do want to thank you for continuing to be part of this project. If you have thoughts or suggestions on any of the above, I'd love to hear them in the comments.

The game show included a segment called Split or Steal. The show has a jackpot and two strangers each face a secret choice: split the money evenly, or steal it all.

If both split, they share it. If one steals and one splits, the stealer gets it all. If they both steal then they each go home with nothing.

This is a version of the Prisoner’s Dilemma, a classic in game theory developed by John Nash for whom the competitive equilibrium solution (called a Nash Equilibrium) is that both players will chose ‘steal’. If you want the mechanics explained more handsomely, you can see Russell Crowe talk through it in A Beautiful Mind.

The logic can be extended on a grant scale to argue why we can’t have nice things. That is the case Garrett Hardin makes in his flawed classic The Tragedy of the Commons, in which he argues that individuals seeking to maximize their own benefit in common pool resources like grazing land, fisheries, and the atmosphere itself will lead to the collapse of these commons.

Prisoner’s dilemmas and tragedies of commons are the sort of thing that people who know any competitive game theory are going to be looking for in the world. They are an argument as to why we can’t work together collectively and why we have to accept the private ownership over the collective resources we all rely on.

They are also wrong.

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We aren’t angels, but we aren’t devils either

As a starting point it turns out self-interested people are pretty good at running a commons, keeping them away from tragedies. The actual tragedy of the commons is people enclosing and privatizing them to make money, then coming up with economic fairy tales to justify the theft.

It also turns out you can figure out how to beat Golden Balls too.

The core issue is that games which seem competitive can sometimes become cooperative when viewed from a different lens. In the Golden Balls segment one of the players says he’ll steal no matter what but will split the money with the other player after the show. He won’t budge in that decision and because of that forces a choice on the other player to split to have the chance of any winnings.

It flips the game on its head and seems to turn the game from one of competitive deception to one of cooperative deception. It is a strange twist with an unexpected result.

It is often the case that what seems like a competitive game often has a cooperative element within it that can be pulled out. For example, think about tennis. This is a game with a winner and a loser. Yet take a step back and there is a different cooperative meta-game involved. Yes one of the players will win and the other will lose, which can be seen as providing value to the winner, but both players are better off than if they hadn’t played tennis at all.

Winning at tennis is the best outcome, losing at tennis the second-best outcome, and not playing at all is the worst outcome. I assume… I’ve never actually played a proper game of tennis.

The prince who watched marmots

The most prevalent myth of competitive game theory isn’t one of the ones I’ve mentioned so far but is instead the granddaddy of them all, the theory of evolution through natural selection. Darwin’s case for this had nuance, Herbert Spencer simplified it as ‘survival of the fittest’ and that bit became a core feature of social Darwinism (which he probably would’ve hated).

But evolutionary theory didn’t just have a story to tell about violence and competition red in tooth and claw, it also had a story to tell about cooperation. Peter Kropotkin spent the 1860s surveying Siberia for the Russian army before getting really interested in breadmaking, and what he saw about how animals behaved in the wild to him told a different story.

Uncle Pete has quite the beard

Animals in that landscape weren’t mainly competing each against each for scraps. Marmots post sentries. Wolves hunt in packs. Colonies of birds and insects pooled their efforts together for food and safety. Animals engaged in mutual aid.

Same board, different games

The framing of the games we play, competitive or cooperative, has real consequences. The first feature of a wicked problems are that there is no single way of formulating it, and an implication of this is that how you define the a wicked problem enables and constrains the way you can develop attempts to grapple with them.

It reminds me of the Landlord’s Game, developed by feminist and Georgist activist Lizzie Magie in 1904, which was developed to demonstrate the impact of rentiers on economic development. The game ultimately ‘inspired’ (ie. was stolen to make) Monopoly.

Source: Monopoly, v1.0

In Lizzie’s original game there were actually two sets of rules using the same materials. Under “Prosperity” rules, rent is paid into a public treasury and redistributed, the game ending when the poorest player doubled their money and everyone collectively wins. Under “Monopolist” rules the game is the competitive, friendship-ruining slog we all remember from childhood.

Source: Monopoly v2.0

Though not all the way there, the Prosperity rules have in their intent (if not fully in their design) a lot in common with the ethos of the Eurogames which have grown to dominate board sales in the 21st century.

It seems like we’d all rather spend our lives playing games that were a little more cooperative.

It doesn’t look like an exchange, but it is. If you give $100 to a soup kitchen to deliver food to folks who are hungry, you are doing so because you think it is important to feed people.

But there is another element here, which is that you’ve also decided an organization can use that $100 to feed people more effectively than you can do by yourself considering the value of your time and money.

You might think of the money that goes into that donation as a gift, but it is also the hiring of a professional service. A professional service based on understanding the context of service delivery in the advancement of a charitable cause better than you can. It might be in a different domain than hiring a lawyer, but it is at its core the same type of transaction.

However, it is rarely viewed that way. Instead, the idea that charities should never spend any resources on supporting their own organizational capacities and that anything other than front-line delivery is waste still manages to suffuse much conversation about the sector.

The consequence of this is a deep over-policing of the sector, which mutually reinforces a sense of distrust between donors and charities, charities and their beneficiaries, and between charities themselves.

Participatory grantmaking is a powerful framing to counteract these challenges.

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Why participatory granting?

What is happening with a donation, which is similar to charitable granting at a larger scale, is an information problem. The people doing the work on the ground have deep expertise in the problem domain and context which funders usually don’t. It also means that those external funders and the evaluators they occasionally hire don't have as much contextual knowledge as those who are doing the work. This matters when it comes to determining whether those who were funded did the work that was expected of them.

Source: The Social Network (2010)

This isn’t to say there isn’t any value in evaluating work. While accountability is often the focus of evaluation, it isn’t the only value. Learning and prioritization at the organizational, funding portfolio, and ecosystem level are also valuable.

What traditional top-down grantmaking does is pit those seeking funding against each other to secure funds from an insufficiently-sized pool to advance their work. That work includes this deeply contextual expertise, and were it not for the competitive funding environment, that expertise would enable the organizations working in similar spaces to be amongst the most efficient and effective evaluators of the effectiveness of service delivery, alongside the beneficiaries themselves.

What participatory grantmaking has the potential to do is change who is in the decision when grants are actually made. It changes what information is shared about who delivers service and how. It changes who has power.

Shift information, funding, and power

A participatory grantmaking process brings in the leaders of the organizations being funded, sometimes extending to frontline staff, and at the most radical end actually incorporating intended beneficiaries. In the process, the arrangement ceases to simply be gift-giving because although the philanthropist is providing the financial resources, the participants are able to more robustly pull in their expertise as a valued resource. It partially shifts the framework from pure gift-giving to incorporating mutual aid.

Participatory budgeting is useful for a lot of reasons, including better decisions, more community ownership, and reduced elite capture of public resources. When the participants vote, it also produces and uses evidence. However, this evidence just doesn’t look like the same evidence that an evaluation report uses.

The formal evidence it produces is the actual priorities set by those voting in a participatory budgeting-grantmaking process. Given how commonly surveys are used in evaluations, as a baseline that should be useful in itself. Yet this evidence should be taken more seriously than a simple survey result, as participants in a real process are wrestling with actual tradeoffs and have skin in the game. The stakes make the information better.

There is also informal evidence that is produced. These are the stories about what each participant does, which they share with each other to build support for their own projects. These are the reputations for collegiality and backstabbing, which generate collective trust and peer-accountability, which in turn enable authentic partnerships. These are the shared insights into systemic challenges, some of them produced by the philanthropic funders themselves, which they can then advocate to change.

Who gets the ball rolling

The formal evidence provides more clarity for funders, the informal evidence provides more capacity for the funded.

It also doesn’t need to be funder-led. The Participatory Budgeting Project’s toolkit for running PB inside an organization makes essentially the case for applying participatory budgeting for internal decision-making, and nothing prevents a network of organizations from trying processes like these collectively themselves.

Ultimately, the most important thing a participatory grantmaking process should produce isn’t the budget. It’s the organizational capacity, collective expertise, and trust-building across a sector.

Professionals and workers whose expertise is valued work together, forming professional associations and trade unions to have their expertise recognized and deepened. Maybe it is time for the social sector to learn how to do the same.

A vote is transparent, which means you can look the inputs into the process (votes) and see how the results are calculated. Indeed, given the same voting system and anonymous ballots anyone should be able to take those votes and come to the same results.

It works at scale to the degree that if you could properly administer a vote, you could run one with every human being on the planet.

A vote is basically participatory, which means that as long as the process around a vote is well-designed, those who engage in a vote will have their preferences included. However, here is where things start to get a bit more complicated as some ways of running a vote produce better or worse outcomes than others when it comes to translating those preferences into a representative result.

As for efficiency, much like how participatory a vote is, it depends a lot on what system is used. Voting is incredibly efficient to administer when compared to alternative process like negotiations and committee meetings. However, the efficiency of outcomes depends a lot on how it is used.

When voting is used to set priorities from people with diverse interests (ie. people) then how well a vote and its voters are able to incorporate tradeoffs into their decisions is critical to how efficient the results of a vote will be. Voting on budget allocations (money, time, or other constrained resource) brings many of these challenges together and it is useful to look at voting systems used for elections to see which ones map well onto budgeting decisions.

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One winner means no winners

There are voting systems which exist but are not widely used in elections and I’m not going to work through those in this post because it is unlikely that people have real practical experience campaigning in a knapsack voting or quadratic voting election.

As a Canadian, I feel obliged to start with first-past-the-post. This is a voting system in which there are multiple candidates who run for a single seat, voters get a single vote, and whoever gets the most votes wins. While I have issues with first-past-the-post elections in general, most notably its non-proportionality, the core issue in budgeting design is one particular element and this is the fact these elections produce a single winner.

The thing is, budgets usually contain many items. When I spend $200 at the store I’m not deciding between 60 bags of milk or 300 lbs of bananas. I’m pulling together a pretty diverse array of groceries and working within that budget constraint. Other voting systems like alternative voting and approval voting in which have interesting properties with multiple winners are similarly inappropriate when applied in a single-winner way to budgeting.

Two households, both alike in dignity

There are a few voting systems which can elect multiple winners and are extensions of the first-past-the-post logic.

Bloc vote: gives every person one for for each of the 2 or more people who will be elected. In practice, this is first-past-the-post on steroids. If there are 5 at-large city council seats up for election, in a partisan process a political party with enough support to get one of those seats will usually be able to sweep the entire council.

Single-non-transferrable vote: gives every person one vote and elects the 2 or more people with the highest vote totals. It produces results that are non-proportional and, in practice, also creates some of the strangest incentives around strategic voting of any electoral system. The key feature is that political parties will try to anticipate the amount of support they’ll get then run the number of candidates that can most efficiently get that support and try to get their voters to split their votes equally between those candidates. This can make for strange results like popular candidates can get move votes than anticipated and losing their teammates elections.

The bloc vote isn’t a great choice for budgeting because most of the time the items being voted on cost different amounts. This also means that if there is a constrained budget, it isn’t going to be clear up front how many winners there will even be. If a bunch of bananas costs $5 and a bag of milk costs $10, then if milk doesn’t get elected but a bunch of bananas does, there’s $5 leftover that can be used to fund another winner. If you don’t know how many winners there will be at the start, you can’t really assign votes accordingly.

The single-non-transferrable vote works here, but it doesn’t work well. The strange strategic incentives end up causing highly unpredictable outcomes and making choices far more difficult for voters than they need to be. They also introduce a calculation issue that plays a role in some other approaches, which is greedy vs cost-conscious calculations.

A greedy algorithm is one which calculates all the votes for each item, ranks them from highest-to-lowest, then funds them in that order until the money runs out. A cost-conscious algorithm calculates all the votes from each item, takes cost into account (for example, by dividing each item by its cost), ranks that from highest to lowest, then funds them in that order until the money runs out. Generally the cost-conscious algorithms here are going to be more efficient when it comes to generating a result with a higher support given total funding constraints.

Rival menus

That ordering is important when it comes to another range of voting options which are the list proportional representation systems. These systems and variants of them are the most common voting systems for parliaments and have the strength of producing proportional outcomes. They are tricky when it comes to actually making budgets.

A reasonable approach to adapting this model would be to create a set of menus for different categories of items. This effectively is like making one of those ordered lists above in advance, then asking people to vote for different lists. The share of the total number of votes each list gets is its share of the total budget. Within that list you fund items going from the top of the list to the bottom of the list until you’ve spent out its share of the budget.

The problem is that this leads to two additional issues. The first is that it just boots the issue of who chooses a collective budget from the level of the voter to whoever is in charge of each menu. Those orderings need to be set by someone and this just leaves the whole budget ordering issue in their hands.

The second is that it has a hard time managing cross-listed items. Some budgetary items could fall in more than one place. For example, if you are voting in a municipal budget are biking trains transportation, parks, or something else? If it appears buried on one of those lists then a voter might support that item but not the ones above it; if it appears on more than one list what happens if it would be funded by both?

Somehow KFC and Taco Bell have managed a more workable solution

The core issue is that voting systems focused on political parties often have a hard time functioning in a non-partisan context. It also means that a range of popular voting models, like mixed-member proportional and mixed-member majoritarian don’t adapt well either because a key component of these approaches is a party list.

Transferrable voting and budgeting

Transferrable votes have a lot of features which work well in a multi-winner budgeting context, in particular their use in producing a result which approximates an efficient allocation. The single-transferrable vote is a method that has been used in elections and produces proportionate results without party lists, which is a good starting point for budgetary elections. This type of voting works with a ranked ballot, in which all the options are ranked in order from highest to lowest preference.

We’ve also been able to adapt this to a range vote, which is like a 0-5 star rating in a website, with proportional results as well. You can try either over at Groupthink Lab’s Polls site. The greedy alternative vote, which is the standard for most participatory budgeting processes, is like a special case of a range vote (the options are 0 and 1 with nothing in-between) that uses a single-non-transferrable-vote style calculation.

Fast food chains figured out decades ago that when you're selling combos instead of single items, you need a mechanism that can handle bundles without pretending every option costs the same to produce. Voting systems built for electing people need adaptation to catch up to that insight.

It is also the continuation of what might be the oldest line of empirical political science work. The tradition goes back at least as far as Politeiai, in which Aristotle and his students collected constitutions from 158 Greek city-states, and there is something about a line of research which extends back thousands of years which I find deeply grounding.

He’s the one on the right

It is also humbling and reminds you that the work of research extends countless generations into a shrouded past while also extending countless generations into an unknowable future.

The first time I was a formal part of this process was when I worked as a research assistant for Dr. Brian Tanguay at the tail end of my undergraduate degree. As part of this work, I had the chance to read Arend Lijphart’s Patterns of Democracy, which undertook a comparative analysis of different democratic government structures around the world.

While not the only important piece of democratic design, Lijphart did highlight the importance of different electoral voting systems on governance, observing that proportional representation voting systems tend to produce greater participation, stability, inclusivity, and a reduction in political polarization compared to majoritarian voting systems like Canada’s first-past-the-post.

Since then, I’ve been convinced of the importance of how voting systems are designed in both electoral and non-partisan decision-making systems. It is worth looking at how the voting systems used for elections map onto the specific context that is building out a budget.

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Into the weeds!

Sorry folks, this one is a little more technical than most posts. I assure you that I do listen to my audience when you tell me going down the rabbit hole on voting systems isn’t always your favourite thing. Noted.

PB is a process with many elements, but to me voting is a pretty critical one. Yet other than mentioning that voting occurs, the specific voting system used is rarely outlined in surveys of PB around the world, including that 2021 Atlas, which rarely details which systems are used.

For example, from the international survey in the Atlas only the vote used in Ireland is described in much detail at all. It implies that the system used is a variant of an Approval Vote, which is sometimes called a Greedy Approval Rule, though this is not totally clear.

Other voting rules produce results that work better with budget constraints, like knapsack voting. Even more compelling to me are voting approaches tied to the method of equal shares, which tries to directly apply proportional representation methods to budgeting decisions. If you are curious to learn more about these, I go into them each in more detail elsewhere.

It seems like the field picked up approval voting as an approach early on, spread it by replication, and mostly stopped asking whether it was right for the job. It makes enough sense as the approach is understandable, it’s simple to explain and easy to run, but simplicity on its own is an imperfect virtue. More is required.

Other methods could have been adapted to this purpose, like the single transferable vote, range vote, or Borda count. But knowing what and how to adapt those is a trickier matter as budgeting is not the same as an election.

What is different?

Elections conforming to current global norms are usually seen as legitimate reflections of popular sovereignty and follow the above assumptions. However, there are important ways in which collaborative budgets might be different from popular elections.

• First, the goods under consideration may have different costs. Conversely, elected officials are generally weighted equally within legislatures. This is important when we consider that the Law of Equi-Marginal Utility argues that efficiency is based on marginal utility per unit of money that a good produces, not just its marginal utility.

• Second, people may have different contributions of money into the budget. If you contribute five times as much to a voluntary budget as I do, then you may be upset if our votes are weighted equally.

• Third, people may have the withdrawal option, meaning that if they are unhappy with how the collaborative budget is allocated, they may be in a position to withhold some or all of their money.

If none of these three differences are present, then voting systems that work with elections can often be used. Once any or all of these are present, things start to change.

What makes a voting system “good”

Before moving on, it is also important to consider what we would want out of a voting processes. Three things are desirable in effective collaboration for budget development.

• First, the process must be efficient, meaning that the resources must be allocated in a way in which one participant cannot be made better off without making another participant worse off (Pareto efficient). Without efficiency, the potential gains from collaboration go unexploited, and these gains are needed to produce real value for each participant in the collaboration.

• Second, the process must be participatory, meaning that those involved in the budgeting process must be able to have real power in making allocations. Without this, the budget is not actually an organized, collaborative effort. Instead, it is either unorganized, or the resources are ultimately allocated by decree.

• Third, the process must be transparent, meaning that participants must know how the budget allocation is determined to the degree that they could replicate the results given the same input information. Without transparency, not only is trust in the budget allocation process reduced, but it also becomes impossible to demonstrate that the process was also participatory and efficient.

In addition to being efficient, participatory, and transparent, in a great range of situations it is desirable to have a process that is also scalable.

• Scalability means that the process can keep thoseparticipatory, efficient, and transparent features whether it is being used by a small number of people or a large number of people. While not all collaborative budgeting processes require scalability, having scalable budgeting processes greatly increases the range of applications for such processes.

Don’t default, design

Every one of those differences, the heterogeneous costs, unequal contributions, and the exit option, is a design parameter, not a footnote. Treating them as footnotes is how a field ends up running Approval Vote variants on hundred-thousand-dollar budgets because that’s what the first few practitioners happened to reach for. The tools exist to do this properly. The question is if the intentionality of design behind these processes can match the needs of the processes themselves.

Just like this

A few weeks ago it was a snack bar with a few other friends at the annual neighbourhood block party. Other times it has been iced tea or the classic lemonade stand.

One of the nice things that always happens is that once the stand is up we send a little WhatsApp message to folks nearby and a few will always go out of their way to pop by and support the tiny venture.

So what happens if instead of selling the lemonade the kids wanted to sell the lemonade stand? Maybe someone will buy the stand, though if all the stands are being sold on the same day this could be tricky.

The result is that while many of these businesses are healthy, some will close anyway. They will take with them the goods and services they provide their customers, the supply chains for complex products created in our country, and the jobs of the people they employ (BTW, we aren’t just talking lemonade anymore).

For the neighbours who would’ve come to buy lemonade, maybe there should be a pathway to buy the lemonade stand. Unfortunately, the regulatory architecture that keeps neighbours from pooling capital to back a local business also keeps them from being ready buyers when a boomer owner retires.

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Tick, tick, tick…

The scale of the coming succession is hard to overstate. In the next decade, hundreds of thousands of Canadian small businesses will go up for sale, representing a shift of over $2 trillion in assets. If there are viable businesses which simply close, that is a huge loss. If there are businesses which get acquired but are simply stripped for their assets, that is almost as bad a structural failure.

Despite the scale of the challenge, until quite recently (and still not at a sufficient scale) our public policy attention was almost exclusively oriented towards start-ups. Incubators, accelerators, pitch competitions, and innovation grants are tuned to new business formation. The going-concern value of established sustainable businesses which already employ people, serve their communities, and turn a profit is barely on the radar. We are subsidizing the birth of new businesses while the existing ones quietly liquidate.

Markets don’t leave gaps like this empty for long. A glut of succession-driven sales, a thin supply of community-ready buyers, and patient capital with a roll-up playbook are a setup that rewards monopolists.

Vroom vroom

Thinking about value differently

Part of what makes this dynamic so hard to interrupt is that the consolidator’s valuation methodology is the only one anyone is using. Standard investor-focused metrics are built to measure what the business returns to its owners. What they do not directly capture is the impact on other key stakeholders like the customers they serve, and sometimes those impacts are different in ways that could enable alternative transition models.

It’s in the consumer surplus of having a reliable gathering place, the social infrastructure of a business that knows its customers by name, the local spending multiplier of wages that stay in the community. The monopolist isn’t going to value those, but a community around a small business might.

Community-built Community Wealth Building

“Community Wealth Building” (CWB) is sometimes used to describe exactly the kind of localized ownership shift that would interrupt this pattern. However, it is possible that this approach could replicate some of the systemic issues around inequality it is trying to address if residents in the community are just consulted in CWB rather than leading it.

The acquisition of businesses by foundations or municipalities can be impactful and a better exit than a rollup. Yet there is a danger that it ends up as community-adjacent ownership rather than actual community ownership if people are left out of decision-making about what is acquired or how it is run for community benefit.

Unfortunately, the alternative is smaller, slower, and harder to administer. It is non-accredited residents holding substantive but manageable stakes in the businesses around them, and the financing systems for doing this are messy. It doesn’t produce a clean institutional buyer that a retiring owner can hand the keys to, but it has potential to produce a community where the people bearing the risk and the ones making the decisions are the same people.

This is also what makes the scale of the succession wave as much an opportunity as a challenge. If the volume of transfers is large enough, and the policy environment shifts enough to enable non-accredited residents to participate at manageable scale, there is a window here to reshape local ownership in ways that don’t come around often. The question is whether anyone with the capacity to use that window is actually looking at it.

Protect your neck; diversify your bonds

Central to this is having your money in a variety of investments. Different industries, different financial instruments, different geographies. Diversification.

Yet at its core your life is not diversified. You live somewhere. You work somewhere. You belong somewhere.

From a pure financial perspective, this is a weakness. For most Canadians, their most important financial asset, if they have any, is their home. Its value is likely correlated with the value of their job. This is further correlated with the value of their social capital.

This is a pretty mercenary way of thinking about your life and it is probably best illustrated in the absence. Imagine a community with a major factory that employs a lot of people. If that factory leaves the town, it doesn't just lead to people being unemployed, it also leads to a fall in property values and the likely collapse of many civic organizations funded either directly by the company or by the wages going to the people who worked there.

If you are following basic financial planning advice you would look at these things and immediately see the danger and follow the key dictum “don’t put all your eggs in one basket”.

Of course, the other approach could be adapted from Warren Buffet: “put all your eggs in one basket and watch that basket very closely”.

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Why not both?

In economics and finance the baseline assumptions of the theoretical rational economic man (note: doesn’t have to be a man but, c’mon, he’s clearly a man) assume a deep individualism and non-existent relationships with places, people, or history.

Turns out, that’s not how people actually work.

We exist in time and space, and we exist in relationship with other people. Try as some might, we cannot escape our connections to each other and to where we are.

The baseline model of financial diversification would suggest we have backup plans in case something negative happens where we are. However, this shouldn’t be at the expense of pulling resources and investment out of our homes and communities. Indeed, using our own insights into the unique assets our communities hold can be allow us to develop approaches to thinking about community wealth in ways that benefit us individually and collectively.

Small business risk and diversification

The most common way people invest locally is by owning property, with about 2/3rds of Canadians owning their own home. Ownership of a small rental property is also quite common, with just under 8% of Canadian families reporting rental income. There are 1.1 million businesses that employ people in Canada, which means about 2.6% of Canadians own businesses that employ others, 98% of which are small businesses.

Most of those small businesses are embedded in and serve their local communities, which means they are dependent on and contribute to the prosperity of those communities. For most of these small business owners, this is their job. This also makes a small business a risky place to put your money, particularly at the start, and this often means that for a small business loan, if you own a home, you will be putting this up as collateral.

Taken together, this means that financial income from your real estate, investments, and labour income are all dependent on the success of a single venture. That’s a big risk for a small business.

De-risking small business

As an alternative, the person who operates a small business could be its general manager (GM), hired by a group of investors. Compensation could be provided based on performance, sharing some of the upside, but the downside risk could be spread more widely.

This could even be a temporary arrangement, running the business for a few years as GM, then buying out the other investors later and moving towards full ownership. You learn the customers, the margins, the supplier relationships, the unglamorous Tuesday-afternoon surprises that kill new businesses.

Adding to this, entrepreneurship through acquisition provides an option of doing this without starting from scratch. If the potential GM is already familiar with the business, possibly working there as a key employee, they would be sitting on exactly the kind of operational knowledge a local investor would want. They would also be well placed not only to be a good steward of those resources, but also to pull from the networks and expertise of those local investors as well.

Easier to buy a mine than a cafe

Unfortunately, a retail investor today can put money into a cobalt mine on the other side of the planet with a few clicks and none of the legal overhead, while pooling a few thousand dollars with neighbours to buy the cafe down the street can trigger compliance costs that exceed the value of the business itself. Regulation built to protect retail investors from arm's-length strangers applies just as heavily to investing in people you already know.

The same regulatory architecture that keeps neighbours from pooling a few thousand dollars apiece to back the cafe also keeps that GM’s own neighbours from backing a buyout. It prevents those neighbours from de-risking small business ownership for someone well placed to de-risk the business itself.

The flip-side here is that it also leaves the GM's neighbours with their only local investment being the house they live in. It’s concentrated, illiquid in the short term, and entirely undiversified within the local economy. Pulling equity out of that house to invest in the businesses around it would diversify that risk.

Right now, doing so easily and at a manageable scale is something only available to accredited investors. The three basic ways of qualifying here are:

Income test: you have $200,000 or more in each of the 2 most recent calendar years, with a reasonable expectation of exceeding that level in the current year, or $300,000 or more combined with a spouse or common-law partner in each of the 2 most recent calendar years, with a reasonable expectation of exceeding that level in the current year

Financial assets test: you have (alone or with a spouse) own financial assets worth $1,000,000 or more. Financial assets include cash, securities, and investment contracts — but not your primary residence, personal property, or other real estate.

Net assets test: you (alone or with a spouse) have net assets of $5,000,000 or more, which can include a primary residence.

This leaves local diversification as something off the table to most people who own a home in a community, let alone those who do not own property.

Mutual diversification

A healthy local business sits in an odd no-man’s-land. It is too small for institutional capital to bother with, too risky and illiquid for an individual investor to take on alone, and too commercial to qualify for the grants or philanthropic dollars that flow to charities and startups. It is investable in principle but not in practice.

Part of why is informational. A pension fund or a private equity shop operates at a distance, by necessity. Distance means they can’t actually watch the business, so they have to substitute heuristics: standardized financial ratios, sector comparables, growth multiples. Those heuristics flatten context.

A local investor doesn’t have this problem. They already have the context a distant fund has to approximate with a spreadsheet, and may even be able to help the business improve rather than just observe it.

Moreover, if there is a set of businesses available for acquisition, this can happen at scale. A group of neighbours who invest $10,000 each in a local cafe is great, but it is limited in what it can do for investor diversification. If there were 20 small businesses within a community that could each accept $10,000 investments from residents, that is room for a resident to invest up to $200,000 in a portfolio of businesses.

Moving one step beyond, if the collective financial returns from that portfolio of businesses exceed the cost of a mortgage, then it becomes an attractive vehicle for building community wealth. At a higher level, it allows a community to slowly pull wealth out of the unproductive residential real estate and shift them towards productive business investments.

Given the current wave of small business owners retiring, it is also a once-in-a-generation opportunity to reshape local economies for the better.

This bakery had been sitting on the market in Thunder Bay for three years when Erin Sisko bought it. The bakery already had a loyal customer base, deep community trust, and a retiring owner who wanted to see the place go outlast her.

Unfortunately for Carol at the original asking price, nobody wanted it. Fortunately, Erin loved what the bakery made, knew the community well, and believed that quality could be maintained through the transition. Moreover, she had a strategy for profitability improvement through the implementation of new business processes that would not directly impact the core product.

This story is an example of entrepreneurship through acquisition, an approach to entrepreneurship in which entrepreneurs spot undervalued assets, modernize them, and returns. With the Silver Tsunami wave of Baby Boomer business owners retiring it is natural to assume not only that there will be an oversupply of businesses for sale but also the dangers to navigating in poorly.

Building the ecosystem around making entrepreneurship through acquisition easier will make it easier for entrepreneurs to navigate this option. The programs to support this approach are growing and there are policy changes like the institution of employee ownership trusts as a buyout model are valuable advancements.

This last one also points to an intriguing direction that entrepreneurship offers which isn’t just a change in who owns a business, but a change in ownership itself. Through social acquisitions, succession planning becomes a pivotal opportunity for community wealth building. However, making this work goes back to a critical issue from early in the story of Carol’s Cakes.

What if it were sold to its workers? How about its customers? Maybe a local charity? Should these all look at the price in the same way? At its core this raises a key question: how much is a business worth, and to whom?

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What the appraisal already assumes

In theory a business broker would come in to appraise a company like Carol’s Cakes using a pretty standard valuation approach. Cash flows, identifying comparable transactions, and applying multiple applied to earnings that seem consistent with retail bakeries would be a pretty standard playbook for this. Maybe the seller will name a target number and the broker would try to temper those expectations.

A pretty standard fee model in Canada is that for a business under $1 million a broker is likely earning a flat fee or around 10% of the value of the business. Many small businesses are like Carol’s Cakes in that they may take many years to sell, with some never selling at all. They are also marketed towards other potential investor-owners, packaged and priced in terms that make sense for those focused on profitability.

The challenge here as this framing might not actually be the right one for every class of possible buyers. When we ran the Legacy Leadership Lab we were looking to support the social finance ecosystem in Canada by identifying what would be needed to enable impact investors to convert small and medium sized enterprises (SMEs) into social enterprises when their owners were looking to retire. What we found were a range of reasons SMEs might be interested in social acquisitions and, alongside this, a variety of forms social acquisitions could take.

This drew me back to the work of Henry Hansmann, who spent a career at Yale Law School focusing on comparative models of legal governance. He argues that ownership structure follows transaction costs: a firm tends to be owned by whichever group of patrons would otherwise face the highest costs dealing with it at arm’s length. The default model is for-profit investors, and enterprise valuation is built entirely on this premise.

Yet worker cooperatives, consumer cooperatives, and community-owned enterprises run on a different assumption. Their residual claimants, whoever gets the leftover money after every other obligation is paid, are the workers, the customers, the neighbours. For investor-owners these would be profits, but for these other classes of owners these could look like higher wages, cheaper goods, higher property values, or something else entirely.

From an investor’s perspective the excess wages and below-market prices are a waste, the sort of margin-improvement opportunity a private equity buyer is looking to exploit. For a worker-owner or consumer-owner, they are the return on ownership, full stop. In the framework I laid out in the open access Routledge Handbook of Cooperative Economics and Management, we could see how these differences could actually take the same information about an enterprise and lead to different valuations for different owners.

Trash to one buyer, treasure to another

This is also what opens up what I call a trash-to-treasure opportunity, in which the value of an enterprise under one ownership model can be raised by simply changing what type of stakeholder group owns it. A business that an investor walks away from as marginal can be exactly what it looks like to the people who already work there: a livelihood, a community anchor, something worth keeping alive on terms an outside buyer would never accept.

Trash-to-treasure is not the same as searching for treasure in trash

However, it has three practical challenges.

• First, here are not well-fleshed out models for how to construct a valuation for a business from a perspective other than that of an investor-owner. Worker-owner, consumer-owner, producer-owner, charity-owner, and even public-owner methods are relatively underdeveloped and collapse toward investor-owner logics by default.

• Second, some of those classes of owners are hard to organize into buying groups. One investor is easy to organize. Organizing workers to arrange a buyout can be much harder. Customers can be nearly impossible to organize, especially in a retail operation.

• Third, buyout financing tools aren’t designed to take into account either of the other two practical challenges.

The investor-focus of valuation, potential acquirers, and financing locks in a particular mode of succession transition. If there were a larger, wealthier cohort to follow the Baby Boomers than the transition would be easier since there would be just as many SME buyers as sellers. Unfortunately, that isn’t the case and the timing matters.

Some of the businesses that aren’t purchased by entrepreneurs will get picked up by private equity, which has its own problems. Many won’t, with closures of profitable businesses impacting many different stakeholders in their communities beyond the business owners themselves.

This is why developing other lenses around enterprise value matter. They matter for the workers weighing a buyout, the community group trying to keep a rural grocery store open, or the neighbours who like having a local hangout spot. The enterprises aren’t generic investments for those folks, they are already a part of their lives.

What they need are better measures of valuation and an ecosystem that can support social acquisitions. A few years ago we asked a community trying to build that ecosystem what was missing. Those gaps are real and worth its own post. But the valuation problem sits underneath all of it, because it decides what even counts as a viable deal before anyone gets to the financing conversation at all.

They ask where they’d use it. Not how. Where.

It used to surprise me. It doesn’t anymore, because I’ve had some version of the same conversation dozens (at least) of times to recognize it as a pattern rather than a series of coincidences. Someone runs a board, a co-op, a community fund, a grant program, and they’ve heard that there are better ways to count preferences than the one they’re using they’re curious.

Sometimes they’re even excited.

But then the stalling point isn’t about how to count ballots better, but about when to hold votes at all. Indeed, sometimes when I suggest possibilities the response is “that’s not a great place for a vote because that’s where we have conversations about what matters to us as a group; we have a process built around sharing our perspectives and if we just voted we wouldn’t get that rich discussion”.

I am not going to suggest getting rid of a good conversation. Indeed, I am hoping we can have more of them. But the mechanism question and the integration question are not the same question, though it is easy to conflate the two.

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The math is the easy part

Tell someone that simple plurality voting can produce a winner nobody really wanted, or that ranked-choice methods solve for that, and they nod along. The theory isn’t the obstacle. Kenneth Arrow showed decades ago that no rank-order system can satisfy a modest set of fairness conditions once you have three or more options on the table, and the mechanism design literature since has mostly been an extended argument about which compromises are least bad. That’s interesting, but it’s not what stalls people.

What stalls people is the next question, which they usually arrive at on their own, a little uneasily: okay, so if we hold a vote, what happens next?

Decisions need to be implemented

A vote produces a result. An organization has to live with that result for longer than the vote itself lasts. Those are different problems, and a lot of voting-system advice answers the first while ignoring the second entirely.

When Norman Kearney, Sean Campbell, and I ran a participatory budgeting pilot with the City of Kitchener, the design question that mattered most wasn’t which algorithm to use. It was what the result needed to be able to do after the vote closed. Could it be implemented? Did it engage enough people to carry the weight of legitimacy? Does it actually reflect the preferences of residents who voted? Would it be a playground people wanted to play in?

This isn’t just a public engagement issue, it also impacts collective efforts outside of government. When we created the Legacy Leadership Lab Community Continuity process Meg Ronson, Tara Campbell, and I ran was an even more direct test of this. We built the outputs to travel across three different funding scenarios because we had no guarantee any of them would materialize. In the end, none of them did. But it did surface what mattered in our collective work.

That’s the part that doesn’t fit into “where would we use this.” The honest answer to that question is: it depends entirely on what the result needs to do. Part of it is about the result, but part is also about what takes you there.

The neutral container that isn’t

John Ralston Saul has a line I keep coming back to: “voting is just the punctuation – the periods and commas of democracy. The democratic sentence is all about getting involved – engaged – speaking out, being visible in whatever way suits you”. He’s right, and the corollary is the part people skip past. The mechanism you use to punctuate that involvement is not neutral scaffolding sitting underneath the real decision. Method of equal shares votes, proportional representation, and straight majority rule each encode a different theory of whose preferences count, under what conditions, for how long.

These different theories also change how people talk to each other. If you just let a leader make the decision then everyone is going to bombard that leader with requests and ignore each other. If you hold a first-past-the-post the style vote, then people are going to quickly form blocs and bombard the handful of undecideds in the middle to come to their side without any attempt to form connections across difference. If you use a proportional voting system, including the participatory budgeting models supported by Polls, then persuading anyone with a vote just a little bit can make a difference.

This is why “where would we use this” is the wrong first question, even though it’s the one I get asked almost every time. The right first question is what are you trying to achieve. If it is just a decision, any decision, then having a leader decide is fine. Hell, having a coin flip decide is fine.

If what you want is a decision that reflects the preferences of the group, there are better and worse ways to see that happen. There are better and worse ways to bring people together.

If you want to use the decision to create conversations, to create capacity, amongst that group then you have to design for that peer-engagement. You have to provide time and space for it. You have to incentivize it.

The vote is part of the design, not all of the design, but a critical part of the design. If you are running a truly participatory process the focus and authority it gives allows doesn’t just solidify a choice, it creates capacity. It creates power.

Good hourly rate, always brought in for interesting work, get to meet a lot of people, and the folks who hire you are usually respectful and appreciative clients. As far as paid work goes it is fantastic.

I always wonder about the other side of it, which is why are people hiring consultants anyway?

Source: Apparently an Etsy listing that once existed by is now lost to the ether

There are the reasons that seem to make intuitive sense, like needing highly-skilled people on a temporary basis because you don’t have the internal capacity for one short-term project or needing specialized professional expertise in a similar manner to how you would hire a lawyer or accountant.

There are also the cynical reasons. A decision was made and you need an external source to credibly justify the rationale for it. Leadership wanted to cut a bunch of jobs but firing people feels icky so you hire someone else to do the hard bit. Neoliberal cost-cutting has resulted in a government incapable of running itself, so while you could hire skilled civil servants as a cost-cutting measure you fire them all and hire management consultants at many times the base salary to do the same job but worse.

Somewhere in-between these two poles is the kind of work I usually do, which is largely strategic planning with some evaluation work.

I say somewhere in-between the sensible and the cynical because I do think there is real expertise involved in doing this kind of work, but the work itself is odd. There is sometimes a bit of external research involved, though more often than not it is work that staff could do given a bit more time and resourcing. There is also synthesizing findings and presenting them in a way that an organization’s leaders and other key stakeholders can understand, providing some common language for everyone to work from.

That’s all true, but at its core what you are usually presenting back is information that already exists in the organization itself. Yes there are hard questions that people are trying to answer with a strategic planning process, but the people who know those answers are already in the room.

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Why do left hands and right hands have such a hard time talking?

The problem here is that the bits and pieces of an organization work together, but they don’t always talk together. Information gets trapped in little pockets here and there, but because of the way organization hierarchies work they stay trapped here and there.

A core issues is how organizational production works. UCLA economists Alchian and Demsetz wrote in 1972 about the value of team production in organizations. Their core idea was that value that emerges from coordinated group effort in ways that can’t be disaggregated back to individual contributors. A surgical team. A software development group. A functional editorial process. The value doesn’t live in any one person but in the coordination between people, the knowledge flows, and the complementary skills that people have figured out how to fit together.

A lot of this team production happens at the micro-scale of the individual production unit. Some of it occurs at a meso-scale where these pieces integrate together, thinking about something like the production of an entire factory or hospital rather than the individual production line or clinic.

At the overall organization-level this team production comes across as strategic planning, and at the core of strategic planning is capital allocation. Strategic capital allocation is about deciding how to build long-term organizational capacity like process improvements, infrastructure, capability-building, and hiring decisions, which in turn impact the capacities which determine how day-to-day operations function.

The tricky piece is that the nuances of which of these investments will actually pay off are known by those people doing team production on the micro-level but have a hard time transferring those insights all the way up to the strategic level. Moreover, those folks on the front lines are rarely the ones writing the cheques that back those strategic allocations. Good strategic planning should tap into those insights from the whole organization to guide those strategic allocations.

Three ways capital allocations break

James Surowiecki wrote The Wisdom of Crowds not only as an argument for collective decision-making, but also as synthesis of research describing when it does and does not work well. There are three key elements needed: diversity of mental models (not just preferences, actual diversity in perspectives), independence (views formed without being shaped by each other), and decentralization (no single gatekeeper filtering what information enters the process).

Most budgeting processes violate all three at once.

Hierarchies turn measurement into a game that undermines the quality of information being shared in budget consultations. Diverse perspectives get stripped of their nuance and judgement before reaching decision-makers. Most importantly, at its core the centralization of decision-making ensures that individual judgement is lost and participatory elements in internal budgeting processes are amongst the most performative approaches to consultation.

Whatever else a strategic planning process achieves, if it is not connected to how the organization sets its priorities (ie. the budget) it will systematically discard the information organizations need to take advantage of team production opportunities.

Flat is not neutral

The radical alternative is to flatten organizational decision-making, which is usually where me and many of my ilk get brought into strategic planning. We open the process up, let people submit ideas, run workshops, run surveys, and buy lots of sticky notes.

This Substack is deep in the pocket of big post-it

Unfortunately, participation without structure doesn’t eliminate power, it just further hides it. This is what Jo Freeman was getting at in The Tyranny of Structurelessness after being heavily involved in feminist organizing in the early 1970s, she kept observing frustrating patterns as people kept trying to remove hierarchy without naming it. This doesn’t get rid of hierarchies. Instead, it makes them unmanageable, because now you can’t see it, name it, or do anything about it.

There is a value in strategic planning of connecting insights with resourcing but making organizational power explicit. For example, voting is great, but if those voting don’t have equal authority in the organization they don’t need to have equal weight. It is uncomfortable, but power is uncomfortable. Surfacing what is already there, makes it legible, makes it something you can actually govern, and allows a clarity to arise when addressing it critically.

This can come about in a variety of ways. For example, if considering the budget of a particular unit maybe have roughly a third of the decision influence toward the department most directly affected, while two-thirds of the voting power comes from across the organization. The exact split matters less than the principle, that decisions are connected to both the individual unit and the organization of the whole.

Independence is infrastructure

Protecting independence within a structured process matters more than most designers allow for. Anonymous input mechanisms are important not because people are dishonest, but because hierarchy shapes expression in ways participants genuinely don’t notice. If senior leaders signal their preferences before others have formed views, you are not harvesting collective intelligence. A head nod from a leader snowballs as people trying to anticipate that leader’s whims fall over themselves in excessive agreement.

Evaluation post-investment is just as important to strategy as strategic planning itself. Systematic review of both successes and failures is often seen as accountability, but it is more than that. It is opportunity identification. It is reprioritization. It is the way that operations can deviate from plans in ways that allow the organization to learn.

It can be done. But first you have to trust that the people with the answer are already in the room.

Launch a thousand blog posts?

Ok, maybe we’ll constrain it (a little) to powers of social planning. Still pretty big and broad powers, and still a question that has focused the mind of many an economist over the years.

It has also been an issue that has (sort of) been solved a few times. Hermann Heinrich Gossen worked out the core logic of optimal resource allocation in 1854, though it didn’t really catch much attention at the time. William Stanley Jevons arrived at the same result independently a few years later, though if you’ve come across his work it is probably because it has re-entered the zeitgeist to explain tech substitution in sustainable energy and artificial intelligence.

I say the issue has sort of been solved for optimized economic planning because what you need to do said planning is highly unrealistic in practice. In part because of this (and the cold war) there was a push in the mid-20th century to prove that markets could produce a similar optimal economic result, which economist Kenneth Arrow (a self-described democratic socialist in his youth, and a fellow-traveller throughout his life) helped demonstrat this result.

The only winning move is not to play

Much like the omniscient planning result, market efficiency also only works under a highly constrained set of assumptions.

That said, the have been multiple starting points to approaching the question of how to make planning efficient.

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Triangulating onto a target

The Law of Equimarginal Utility, which Gossen and Jevons developed, says this: at any optimal allocation of a scarce resource, the marginal utility of the last unit devoted to each use must be equal. It is the natural mathematical extension of the logic that efficient allocations look for the highest value per dollar across a whole range of goods.

Eighty years after Gossen, the First Welfare Theorem from Arrow-Debreau showed that these could be achieved through markets. With a specific set of conditions that include complete markets, no externalities, perfect information, competitive equilibrium, market allocations are Pareto efficient, which means that no one can be made better off without making someone else worse off. It is hard for those assumptions to all hold, but if they did then so would the theorem.

Both achieve efficiency if their heroic assumptions hold. A competitive market achieves the equimarginal utility condition across participants without setting the allocations directly, but by letting prices do the calculation through decentralized exchange. The omniscient planner does it directly by knowing the benefits and costs of each item.

The planner’s problem

To reach the equimarginal optimum through calculation rather than markets, a central planner would need complete knowledge of every individual’s utility function, every initial endowment, every production possibility in the economy, and the computational capacity to solve a continuous economy-wide optimization problem as all of it changes in real time.

The socialist calculation debate of the 1930s was a serious attempt to find a way around this. Oskar Lange was a Polish mathematical economist who managed to be both a committed socialist and a rigorous theorist, which made him uniquely positioned to take the planning problem seriously on its own terms. His contribution was the most elegant attempt: if planners could observe prices and adjust them iteratively based on surpluses and shortages, they could in principle simulate the market without private ownership.

Friedrich Hayek, the key organizer behind the Mont Pellerin Society which has shaped the political-economic consensus that has organized the world for most of my life, objected to this approach. He laid out an argument focused on the challenge of aggregating knowledge that was not primarily mathematical. His point was epistemic: the relevant knowledge for economic coordination cannot be centralized in principle, not merely in practice. It’s tacit, local, contextual and distributed across millions of people who can’t fully articulate what they know and couldn’t transmit it to a centre even if they tried. Hayek argues that the planner can’t get the information even if they want it. And even if they got yesterday’s version, it would have already changed. That’s why under the right conditions markets work really well.

The small print

“Under the right conditions” is doing the heavy lifting there. The conditions of Arrow and Debreu are demanding: complete markets, no externalities, no buyer or seller large enough to affect prices unilaterally. Few actual markets come close.

That said, the reality is that neither the planning nor the market approaches achieve their optimized goals in the real world. Sometimes one works better than the other, sometimes neither works particularly well, and sometimes we just have to figure out how to make things work on our own.

What this leaves us with is thinking about planning at both the grand national scale and the community-level micro-scale. The level at which the process is just as important as the outcomes. The level at which trust is core to holding everything together.

It is also critical here to highlight that when it comes to Pareto optimization, that idea that no one can be made better without making someone else worse off, distribution is irrelevant. If 673 million people go hungry each year around the world, the appropriate Pareto optimizing solution can’t be one that takes a penny away from anyone’s wealth. The consequence here is that if hunger comes from not having enough money the market’s inability to provide food is in no way a sign of inefficiency.

We’re all muddling through

The planning debate tends to get framed as a binary standoff between markets and governments. As a practical matter, both have inherent flaws and there are a wider variety of ways to organize economic activity beyond them. Instead, it is worth thinking about institutional design from a sense of opportunity cost and ethical choices. There isn’t a perfect answer that always works all the time, but some answers that work sometimes in some situations.

The equimarginal utility condition is elegant and, in practice, largely unattainable outside of textbooks. What we actually have is a series of approximations, each with its own failure mode and its own costs. Markets approximate it for excludable private goods and charge the price of ignoring everyone who can’t pay. Technocratic planning approximates it for public goods and charges the price of pretending someone has the knowledge they don’t. Democratic collective choice approximates it for politically legible priorities and charges the price of everything that doesn’t make it onto the agenda.

I wanted to share in this post an interesting conversation I had with Josh Davila, who runs the Blockchain Socialist podcast. I’ve long found blockchain to be one of those technologies that seems to have a lot of potential but doesn’t quite hits the mark. Doesn’t mean it can’t, just means it is not there yet. And because it is tied to questions of governance it is one of those fields that is up my alley.

Because of that, folks who are trying to use the tech for interesting ends are of interest to me. Hence, from the title forward Blockchain Socialist has been an interesting outlet to me.

As an added bit of fun, Josh also asked me for feedback on the interesting Bread Cooperative, which is a sort of international worker co-op focused solidarity-focused applications built on a decentralized infrastructure. There’s an interesting tension in that.

The whole experience was also interestingly timed.

I recorded this conversation from a hotel room in Montreal. I was in town for the Cooperators annual general meeting, as I am happy to be the Board Chair for their foundation the Cooperators Community Funds. Somewhat serendipitously, the episode dropped the day after the Cooperatives and Mutuals Canada Congress wrapped up.

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Intelligences collective and constructed

The conversation covers a lot of ground. Collective intelligence and how it differs from what LLMs actually do. The participatory budgeting experiments I’ve run with the City of Kitchener. The structural absurdity that it took me three months to incorporate a co-op in Ontario and less than a day to set up a for-profit corporation. The problem of foundations spending 5% of their endowment on grants to fix problems caused by the other 95%.

Of course, the core is a conversation about the uses of and challenges inherent in the wildly varied blockchain space and where it does and doesn’t connect to collective intelligence. Where I find it interesting is that this is a set of technologies that is focused on governance. Currencies and cryptocurrencies are not only tools for enabling economic exchange, they are also governance tools used for enabling and controlling activity. Non-fungible tokens (NFTs) aren’t just about goofy-looking GIFs, they are governance tools for staking an ownership claim. Decentralized autonomous organizations (DAOs) are explicitly governance projects, often drifting about in search of an actual use case.

Governance structures can be viewed as the “rules of the game” when it comes to enabling collective intelligence and, ultimately, what that collective intelligence gets used for. Are they good rules? I like going to a great quote from the management cyberneticist Stafford Beer: The purpose of a system is what it does.

Stafford Beer: The real Dos Equis guy

The collective intelligence that comes from the rules is emergent and can be highly unpredictable. In human systems emergence can lead to incredible creativity, adaptability, and empathy. In human systems emergence can also lead closed-mindedness, rigidity, and hubris. It really is a matter of how the rules of the game work, and the pulling together of diversity and complex interdependence is critical to enabling positive outcomes.

It is also really easy to assume that how emergence works in a virtual system would clearly map over to how it works in the real world. Yet many of the most difficult issues arise when it comes to how the interface between the real and the virtual, whether that is bringing things onto the blockchain or pulling them off the blockchain. Bringing things onto the blockchain suffers from bounded rationality, which can be viewed as the fundamental problem that information collection is always costly. Pulling them off the blockchain suffers a parallel challenge, which is that it is impossible to prepare contracts which can capture all possible exigencies.

The technology for decentralized finance, for international cooperative capital, for provable off-chain verification, is largely there or nearly there. The bottleneck is the interface between the virtual and the material. Wherever blockchain-based systems have to connect to the real world, physical assets, legal jurisdiction, or actual human labour, things get complicated fast.

It also means that the easiest thing to build in that environment turn out to be memecoins, because they don’t have to connect to anything real at all.

The most dangerous joke ever?

Collective intelligence, artificial intelligence, and finance

The distinction I keep coming back to is the one between collective intelligence and artificial intelligence. An LLM draws on the recorded outputs of individual human minds and aggregates them into something that functions are a prediction engine and then some.

It does need to feed on human creativity. Without that, it degrades. Model collapse is the technical term. The system needs to feed on individual human creativity to survive. When it doesn’t, it breaks down.

Of course, collective intelligences aren’t always productive either. Financialization of major sectors of the economy is fundamentally an act of collective intelligence, not artificial intelligence. Indeed, the importance of thinking about new ways of engaging in planning to apply collective intelligence is critical.

At its core a Politburo allocates resources across time at large scale is engaging in planning. So is the board of a large corporation. So, indirectly, is a bank or investment firm. How and to what end are the key differentiators between different planning models.

Number go up

The political consensus in many countries, including mine, largely agrees that the “economic question” has been solved. Of course, when the political consensus decides the economy is a solved problem, what’s left for politics is tribalism. This is a big part of why alternative financial models and the distribution of wealth matter.

Ceding the most powerful long-horizon planning tools to the most short-term-thinking industry on the planet is not a principled position.

It’s unilateral disarmament.

I’ve written versions of several of these arguments here before, on rationing and voting system design, on the community ownership as a financial tools, on the logic and future of social finance. The podcast let me pull a few of those threads together in conversation with someone who is actually trying to build some thing. One might even say that what it is great to interpret the world, in various ways, the point is to change it.

The episode is available wherever you get podcasts. You can also find Josh’s work and support the show at The Blockchain Socialist.

There are a lot of different ways you can structure the rules, processes, and social systems that humans use to work together and the choices of how to make those arrangements are important. They are also, more often than not, made out of expediency at critical time more often than they are designed with deep intentionality.

For businesses the first governance question that has to be decided when they are founded is what their ownership structure looks like. Most default to a for-profit corporate model and that approach certainly has its strengths, including clarity of control and a strong structure for accumulating and investing capital.

Yet there is evidence that this governance structure is not the most efficient ownership structure much of the time. Notably, there is a broad series of studies which find that businesses which have substantive worker-ownership are more productive than those which are only investor-owned, which from an economic efficiency angle is strong case that those businesses are better governed when they have that worker-ownership.

That case doesn’t usually get made because investor-ownership is the default way of organizing enterprises in a modern Western economy. There are many different stakeholders in a modern enterprise including workers, customers, suppliers, distributors, governments, the environment, civil society and, of course, investors. By default the investors are locked in as the privileged class when it comes to governance regardless of who in the enterprise actually generates the most value or bears the most risk.

The problem isn’t that investor-ownership can’t be the most efficient governance model. It often is. The problem is that it is usually a lazily inherited default rather than an intentional structural choice.

I have sympathy with using the default because there it is hard to start and run an enterprise, particularly while you are trying to find the right product-market fit. That said, I believe that in those critical moments when a business model is being built the lens should be broadened to be about finding the right product-market-governance fit, the governance structure should be selected to match who creates value and who bears risk in a given enterprise, the same way a product is designed to match a market."

The tricky thing is you often don’t know in advance who those most critical stakeholders are. Collectively, you don’t always know who you are.

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The menu of options

I just spent the better part of a week with folks in the cooperative sector attending both the annual meeting of the Canadian Association for Studies in Cooperation and the Cooperatives and Mutuals Canada Congress. This is a group built around alternative cooperative ownership structures, but even within this group there is a lot of variety. Worker cooperatives, producer cooperatives, consumer cooperatives, coop federations, and different types of multi-stakeholder coops are all substantively different structures.

It is also quite possible for a coop to flounder because even though the enterprise itself might be viable, the coop form selected wasn’t the right fit. For example, a grocery focused on local food might be set up as a consumer coop but would have had better access to capital and more robust local supply chains if it were actually set up as a producer coop of local food suppliers.

It is a tricky thing to set in stone a governance model which focuses on one stakeholder class as the membership before an enterprise has worked out all the kinks in its operations. For-profit governance dodges this problem by not trying to solve it. Investors are the residual claimants by fiat, and everyone else’s interests get mediated through contract. Efficient governance in the most narrow sense.

Structures that hold uncertainty

Holding a bit of humility about how complex organizations work can create space for the evolution of an enterprise. What I observed as a member of Union Sustainable Development Co-operative while it was getting off the ground was interesting from a governance angle. Initially it looked like buying a small property, likely just a house, and use that to provide affordable housing. A key insight that sparked this development was that it is really hard for people to make retail-level investments in affordable housing in their own community.

The first attempt to acquire a property failed. I don’t think I have a clear sense of exactly how many possible acquisitions fell through, but it was a few. What was interesting to see was that each failure built organizational muscle, from new relationships to improved financial literacy, to legal documents and infrastructure which all strengthened Union’s governance. Each failure did increase organizational strength and ultimately when the first acquisition was made it wasn’t a house but two buildings that contained almost 60 apartments. Throughout the process the investment coop built and expanded its membership.

Another coop started as an investment coop as well with the assumption that the initial investors would also share a lot of overlap with the customer base of an existing company, presenting a pathway for a possible consumer coop conversion. Through the process what seemed to happen was a shift in the likely membership towards organizations that actually supply that business. This then shifted further to a membership composition that I’d characterize as more interested in providing patient capital to enable social acquisitions, with less of a direct tied to any particular business and more of a commitment to broad-based community ownership.

What was interesting in this is what this second investment cooperative offered, which was fluidity in the membership. Three distinct types of stakeholders showed interest at different points in time and the governance structure was able to adapt to that. Had the governance structure focused on one particular membership type too early, a suboptimal model would have been frozen. Indeed, it is still unclear whether this membership model is where it will ultimately land.

If the patron class who should be the membership of the coop is clear right from the start then it makes sense to start there. The investment coop model has an interesting possible use case where there is uncertainty and I expect this to be a particularly useful tool when engaging in social acquisitions in which a business being acquired had historically been run as a standard for-profit investor-owned firm.

In contexts where you don’t yet know which interests matter enough to warrant a formal governance class, the investment cooperative can hold the space while you find out. This isn’t the same as saying that fuzzy governance is fine indefinitely. As an organization matures or there is more known about a company after a social acquisition, the balance of benefits between different stakeholders will become clearer and they can be formalized.

Fit as a process, not a decision

The product-market-governance is a good diagnostic check to think through whether your governance structure is actually aligned with your value creation and risk structure. But the corollary is that fit isn’t something you achieve at founding and then have. It’s something you’re continuously renegotiating as the organization learns what it is.

For investor-owned firms, this renegotiation happens primarily in the financial marketplace through share prices, capital allocation, and management turnover. Democratic organizations don’t have the same instruments. What they have instead are participatory governance tools that work (or don’t) alongside their operations.

The organizations doing this well aren’t the ones that got the stakeholder map right at founding. They’re the ones that built structures permissive enough to survive the discovery process and then act on what they learned.

An Italian immigrant in his 30s was going to use his international connections to buy postal coupons in countries with weak currencies and redeem them at a much higher face value in the United States, pocketing the difference. The returns were pretty much guaranteed and they could be fantastic, doubling investors’ money within 3 months. Because of that, investor interest exploded, pulling in over $15 million.

Source: philately

Unfortunately, within the eight months that the investment lasted, it turned out there weren’t enough postal reply coupons around to do what he promised and pay back investors with the proceeds. Instead, the old investors were being paid back by new investors, which stopped after a series of Boston Post articles led to the whole thing collapsing.

With that the charming Charles Ponzi gave the world a lesson in the nature of financial innovation. Now, left on its own not all financial innovation amounts to a reinvention of the Ponzi Scheme… when insurance is involved it can sometimes reinvent the Tontine.

It’s not incentivizing murder, but it’s not not incentivizing murder…

As a consequence, financial investments are pretty tightly regulated. No one wants to see people putting their life savings into investments which turn out to be fraudulent. Indeed, what makes this more likely is that the nature of most investments is that they are in things that are big, distant, and hard to understand. That’s what the investment professionals and regulators are for.

One way to deal with this is to have well-regulated financial markets. Yet it isn’t the only way to do this, and unfortunately some of our most promising community-building pathways are closed-off because of it.

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The poll tax on community ownership

Cooperatives are built differently. Their owners are also their members, using a democratic one-member, one-vote governance structure rather than the one-share one-vote governance structure of a corporation. This doesn’t make a cooperative immune from malfeasance, but it does put in place a different and quite robust set of controls.

Because of this the regulatory needs should be different. The cooperative’s members are the governance and their incentives in raising and deploying capital are different from those of a standard for-profit corporation. Most notably, the members of a cooperative are relatively equal in their investments into the organization, which limits the opportunities for fraud compared to a company with a single controlling shareholder. Alongside this, the democratic election of a coop’s leadership provides an additional institutional check that is missing in a standard corporate model.

In effect the coop model is itself a governance tool that does much of the heavy lifting that regulatory authorities are built to do. However, it is not treated as such. Instead all of the costly cooperative governance apparatus is added on top of the same apparatus as the corporate model which in effect creates an added burden on coops compared to for-profit corporations.

This is made all the more difficult because this regulatory burden kicks in under conditions that don’t really scale with the size of a coop beyond a relatively small number of members. The result is that there is a regulatory burden that kicks in for cooperatives that doesn’t scale in line with the size of the membership of financial raise. Instead it is pretty much like a poll tax that is equal for every organization which in practice ends up being highly regressive.

Source: Margaret Thatcher, of course

Raising funds

A few years ago I put $10,000 into Union Co-operative, an investment cooperative in Waterloo Region. As part of Union’s development they prepared a public offering statement, a very thick and very expensive legal document, which let them bring on more than 35 members who could each invest up to our maximum $10,000 amount.

The cost of that public offering statement is hard to pin down exactly but almost certainly went into six-figures. Now think through what that means for a relatively small acquisition like buying a $500,000 house to see more than 20% of the value of the acquisition being eaten up by preparing a legal document. The result is that it means if you’re going the go that route it strongly incentivizes a larger purchase, which in Union’s case meant a $16 million apartment portfolio. At that scale, the compliance costs are painful but survivable.

Now think about what this means for other use cases. One place where the coop sector could play a big role is in small business succession planning and the enabling of social acquisitions in which communities can buy the companies that are important to them. This could be as simple as neighbours pooling together the resources to purchase a corner store or local cafe, something that as a business might be something in the range of $150,000 to $200,000.

Seems doable, but the preparation of a public offering statement could easily cost as much as the business itself. In Ontario, under the Financial Services Regulatory Authority’s (FSRA) rules for cooperative corporations, a cooperative that wants to raise capital from more than 35 investors must file a public offering statement before it can do so. From their site:

A co-op must file an offering statement when:

1. They are planning to sell securities to more than 35 people

2. When the sale of securities increases the number of co-op security holders to more than 35 people

The compliance cost for pooling $200,000 from a community of cooperative members can exceed the value of what you’re trying to buy. A Bay Street firm can amortize a six-figure legal bill across a billion-dollar raise to build a cobalt mine on the other side of the planet. A community cooperative trying to save a corner cafe cannot. The barrier is not the spirit of the requirement, which is to protect small investors, but it is in the design.

Lattes here have terrible Yelp reviews

The exemptions are worse than they sound

Luckily the rules do include exemptions.

Exemptions

1. If the issue of securities does not increase the number of security holders to more than 35 people, an offering statement is not required

2. Co-ops with more than 35 security holders are not required to file offering statements if:

• They plan to issue membership shares or member loans as a condition of membership, where issue value does not exceed $1,000 per member per year, and the total held by any member is less than $10,000

• They plan to issue new shares or member loans to members by using patronage returns owed to members

• They plan to use dividends, owed to shareholders, to issue new shares

A cooperative can avoid the offering statement requirement if it raises less than $10,000 each from 35 or fewer investors. Or it can raise less than $1,000 per member per year, which makes it difficult to actually assemble enough capital to buy a business or property.

So for a $200,000 acquisition at $10,000 per member, twenty investors are required. This is fine for what it is, but it does limit the size of the community that can be involved in the coop as a $10,000 ask is a big barrier for many people. However, bringing in members with smaller amounts can also be tricky as someone who comes in with a $500 investment will be taking away a valuable seat that might need to be saved for someone who can bring the full amount to the table. In effect, the regulatory requirement stands in the way of a few key cooperative principles, notably Voluntary and Open Membership, Member Economic Participation, and Concern for Community.

Ultimately it forces moving in one of three directions which are all challenging for a community interested in purchasing a small business as a community.

First, you can go the costly public offering route which will in turn make a small acquisition economically infeasible.

Second, you can go the maximum $1,000 per member route and bring together a large and inclusive community which cannot raise enough money to actually make a purchase.

Third, you can go the $10,000 per member route and leave a lot of enthusiastic community supporters on the outside.

Capital can be raised, but the democratic cooperative logic is difficult to follow in doing so. You can comply, or you can be inclusive. Doing both, at the scale of a neighbourhood requires either a regulatory exception that does not exist or a compliance budget that eliminates the financial case for the whole enterprise.

None of this is, strictly speaking, intentional discrimination against cooperatives. The requirements were written for arms-length investment in for-profit enterprises, then applied universally because the alternative of recognizing cooperative member governance as a legitimate substitute for regulatory oversight would require regulators to think differently about what governance actually means.

The system is not biased against small community enterprises so much as it is indifferent to them. Unfortunately, the consequence is that we are losing opportunities to build more resilient, community-driven local economies.

For each of them at around three months of age, they realized that if I left the room I still existed and would come back. That’s a pretty calming experience. Before that if I left I’d cease to exist and not only did they not know what I’d be doing, they also wouldn’t be sure if I still existed.

A toy in the hand is worth two in the existential void

That is a scary thing and they’d absolutely freak out because they’d feel like they were alone in the world, completely defenceless, and as little babies how would they be able to survive?

Luckily, most people graduate beyond this phase and gain the power of object permanence.

Unfortunately, those that don’t get promoted into management.

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The map is not the territory

Every organization has two structures running simultaneously. There’s the formal one with policies, the reporting lines, the documented procedures. Then there’s the informal one, the shadow system, that informal network of relationships, workarounds, and accumulated practical knowledge that actually gets things done when the formal system runs out of answers.

Managers are often afraid of shadow systems because they can’t monitor and control them. Unfortunately, it is impossible to map out all possible contingencies in any contractual or organizational arrangement. Formal rules are written in advance by people who cannot possibly map out all possible futures.

A consequence of this is that well-meaning people working together will work outside formalized systems to make things happen. Sometimes, this leads negative consequences for the organization, and this is largely what managers are trying to control for. Often, it leads to eliminating innovation that could advance the collective. Usually, it reduces trust between people in the organization. Always, it fails.

Is the juice worth the squeeze?

The budget you keep cutting

There’s an idea from organizational economics that doesn’t get nearly enough airtime outside of academic circles. Richard Cyert and James March, writing way back in 1963, identified what they called organizational slack. This is the cushion of excess resources that accumulates in organizations like spare capacity, redundant relationships, time not fully committed, budget not fully allocated, and empty meeting rooms. Slack, in their framing, isn’t waste. It’s the buffer that lets an organization absorb shocks, experiment with new approaches, and adapt when conditions change.

The management reflex is to squeeze all this out. There is a whole language of consultant-speak which amounts to the elimination of slack, like lean operations, efficiency drives, and rationalizations/ It is aimed at eliminating the gap between what an organization is doing and what it could theoretically do if everything went perfectly. This seems sensible on a spreadsheet.

Source: not a spreadsheet

Shadow systems run on slack. The person who built an informal peer-support network during a difficult period did so because they had enough room in their day to notice a problem and do something about it. The workaround someone developed for a broken procurement process cost a few hours of their discretionary time. The relationships that get activated in a crisis were cultivated across dozens of low-stakes interactions when people get to develop relationships with each other.

A workplace that has water-coolers and retreats with loose schedules cultivates slack. A workplace where people have to pee in bottles to meet quotas doesn’t.

What survives the burn

The adaptive cycle from resilience theory is useful here. Complex systems like ecosystems, economies, and organizations don’t run in a straight line. They cycle through growth phases (the front loop) where efficiency increases and resources get locked into established structures, and then through release and reorganization phases (the back loop) where those structures break down and create the conditions for something new.

What survives back-loop collapses?

Not an unreformed formal structure, as that’s usually what broke. What survives is the tacit knowledge, the relationships, the informal workarounds that kept things running even when official processes failed. After a crisis, it’s almost never the org chart that tells people what to do. It’s whoever knows how things actually work.

This means shadow systems aren’t just a tolerance, they’re the adaptive infrastructure. The informal networks your organization has been quietly growing are part of what will make it resilient when things go sideways. Suppressing them in the name of control doesn’t just create friction in normal times. It actively degrades your capacity to navigate the hard ones. And draining the slack that sustains them accelerates the damage.

Organization (un)design

None of this is an argument against formal structure. Policies matter, accountability matters, and the worst shadow systems are the ones operating entirely in the dark invisible to leadership and parasitic on the whole. The goal isn’t to abolish the org chart. It’s to stop mistaking it for the whole picture.

Cultivating shadow systems in practice means creating enough psychological safety that informal coordination is legible rather than hidden. Asking, genuinely, how things actually get done is not as a surveillance exercise but as a learning one. Treating the workaround someone developed in response to a broken process as signal about the process, not as insubordination.

It also means building pathways for niche innovations to scale. The person who figured out a faster approach to onboarding contractors has done organizational R&D on your behalf at no cost. The question is whether you have any mechanism by which that distributed innovation can be recognized, shared, and grown. When it doesn’t, leadership will have the best chance to learn of its existence during an exit interview.

One of the episodes titled Fool’s Gold has the contestants compete to create the most viral video possible. The #2 winner is (sort of) a table top role-playing game actual play run by a comic who doesn’t really know how to play a table top role-playing game actually works.

Back to the main event. The three contestants, Mike Trapp, Rekha Shankar, and Jordan Myrick, each receive $10,000 to invest in a series of video pitches. Whoever invests in the videos with the most hits on social media wins.

Ten pitches were made of varying amounts, Dragon’s Den style, with a total of $30,000 to spend between the three contestants. By the end all the money had been deployed, plus additional funds from the host Sam Reich, and all the projects were launched because they were all funny and why wouldn’t they be?

This is a soft budget constraint, which basically means that when there’s a cost overrun in this system an external actor covers the difference. In effect, the $10,000 given to each contestant to invest isn’t the actual constraint on what gets funded. By the time the final pitch was made for $20,000, one contestant was out of money and the other two had $3,899 combined to invest.

The remaining $16,101 had to come from elsewhere or this proposal wouldn’t have been funded at all. Good thing it did, because that last one about the service’s most popular creator leaving the site was by far the biggest hit on social media. In the end everything was funded, the process was chaotic, and the episode (plus it’s social media spin-offs) was incredibly entertaining.

It is also a terrible way to actual distribute funds, even though the first-come-first-serve is the default approach taken in most organizations.

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To the back of the queue

The Fool’s Gold approach in which there is a pot of money and people ask one at a time how it works in any organization where a worker, unit, volunteer, or customer makes a request for money to buy something and the person or committee in charge of approving has to give it the “thumbs up” or the “thumbs down”.

Going over budget wasn’t designed but it also wasn’t unexpected. The problem isn’t that any individual decision was irrational it is that the decisions were made independent of each other with resources that are fundamentally not independent of each other.

On opportunity cost

I like ideas from economic theory that seem to be hard-wired into economic systems regardless of how they are structured (capitalist, socialist, feudal, etc.) and I think a strong case can be made that the most fundamental of these is opportunity cost. This is the concept that when you make a choice the cost isn’t just what you observe the direct cost to be, but what you lose by not being able to pursue an alternative.

The challenge with making budgeting decisions sequentially is that it is unclear what the opportunity cost of any decision actually is. Until you know what all the options are, even with a firm rather than a soft budget, the opportunity costs are unclear.

In practice, this is where experience provides a bit of a counterweight. In the actual Dragon’s Den (Shark Tank for the Yanks) the dragons are wealthy and experienced investors. They all have soft budgets and likely have heuristics like an expected rate of return they’d use to decide whether an investment seems worth it to them. Above the cutoff it is in, below it is out.

Ideally, the outcome would be pretty similar to how a rational planner would look at all the possibilities, rank order them, and then optimize the allocation within a budget constraint. With perfect information about all available proposals it likely would be.

But without that advance knowledge of what is coming up, any cutoff point is arbitrary. If the most compelling opportunities come early then that is great, they get funded. If they come in late then they have already been crowded out by lower value options.

Filling the knapsack

The general structure here is called a knapsack problem. The core issue is you have some value you want to maximize and some constraint. In the image below, it is having the most valuable books in a knapsack while working within a fixed weight limit.

Source: Wikimedia

For the Fool’s Gold episode it was the most social media engagement within a ‘fixed’ $30,000 budget for proposed viral clips.

For an investment fund, it could be the highest return given the investible capital available.

For a government, it could be the greatest benefit for a population given tax dollars spent.

For a foundation, it could be the highest social impact per dollar given as grants.

For a teacher, it could be the most learning per minute of classroom time.

The problem itself is ubiquitous.

Can it be fixed?

The fix is conceptually simple, even if implementing it well takes real work: show all the proposals before anyone votes on anything.

One of the benefits of having strategic budgeting cycles is that they can do this. Rather than processing proposals in sequence, decision-makers can have a sense of all options before allocating any resources. This eliminates redundant funding and makes trade-offs clear. You can rank alternatives because you’ve actually seen the alternatives.

There are better and worse ways of ranking those alternatives and deciding who can be involved, but at its core making those decisions efficiently is greatly enhanced by having all those decisions on the table at the same time.

Though I will put out there that as far as streaming services go, Dropout is going to be worth it.

I’d mentioned in that post that an economic modelling of volunteer-based organizations was the topic for my Masters’ thesis and one of my readers reached out and said they couldn’t find it online, which isn’t the standard these days but I guess was the case 20 years ago.

So this post is really serving three functions. First, it will provide a link so that people can find and read my masters’ thesis, which still has a lot in it that I think holds up, alongside quite a bit of material I approach quite differently these days. Second, this post will also be a bit of a reflection on the benefits of difficult writing in a way that I think complements how I’ve been thinking about the integration of AI into writing. Finally, I’ll close with a reflection on a solar eclipse.

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The context

I did my MA after we had launched the campaign on the Laurier campus to start LSPIRG, but before LSPIRG had formally been established. Given that I was in the process of organizing volunteers to start a nonprofit, as an undergraduate student in economics and political science at WLU I had noticed that in neither economics or political science had I received any substantive content about volunteerism or nonprofit organizations.

I’ve always liked the clarity of microeconomic theory because it makes it easier to assess where it is and isn’t working. Clear assumptions can make it much easier to recognize the limits of a model. It also means that if you have to go beyond a model you can sometimes adapt elements of an existing model, change them, and see what it produces.

This was at the core of what I did for my thesis. I started with a few ideas in mind that came from my courses, key ideas including the neoclassical theory of the firm, market structure models, and game theory, and exploring what it means for an enterprise to try and produce goods or services without setting a profit. My advisor Lorne Carmichael provided me with an incredible amount of support during the process of writing an MA thesis which was an unusual choice in the Queens Economics Department that had some complications attached to it (note about academia here: if it is an option no one ever takes, there is probably a reason for that).

I went the thesis route because I had decided that the MA was going to be my last degree ever, but I did want to go as deep into the nonprofit issue as I could because I saw my future involving work with the sector so I wanted to deeply understand it. Because, again, this would be the last time I’d be in a university.

Doing the work

When it came to writing the thesis itself, I read widely trying to find researchers who I’d find helpful in grounding my work. My starting point was that I wanted to take the nonprofit sector seriously in my work and, as much as possible, approach it on its own terms. Nonprofits didn’t strike me as just being artificial constructs of government agencies even when many do rely heavily on government contracting. Nonprofits also didn’t strike me as being inherently suspect for-profits-in-disguise, in large part because on its face, if you’re in the nonprofit sector for the money, it is a hard and overly-complicated grift to pull off.

So in addition to adapting the math from neoclassical economics for my analysis, I drew from three writers coming from relatively mainstream economics traditions to ground the work. The first was Lester Salamon for drawing theory from empirical work on the nonprofit sector. The second was Burton Weisbrod for his theoretical work on the application of externalities and public goods theories to what motivates the creation and use of nonprofit organizations. Finally, Henry Hansmann for his application of law and economics concepts to nonprofits and the development of a comparative approach towards looking at organization legal forms.

In addition to reading theory, I also spent 5 hours a day for three months sitting in a cafe in Kingston with a pad of lined paper drawing diagrams and doing calculus by hand to see if I could formally model some of the key issues I was using to think through the nature of the nonprofit sector. I am pretty sure that the few dozen pages of mathematical diagrams and proofs that are in this thesis were at best skimmed over by the members of my defence committee, but this ended up being some of the most transformative work for me as a writer.

That isn’t because those mathematical frameworks and writing are going to radically change anyone’s sense of the nonprofit sector. I can say from experience that over the past 20 years of this thesis being in the Queen’s library, this work hasn’t set the world on fire.

What it did do is change the way I thought about both the nonprofit sector and economics as a field. Economic models usually prioritize rational choice theory assumptions and what I kept finding as I was working through those in modelling the nonprofit sector was how often they would break down.

I didn’t have the language of complex systems at my disposal yet, but implicit in the arc of this thesis was a shift in my thinking away from rational choice theory as a baseline for my analysis towards a more complexity-informed approach. In many ways, what this looks like for my approach to economic policy analysis is trying to be more aware of limits. Limits to centralized rational decision-making. Limits to the management of information. Limits to institutional logics.

The consequence

What that looks like today is that I ask questions about the nonprofit sector in an unusual way, and this informs how I approach social finance, social entrepreneurship, and participatory decision-making. It also changed how I think about other economic sectors as well, because understanding volunteerism matters for a broad range of human social activities.

Here is where the solar eclipse comes in. While a solar eclipse is undoubtedly awe-inspiring on its own, for many astronomers it also gives them a chance to learn about the sun in ways they can’t otherwise. A solar eclipse is the one time they can get a clear view of the outermost layer of the sun, the corona. Otherwise, the light from the mass of the sun is so bright that it overwhelms attempts to observe the corona.

What you can observe in the nonprofit sector is voluntary action. Self-organization, the volunteering of time, and the donation of financial resources without an immediate, direct benefit to those providing the resources are central to voluntary and philanthropic activity.

These activities are also core to having a motivated and engaged workforce in the private sector. They are also core to having citizen-focused services in the public sector. They are also core to having engaged students in a classroom. They are the features of an innovative organization in any sector because innovation involves imagining a different future and working towards it without the promise of an immediate reward.

The challenge is that usually we don’t see these pieces as clearly because the dominant incentive structures of a system - money, votes, grades, whatever - overwhelm the nuanced nature of innovation within most organizations. As a baseline, the elimination of these pieces in voluntary and nonprofit organizations provides a good starting point for drawing observations which could then be taken into other types of organizations.

It also shows us where the best efforts in trying to create innovative organizations go awry.