Apple's Rendezvous implementation with iTunes is designed to do this, and wireless access points seem to be improving to make this kind of thing more possible. Apple's Airport base stations now come with external antennae ports and do wireless bridging. I'm certainly planning to set this up at home (and test how viable it is at work, ie. how much bandwidth it sucks up).

It seems the hitch is creating a community which is big enough to provide enough music; which has enough crossover in taste to make it worthwhile; and whose members are close enough (a few Km?) to create a network.

Then there is the problem of community culture: for example, I was interested in a free wireless network in my area (before broadband was affordable), but the main participants seemed to enjoy the very technical process more than the goal. Thus, it wasn't a very populist kind of network. I imagine it is still in a state where there are lots of nodes with unbridgable gaps between them, and off-the-shelf components that anyone can use have (or will have) become available long before they have finished their home-grown versions.

Re: "If the community around you has the music, do you need to download all of the music to your machine?"

Check this out: the network is the hard drive
http://canarie.ca/press/releases/01-02-07.html
Canarie, who developed the Canada's Ca*Net3 network, have done experiments making an optical network act like a nation-wide optical storage device, 8000km in diameter. Rather than storing data on traditional hard drives, the data is kept spinning around the network at the speed of light.

I wonder what the RIAA would make of files which are simultaneously everywhere and nowhere?

Am