Place-Based Enterprises: Small Is Still Beautiful

The real voyage of discovery, wrote Marcel Proust, “lies not in seeking new lands but in seeing with new eyes.” Seeing with new eyes requires challenging the conventional wisdom that bigger is better, that separating the producer from the consumer, the banker from the depositor, the worker from the owner, the government from its citizens is a necessary requirement for achieving a prosperous economy and a healthy society.

Seeing with new eyes means rediscovering the importance of place. Perhaps the finest empirical analysis of the relationship between local institutions and community life was conducted 50 years ago by Walter Goldschmidt, then a researcher for the U.S. Department of Agriculture. Goldschmidt examined two remarkably similar farm communities in California’s San Joaquin Valley. Dinuba and Arvin had the same volume of crop production, comparable soil quality, and similar climate. The communities were equidistant from major urban areas and were similarly served by highways and rail lines. They differed in only one major respect: The Dinuba economy was based on many small family farms, while the town of Arvin depended on a few large-scale agribusiness operations. Goldschmidt discovered that Dinuba’s family farm economy provided its residents with a substantially higher median income and standard of living. Moreover, the citizens of Dinuba, to a far greater extent than their counterparts in Arvin, were involved in building a strong community.

For example, the quality and quantity of projects that benefited the entire community, like paved streets and sidewalks and garbage and sewage disposal, were far superior in Dinuba. The agribusiness town had no high school and only one elementary school. Dinuba provided its citizens with four elementary schools in addition to a high school. The family farm town had three public parks. The corporate farm town had a single playground, donated by a corporation.

Dinuba’s residents not only invested their money in expanding their community’s physical infrastructure, they also invested their time in building its civic infrastructure. Dinuba had more than twice the number of civic associations as Arvin. In Dinuba, there were various governmental bodies that enabled residents to make decisions about the public welfare through direct popular vote. No such bodies existed in Arvin.

You would think that the government would have been delighted by Goldschmidt’s findings, for he had empirically validated the uniquely American belief that the key to a healthy society is the broadest possible ownership of productive assets. You would be wrong.

For 30 years the USDA suppressed the report. Indeed, under pressure from industry, it abolished Goldschmidt’s position and, later, the entire office that studied agriculture’s impact on communities.

Hearing the story of Dinuba 50 years later, it seems Goldschmidt must have been describing a mythical town–or a scenario long since relegated to the dustbins of history. After all, that’s what reading the daily headlines and watching the evening news would lead us to conclude.

The statistics are indeed sobering. A thousand farms a week have gone out of business since 1950. Community pharmacies have been closing their doors at a rate of about 1,000 per year for the past five years. In 1972, independent booksellers claimed 58 percent of all book sales. By 1997 their share had fallen to 17 percent. Almost 5 percent of all retail spending today is captured by a single company, Wal-Mart.

It’s getting scary out there. Last September, the federal government gave its stamp of approval to the merger of Travelers Group and Citicorp, giving birth to Citigroup, a financial enterprise with $700 billion in assets that serves 100 million customers in 100 countries. In November, Cargill announced that it would purchase the grain operations of Continental Grain, reportedly allowing Cargill to control as much as 70 percent of the world’s grain market.

These figures cannot be ignored. But they should not be overstated. The independent sector is under attack and has ceased to be the dominant organizational form, but it isn’t dead.

Consider the following statistics from Minnesota, a state with a population (4.5 million) less than half that of Los Angeles, and typical of most U.S. states:

  • More than 500 independent community pharmacies still exist.
  • Almost 40 percent of all electricity customers own their own electric company, in the form of either a municipally owned or a cooperatively owned utility.
  • Some 400 community banks and credit unions control more than 25 percent of all bank assets.
  • More than 20,000 independent farmers dot the countryside.
  • More than 30,000 second-generation family-owned businesses and 13,000 third-generation enterprises continue to compete successfully.

Place-based enterprises need not simply tap into our nostalgic yearning for a simpler and more rooted yesteryear. They can make a powerful case that humanly scaled institutions are the most effective way to go. In every sector of the economy, the evidence yields the same conclusion: Small is efficient, dynamic, democratic, and cost effective.

Consider education. Exhaustive studies have found that small schools have less absenteeism, lower dropout rates, fewer disciplinary problems, higher teacher satisfaction, and higher test scores than big schools. The evidence is so compelling that big cities like Chicago and Philadelphia and New York literally have begun downsizing their schools by subdividing existing school buildings into two or three or even four completely independent schools. And the most impressive results have occurred when the school district not only shrinks the size of the school but also shrinks the distance between authority and responsibility by delegating decision-making power to the individual school.

The same scale of institution that best cares for our children best cares for our money. In 1990, 92 percent of the nation’s 12,165 banks had assets under $300 million, and two-thirds had assets under $100 million. Happily, the Federal Reserve has found that there are no efficiencies to be gained by banks any larger than this. In the 1980s, researchers found that savings and loans that stuck to their knitting and lent close to home did not, on average, require a federal bailout.

Community banks also serve their communities best. A 1996 Federal Reserve study found that small banks made 82 percent of all commercial loans to very small business borrowers. And fees for checking accounts and other basic services were, on average, 15 percent lower at small banks than at large, multistate institutions, according to a 1997 study by the U.S. Public Interest Research Group.

In manufacturing, too, small scale pertains. Small manufacturers constitute more than 98 percent of the 360,000 U.S. manufacturing enterprises. Two-thirds have fewer than 20 employees. From 1979 to 1989, small- and medium-sized manufacturing businesses created more than 20 million new jobs while the Fortune 500 lost almost 4 million jobs.

Place-based enterprises are not only efficient, they are also wildly popular. Poll after poll concludes that the vast majority of the population supports community team policing, home-based health care, community banks, neighborhood schools, and local businesses.

In brief, community-based enterprises and institutions still command considerable resources and even more considerable respect and admiration. Today, individually and collectively, these enterprises are building on this foundation to survive in the age of planetary corporations and electronic commerce.

Meanwhile, communities around the country are looking for ways to encourage local ownership without interfering with the dynamism and entrepreneurialism of the private sector. Kent County in Maryland, Cape Cod towns in Massachussetts, and other communities have adopted comprehensive plans that explicitly call for planning bodies to support “locally owned businesses.” On the West Coast, five cities, including Carmel, California, have adopted bans on the “formula restaurant” (defined as a restaurant “required by contractual or other arrangements to offer standardized menus, ingredients, food preparation, employee uniforms, interior decor, signage, or exterior design” or “adopt a name, appearance, or food presentation format which causes it to be substantially identical to another restaurant”). Carmel is not prohibiting McDonald’s from setting up shop; it just can’t look like a McDonald’s. In essence, Carmel is outlawing uniformity–and thereby encouraging local ownership.

Since the 1970s, Congress has provided handsome tax incentives to companies that give stock to their employees. More than a thousand companies are now majority-owned by their workers. These firms must operate in the same competitive marketplace as investor-owned firms, but they tend to have a different decision-making calculus. Absentee owners might well decide to close a profitable operation if they can make more money in another location. Such a decision would be unlikely at an employee-owned firm.

And Congress last year debated a bill that would have abolished the inheritance tax on family-owned farms and businesses bequeathed to family members who continued to operate them.

We live in an era of great change. But change is not necessarily progress. As Bertrand Russell said, change is inevitable, while progress is problematic. Change is scientific while progress is ethical. We will have change, whether we will it or not. But we will have progress only if we develop strategies that channel investment capital and entrepreneurial energies and scientific genius in directions compatible with our dearly held values. This means strategies that defend and nurture place-based enterprises as the building blocks and lifeblood of dynamic, self-conscious, and healthy communities.

David Morris is vice president of the Minneapolis- and Washington, D.C.-based Institute for Local Self-Reliance. He also directs its New Rules Project: designing rules as if community matters ( This article was adapted from an address to the Place Matters conference in St. Paul on Nov. 12, 1998.

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