Centralized vs Decentralized Systems

The basic level of human interaction is based on decisions. Without a decision, humans could not survive. We make decisions to eat, talk, walk and interact with other human beings and objects. With every decision, there is an effect. If you choose to walk you burn calories; if you talk to another individual, ideas are transferred, and if you decide to make an action you can produce, maintain or destroy value. Decisions can be made by the self, two individuals or groups. Decisions by individuals shape nations as they evolve; they can be consensual or forced.

A system is an organized scheme or method and decisions are made to drive processes in these systems. Every human group functions with a system or many systems where on one extreme, decisions are controlled by a single individual and on the other every individual makes 100% of their own decisions (a fully distributed system). I will attempt to describe how systems that are more centralized compare to systems that are more decentralized. In the end, all systems function in a world with limited resources and there is a trade off between resource efficiency and meeting the individual's needs and wants.

Centralized systems are beneficial because they can increase efficiency in the systems resource handling decision-making process this can lead to more efficient means of production. Nationwide supermarket chains are a good example of a centralized system. The individual's decision making is limited to a small generic selection of product when compared to the variety that can be found at several local boutique stores. Because of this limited selection, the store maximizes their space and nationwide supply chain efficiencies. In exchange for a limited selection, the customer sees the benefit of lower prices and one stop shopping.

The centralized resource decision-making of supermarkets work when the decision makers of this centralized system align with the needs and wants of their customers. In the short term, these stores become an economic boost for communities where these supermarkets are placed. However, when the decisions in this centralized system become misaligned and the customer's decision to purchase the items fail to occur; this same small group of individuals which created a benefit can cause a large impact on several communities at the same time. These decisions become misaligned because the company becomes out of touch with the customer.

To see an example of this effect look at the latest Sears and Kmart store closures. Sears Holding Corporation’s decisions making did not align with the communities where their store was placed. As a result, more than 100 stores are closing, individuals lose their jobs and large empty buildings will sit in these communities underutilized. These buildings may sit for years empty because the demand for large supermarket sized buildings was limited to only a handful of large nationwide chains.

Compare the centralized model to a model that is closer to the decentralized side of the scale. Instead of one large supermarket chain, a community can have several smaller locally owned stores that each have a focused market. Together these stores carry a wide variety of products, there is a pharmacy, butcher, grocer, furniture store, and automotive supply store. Just like a nationwide supermarket chain these products are selected based on feedback from the customer and trends in the local area. However, the flexibility of the store is much greater. If the owner understands there is demand for a certain product they can make that decision quickly to meet the needs and wants of the customers. Compare this to a supermarket manager who does not have the ability to make changes without requesting approval through a bureaucratic process from the few decision makers in the organization.

While the customer sees more variety and can choose the product that specifically fits their needs/wants he pays higher prices for this service. The community as a whole pays for more stability when they accept this as a model. If one of these stores close due to the failure of the owner to recognize the customers changing needs and wants this is most likely due to a competitor providing that need and want. The small store closes and the space is small enough (when compared to the larger supermarket) that it can be re-utilized by another entrepreneur that has an idea on how to fill another niche in the market. These smaller store closures have fewer individuals losing their job at any given time and the buildings are recycled much more frequently than the large buildings that only fit a certain business model.

In any given instance of a decision the effects on a group of individuals can be succinctly summarized as centralized systems allows for the most efficient means to distribute a limited variety of resources however this spreads risk to all individuals participating in the system. A decentralized system allows for the most efficient way to distribute the most variety of resources while minimizing the spread of risk for individuals participating in the system.

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