PDF Summary:The Sovereign Individual, by James Dale Davidson and Lord William Rees-Mogg

Writing in the 1990s, venture capitalist James Davidson and banker and media consultant William Rees-Mogg predicted that the first quarter of the 21st century would bring sweeping changes to the global economy and the very structure of human civilization. In The Sovereign Individual, they explain both their predictions and the rationale behind them.

One of their most significant predictions is that nations will fragment into millions of city-states and even individual estates with sovereign-nation status. The owners of these sovereign estates are the “sovereign individuals” from whom the book draws its title.

In this guide, we’ll discuss the authors’ predictions, particularly the rise of sovereign individuals, and we’ll take stock of how close their predictions are to being fulfilled. We’ll also provide additional context and insight from books like Predictably Irrational, The 33 Strategies of War, and The Bitcoin Standard.

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By acting as force multipliers, AI virtual assistants will enable individuals and small, efficient organizations to do as much work as larger, less-efficient organizations. This will give small businesses higher profit margins than large corporations. For that matter, it will also make small, efficient security forces a match for large national armies.

Progress Check: Virtual Assistants

Artificial intelligence and related algorithms have advanced a lot since Davidson and Rees-Mogg made their predictions in the 1990s, but as of 2023, they haven’t reached the level that the authors predicted they’d attain. While AI tools are beginning to extend information workers’ productivity in much the way that Davidson and Rees-Mogg predicted, they’re still a limited force multiplier because they only solve specific problems and require very specific instructions.

As Peter Thiel explains in Zero to One, the main reason for this is that computers only excel at certain things, like crunching numbers. But while computers outperform humans at numerical calculations, humans have a decided advantage over computers at things like object recognition and value judgments. He argues that programmers have wasted a lot of time trying to make computers mimic human behavior, instead of focusing on applications that computers are better suited for.

Some of the behavior that Davidson and Rees-Mogg expected from virtual assistants is easy for humans but hard for computers. For example, tasks like conducting a criminal investigation or designing a marketing campaign involve a lot of data collection and prediction (which AI is good at) but also some judgment calls, which AI can’t make very well.

Predicted Changes

Davidson and Rees-Mogg believe that the technological developments we just discussed will have a profound impact on social structures in the 21st century. As circumstances change to favor small, efficient organizations over large ones, both economically and militarily, they expect nation-states and national governments to decline and ultimately disappear. Nations will be replaced by millions of city-states and sovereign individuals. During the transition, they also anticipate a general increase in crime and violence throughout the world. We’ll break down the reasoning behind each of these predictions in turn.

The Decline of Nations

After the end of the medieval era, feudal monarchs disappeared because new technology gave nation-states an economic and military advantage over them. Davidson and Rees-Mogg assert that nation-states will soon disappear in the same way, and for the same reasons, as new technology renders them economically unsustainable and makes their military power irrelevant.

Economic Insolvency

We’ve already discussed how Davidson and Rees-Mogg expect economic activity to migrate from local and national markets that governments can tax and regulate to encrypted online markets that are beyond government control. If this migration makes paying taxes largely voluntary, most national governments stand to lose their largest source of income.

This is a serious problem because, as Davidson and Rees-Mogg point out, most national governments are already deeply in debt. They attribute government debt largely to the welfare-state mentality, whereby the government is expected to levy disproportionately high taxes on the rich, distribute some of the money taken from the rich to the poor, and fund extensive public works. The cost of welfare projects already exceeds tax revenues, forcing governments to endlessly borrow money.

And the situation is only going to get worse for welfare states. Not only will the online economy allow people—especially wealthy people, who pay most of the taxes in developed countries—to avoid paying taxes, but the authors also expect the income gap between rich and poor to increase significantly in most countries.

The Role of Bitcoin in the Decline of Nation-States

Given that Davidson and Rees-Mogg attribute much of the prospective decline of nation-states to economic insolvency, the ongoing prevalence of fiat currency is probably one of the major reasons that nation-states have not yet dissolved.

As Stephanie Kelton explains in The Deficit Myth, governments that issue their own currency face negligible consequences from running a deficit. This is because a nation that issues its own fiat currency (currency whose value isn’t pegged to another nation’s currency or a commodity like gold) can never run out of money. A nation can always create more money to fund its programs or pay its debts (as long as it doesn’t issue so much money so quickly that it triggers runaway inflation). This allows welfare states to fund almost unlimited programs.

As long as nation-states control the money supply, they can remain in control of their own economies, and their sovereignty remains difficult to challenge. Davidson and Rees-Mogg implicitly acknowledged this but predicted that proprietary digital currencies would replace national fiat currencies. This hasn’t happened yet, partly because of technical limitations on transaction volume or speed and partly because cryptocurrencies have not yet established the same level of credibility or acceptance as fiat currencies like the US dollar have.

The credibility issue stems mostly from the fact that when private companies such as banks or crypto companies issue their own currency, they often issue more of it than they can back with gold or other commodities. This leads to devaluation of their proprietary currency when the discrepancy is discovered, fostering distrust.

However, as Saifedean Ammous points out in The Bitcoin Standard, Bitcoin is one digital currency that is truly decentralized. There is no company, government, or other entity that can alter the global supply of bitcoins or even reverse a bitcoin transaction that has taken place. So, at least in theory, Bitcoin solves the credibility concern. Ammous recommends that Bitcoin be adopted as a global reserve currency (a standard to which all other currencies are pegged). He argues that this would curtail wasteful and counterproductive government spending by eliminating fiat currencies. If Bitcoin is ever adopted as a global reserve currency, as Ammous recommends, that would be a significant milestone in the transformation that Davidson and Rees-Mogg predict.

The reason for increasing income inequality is that virtual assistants will enable a smaller number of highly skilled people to do a much larger fraction of the work. As conditions increasingly favor small, efficient companies, there will be a push to increase efficiency throughout the economy. This will result in elimination of many bureaucratic or otherwise unproductive positions, and compensation will increasingly be based on output, rather than hours worked. Jobs where you get paid just for showing up will disappear. As such, exceptionally productive people will see their incomes rise, while everyone else sees a loss of income.

So the rich will get richer, the poor will get poorer, and a larger fraction of the population will be poor. This will make welfare programs increasingly infeasible, as the number of eligible recipients skyrockets while most of the funding disappears. And governments won’t even be able to soften the blow by printing more money and inflating their currency, because fiat currencies will become worthless as the online economy switches over to private digital currencies.

Unproductive Jobs

Analysts have expressed varying perspectives on the subject of unproductive jobs. As we’ve discussed, Davidson and Rees-Mogg believe that many jobs are unproductive, and they attribute this to economies of scale giving big businesses and big governments the advantage. They argue that larger size inevitably reduces efficiency and increases bureaucracy to some extent, and welfare states make the problem worse with frivolous programs that create frivolous jobs.

In Bullshit Jobs, David Graeber agrees industrialized nations are full of unproductive jobs, but cites automation as one of the root causes: Because industrial automation allows fewer workers to do more work, there simply isn’t enough productive work to keep everyone busy. If Graeber is right, virtual assistants would only make the problem worse. If it only takes a few people to do all the world’s work, then most people will end up being unproductive.

That said, Graeber also echoes Davidson and Rees-Mogg’s assertion that welfare states are the worst offenders when it comes to creating frivolous jobs. And the future of unproductive positions is probably linked to the future of welfare states: If the state remains strong as AI enables fewer people to do all the work, then unproductive jobs may become even more common, as Graeber would predict. But if nation-states collapse as Davidson and Rees-Mogg anticipate, then perhaps a handful of sovereign individuals will do all the work, claim all the income, and leave the unproductive masses to a rather grim future.

Military Obsolescence

As we noted earlier, Davidson and Rees-Mogg expect warfare to become increasingly computerized, which will diminish the significance of traditional military size and firepower. This, too, will contribute to the decline of nation-states, because a nation’s sovereignty is ultimately based on its ability to defend itself against other nations.

Today’s nations rely on standing armies and physical weapons for national defense. But the authors expect that online communities and even highly skilled individuals (aided, of course, by their virtual assistants) will soon be capable of waging cyberwar just as effectively as today’s most powerful nations.

Cyberwar as an Extension of Guerrilla Warfare

To understand the implications of cyberwar in more detail, it’s worth cross-referencing books on military strategy. Cyberwar, as Davidson and Rees-Mogg describe it, could be the ultimate form of guerrilla warfare because hackers can attack from anywhere in the world without exposing themselves.

As Robert Greene explains in The 33 Strategies of War, guerrilla warfare has always been a favorite way for smaller forces to defy large military powers. Armed guerrillas operate in small, mobile groups. They attack vulnerable positions or infrastructure suddenly, and then go back into hiding so that their more powerful opponent never has a clear target. Meanwhile, the larger force remains vulnerable, not only because it’s more visible but because it takes a lot of infrastructure and supplies to sustain a large force, creating many targets for the guerrillas.

If weaponized AI advanced to the point that hackers could disable and destroy armament and supporting infrastructure at will, then traditional war machines would become little more than an expensive liability.

The Rise of Micro-Sovereignties

The authors contend that as nation-states decline in the 21st century, millions of micro-sovereignties will rise to take their place. These could be city-states, or even individual estates where a wealthy person gets to decide what laws apply on her own property.

These small communities of high-productivity individuals will be much more economically efficient than today’s welfare states. And as conventional warfare is replaced with cyberwar, they will be just as capable of asserting and defending themselves as today’s sovereign nations.

That said, Davidson and Rees-Mogg expect that most micro-sovereignties will be formed by mutual agreement on terms of secession, rather than by revolution and military force. As national governments become increasingly bankrupt and incomes become increasingly difficult to tax, the option of selling or leasing sovereignty to individuals or other entities will become increasingly attractive. Eventually, today's national governments will sell off or lease out practically all of the territory over which they currently exercise sovereign control.

The authors explain that once this has taken place, there will be at least three types of micro-sovereignties.

Fulfilling the Social Contract with Micro-Sovereignties

The Social Contract proposed by Swiss political philosopher Jean-Jacques Rousseau in the 1700s provides some additional perspective on why a state might fragment into micro-sovereignties. Rousseau argued that the only ethically justifiable government was one formed by a “social contract,” a mutual agreement of individuals to join together and form a society for their common good. In Rousseau’s view, a state exists for the good of all its citizens, so a government that works for the good of some (even the majority) of its citizens but to the detriment of others is not a legitimate government. He also contends that every state eventually reaches this point, causing governmental collapse and subsequent formation of new social contracts.

When Davidson and Rees-Mogg claim that some individuals would find it beneficial to purchase sovereign control of their own lands from the national government, they imply that national governments are no longer working for the good of all their citizens. Instead, modern welfare states work to benefit some of their people at the expense of others—particularly the wealthy, who pay a disproportionate share of the taxes. Thus, based on Rousseau’s analysis, they have already lost their legitimacy. As these illegitimate states die, communities with mutual interests will form new social contracts, creating new states. And if some individuals choose not to enter into any new social contract because they have enough resources to be completely autonomous, they would become sovereign individuals.

Competitive City-States

Many micro-sovereignties will be city-states or regional governments that compete for citizens the way businesses compete for customers. Basically, they will be service providers that provide the kind of infrastructure and protective services currently provided by governments. Each micro-sovereignty will probably cater to a unique set of preferences to differentiate itself from its competitors. For example, one might advertise itself as a drug-free zone with strict regulations on pharmaceuticals, while another advertises itself as a drug freedom zone with no restrictions on pharmaceutical chemicals or recreational drug use.

(Shortform note: Davidson and Rees-Mogg may have derived their idea that competitive city-states would choose to specialize in unique services or benefits from the economic principle of market “positioning.” In theory, every unique market sector where free-market competition operates will eventually establish a clear market leader, so it’s advantageous to differentiate your product enough that you can position it as the leading product in a unique market sector. Positioning has traditionally applied mostly to private companies, but Davidson and Rees-Mogg expect that it will increasingly become relevant to nations as well.)

Most of them will probably charge their residents a flat annual fee rather than trying to tax incomes, for two reasons: First, flat rates will be more competitive, because residents will compare the cost and benefits of living in different micro-sovereignties and choose the ones that offer the best value. Second, as we’ve discussed, encryption technology will make it virtually impossible for governments to keep track of individuals’ incomes anyway.

(Shortform note: If tomorrow’s city-states have to compete for citizens the way today’s companies compete for customers, that could give rise to a variety of creative taxation systems in addition to the flat-fee taxes that Davidson and Rees-Mogg foresee. This is because, as Larry Keeley and his coauthors explain in Ten Types of Innovation, pricing structures and revenue streams are one of the 10 standard areas where companies can innovate to differentiate themselves from competitors. For example, perhaps some city-states would lease the right to monopolize sales of food or retail goods to generate income so they could operate without any tax revenue and attract more citizens.)

Sovereign Individuals

Other micro-sovereignties will be individual estates of the wealthiest and most productive individuals. As technology puts them in a position to defend themselves and their assets from crime and military aggression better than any government can, they will find it cheaper to assert their own sovereignty, rather than live by the terms of another sovereign entity and pay for protection through taxes. As such, they, too, will purchase or lease sovereign control of their own property.

What Will Sovereign Individual Estates Look Like?

Though Davidson and Rees-Mogg spend a great deal of time explaining why they expect wealthy individuals of the future to gain personal sovereignty and the advantages it would afford, they don’t provide a very detailed picture of what day-to-day life would look like for a sovereign individual. We can infer that they either felt these details were too difficult to predict with certainty, or else didn’t mention them because life for wealthy individuals wouldn’t actually look much different after gaining sovereign status.

Many wealthy people already live in gated communities, so their geographic borders would be easy to establish and probably already protected by walls. It’s not unusual for utilities like electrical power lines to cross national borders, so sovereign individuals could potentially import most of their utilities. This would obviate the need to build their own infrastructure, and individuals would probably rely on the same utility companies they used before they gained sovereignty.

And if you’re a sovereign individual without other citizens living in your domain, you wouldn’t need law enforcement or judicial capabilities. So perhaps the difference between being a wealthy citizen and a sovereign individual would be little more than a change in billing structure: You lease sovereignty for a flat rate instead of paying income taxes, and maybe you pay your utility bills a little differently too.

Cyber-States

Some online communities may exercise powers similar to those of a sovereign state without controlling any physical territory. For example, they might make their own laws, offer judicial services to settle disputes between their members, and defend their members from other governments that might threaten them.

Are Platforms a Stepping Stone to Cyber-States?

Although today’s tech giants make no claims of holding sovereign nation status, they arguably already bear some resemblance to the cyber-states that Davidson and Rees-Mogg describe. For example, platforms like YouTube already have community guidelines and terms of use that could be seen as cyber laws applicable to their users. They also have internal mechanisms for resolving disputes, such as copyright claims, which perform a function similar to courts.

Platforms enforce their rules and rulings through mechanisms like demonetization and deplatforming, which can be financially devastating to users who’ve built a business on the platform and depend on it for income. For example, Jason Ethier may have lost over half a million dollars of annual income when his YouTube channel was demonetized in February of 2020.

Most platforms also make it much easier to conduct business with other users on the platform than with people on other platforms, creating virtual borders and barriers to cross-platform that can have a similar effect to the restrictions countries impose on imports and exports. To address concerns that this gives large platforms an unfair advantage in the market, the EU recently passed a law requiring platforms to open up their borders, so to speak: They will be required to provide cross-platform functionality of certain services, ensuring fair market competition once the law takes effect. It remains to be seen if they will actually comply, as enabling cross-platform interoperability will be extremely expensive, both in terms of up-front development costs and lost profits.

Davidson and Mogg might predict that this conflict of interest between tech giants and EU regulators will create an escalating power struggle in which the big tech companies will eventually declare their platforms sovereign cyber states, obviating any obligation to comply with national laws.

Transitional Violence

Davidson and Rees-Mogg hope that the era of micro-sovereignties will ultimately be one of greater peace and individual freedom than the era of nation-states has been. As we’ve discussed, they also expect most micro-sovereignties to be born out of peaceful treaties rather than violent revolutions. But they warn that during the period of transition from nation-states to micro-sovereignties, there will likely be an increase in crime, terrorism, and other acts of violence throughout the world.

This is because one of the functions of government is to deter crime by providing law enforcement services. As national governments fall apart, law enforcement services will break down, removing this deterrent to crime.

Meanwhile, lack of funding will oblige welfare programs in welfare states to reduce or suspend benefits at a time when many people will see their real income decreasing. The authors expect low-skilled office workers to take the largest loss: Many of them hold positions that provide comfortable middle-class income, but they will be replaced by virtual assistants.

Some of these people may become desperate enough to turn to crime as an alternate source of income. Others may resent the social and technological developments that cost them their livelihood enough to engage in terrorism or violent protests.

And still other people will see the social and governmental transitions as something that must be resisted to preserve nations as a matter of principle. The authors assert that national identities are somewhat arbitrary, but are still an object of loyalty for many people. So nationalist ideology will also drive opposition to change, and some of the opposition will likely rise to the level of terrorism or paramilitary aggression.

Preparing for the Transition

If Davidson and Rees-Mogg are right, there will be a period of time in the near future when criminal violence and terrorism become more common. At the same time, government services like welfare and law enforcement may not be unavailable. When that happens, what can you do if you’re not wealthy enough to have a robotic defense network that you can activate as you declare the sovereignty of your own compound?

You can prepare for a transitional period of elevated violence much like you would prepare for any natural or man-made disaster. Basically, the goal is to make your lifestyle as resilient as possible by making sure you have backup sources of everything you need. That way you can keep your options open if outbreaks of violence disrupt the services and infrastructure that you would normally rely on.

Specific needs for which you should consider backup options include food, water, medicine, commodities like toilet paper, sources of heat and electricity, means of communication and transportation, and security measures. Some of these, like food and medicine, you can easily stockpile, giving you reserves to draw from in an emergency. Others, like electricity and transportation, might require a little more investment or creativity to build in backup options. But there are still ways to address them, such as installing solar panels on your roof.