How decentralized systems can help rebuild local communities

Manager changing a sign from closed to open sign on cafe door.
In decentralized systems local communities take back control.
Image: Freepik.com
  • Since the 1980s, IT systems and cost-cutting led to the collapse of community social structures and the centralization of banking, hospitals and more.
  • Cutting-edge technology has changed the equation, making local management of data and resources as efficient as central management.
  • Local institutions can now be rebuilt and local communities can again manage themselves.

The 1946 Christmas film, It’s a Wonderful Life, celebrated the role of community banks, cooperatives, and credit unions in helping communities invest in their residents and build better lives. This vision, known as “community capitalism” during the post-World War II years, guided America’s recovery from the debt load and social dislocations of the Great Depression and World War II.

The mid-20th century vision of community capitalism had great power – 56% of the US electricity grid was built by community cooperatives during this period – but just as importantly helped build the social capital and community autonomy that led to the civil rights movement and related social reforms of 1960s America.

But local financial institutions are largely gone now, along with local hospitals and neighbourhood governments, killed by consolidation into big banks, big hospitals, and more centralized government. The force that continues to drive this consolidation is pressure to cut costs and the computer systems that make efficient centralization possible. However, a significant, although unintended result, is the loss of community control and citizen engagement.

From the 1980s onward, communities were under attack from the first wave of digital technology which made it cheaper and easier to manage diverse communities from a central database using centralized administration. The resulting concentration of information and financial capital led to more than half of the US’s community financial institutions disappearing over the next decades, as did local hospitals, and neighbourhood-level government. Services became cheaper and more uniform, but communities lost their local institutions and the skills, engagement, and local knowledge that go with them. As a result, communities lost control over their money, their health, and the ability to govern themselves.

By the year 2000, the move to centralization was so advanced that Robert Putnam’s book Bowling Alone described the change as the collapse of community social structure. Many factors contributed to this collapse, but one of the biggest and least appreciated factors was management by centralized digital technology. In 1980, the majority of workers were employed by small businesses serving mostly one community; by 2010 the majority were employed by big business with a national or international agenda.

This shift to centralization was reflected in stock market valuations, where the biggest companies grew the fastest. Centralization also hurt innovation, because small, young, businesses are generally nimbler and more innovative than big companies. In 1980, 12.5% of companies were less than a year old, but by 2014 this number had shrunk to 8% – and this shift likely contributed to the overall slowing of economic growth and the rise of inequality.

Why we need a local approach

Thinking in terms of national-scale policies and big business rather than in terms of networks of communities and small businesses may be the primary problem we face in addressing inequality. While it may feel more impactful to talk about billions of dollars and programmes that cover the whole country, people don’t live “in the whole country”, they live in specific neighbourhoods with specific problems. Whenever you establish a uniform policy, it is mathematically certain that you are also marginalizing atypical communities.

Inclusive policies – those that help everyone – must be tailored separately for each different community. When we discuss how national policy can help workers, we often end up forgetting about workers in marginalized communities and end up with policies that may hurt them, even while helping the majority of workers.

What is the World Economic Forum doing about the Fourth Industrial Revolution?

The World Economic Forum was the first to draw the world’s attention to the Fourth Industrial Revolution, the current period of unprecedented change driven by rapid technological advances. Policies, norms and regulations have not been able to keep up with the pace of innovation, creating a growing need to fill this gap.

The Forum established the Centre for the Fourth Industrial Revolution Network in 2017 to ensure that new and emerging technologies will help—not harm—humanity in the future. Headquartered in San Francisco, the network launched centres in China, India and Japan in 2018 and is rapidly establishing locally-run Affiliate Centres in many countries around the world.

The global network is working closely with partners from government, business, academia and civil society to co-design and pilot agile frameworks for governing new and emerging technologies, including artificial intelligence (AI), autonomous vehicles, blockchain, data policy, digital trade, drones, internet of things (IoT), precision medicine and environmental innovations.

Learn more about the groundbreaking work that the Centre for the Fourth Industrial Revolution Network is doing to prepare us for the future.

Want to help us shape the Fourth Industrial Revolution? Contact us to find out how you can become a member or partner.

Centralized, uniform management is one size fits none. Greater centralization produces greater uniformity, where small and marginalized communities suffer because they aren’t big enough to matter in the central planners’ calculations. Big banks don’t generally lend to companies making less than $1 million per year, despite the fact that these smaller companies still employ a huge fraction of all workers, especially minority and lower income workers. Huge hospital complexes and centralized city government see only an anonymous mass of patients and citizens and miss the diversity among communities.

Community capitalism is different from stakeholder capitalism because it places priority on the well-being, sustainability, and self-determination of the community, rather than focusing on individuals or society as a whole.

—Alex Pentland and Patrick Davis.

This focus on community can help to address some of the root problems with capitalism, by giving communities more control over their fate and recognizing, as economist Thomas Piketty says, that there is nothing wrong with large returns to capital, but rather that the capital is in too few hands.

Community capitalism

The opportunity today is that distributed digital networks can be as cost-effective as centralized databases and management. At the same time, distributed networks empower local communities by letting them set their own regulations and control investment in their neighbourhoods. A modern version of community capitalism can deliver efficiency along with empowerment and citizen engagement.

The superior performance of network solutions is the hallmark a new generation of digital technology known variously as “edge computing” or “federated computing”. Driven by concerns about data privacy and security, these new financial solutions don’t centralize data or control; instead, they use locally pooled data and intelligence to coordinate local actors. For instance, using an MIT-developed federated network architecture called OPAL (Open Algorithms), Fidelity Investments and the 18 largest banks in the US created Akoya.com, which replaces dangerous data sharing between banks with a much more secure distributed approvals network. The same technology is now enabling small community organizations to regain control of their resources.

Distributed networks empower local communities by letting them set their own regulations and control investment in their neighbourhoods.

—Alex Pentland and Patrick Davis.

In the case of the US, NGOs are stepping in to the fill the gap. The best and most visible example of this is the Community Reinvestment Fund, USA (CRF). Capitalizing on its presence in under-resourced communities, CRF has leveraged its network of small business lenders into a nascent digital community called Connect2Capital, which is designed to help improve access to funding for small business owners throughout the country.

Building on Connect2Capital’s early success and momentum with local lenders, CRF is now working with partners like MIT and a new startup called Kanopy, to leverage its member growth into a community platform offering small business owners quick and easy access to resources with the look and feel of a social network experience. By combining the economies of scale and advanced intelligence of a platform with the resource distribution enabled by a federation of local lenders, local communities will be able to determine how best to withstand and adapt to future shocks.

Despite the centralization of banking, medicine, city government and more, there remain thousands of credit unions, coops, small hospitals, and neighbourhood committees that are dedicated to delivering the responsible, affordable resources needed to help marginalized American communities join the mainstream.

We have the opportunity to flip centralized systems on their head, so that it works for all our communities rather than just the fortunate few. Providing equitable access to financial capital, data, and social capital such as skills and know-how is essential to creating a just economy that works for all.

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