The Sovereign Individual: A Review

The OG Libertarian Fever Dream

I’m doing fewer book reviews lately, which must mean I’m reading fewer interesting books. A few months ago, however, after seeing recommendation after recommendation for The Sovereign Individual by James Dale Davidson and Lord William Rees-Mogg (the latter an actual British aristocrat), an obscure cult 1990s techno-utopian manifesto with a new, 2020 introduction by Peter Thiel, I decided to give it a read.

One must have great charity for old books making predictions about the future, and judge them less on specifics but rather general frameworks. The future is hard to predict, so even getting one major thing right is extremely impressive.

This book, however, didn’t so much predict the future but help create it. Most famously, its authors posited that the mathematics of prime numbers underlying private-public key encryption, featuring calculations that are hard to guess but easy to verify, could be adapted to create digital money. These few off-hand paragraphs eventually inspired the creation of Bitcoin, itself now an asset class worth over $2 trillion.

For those who love interesting, unorthodox ideas, it’s a treat, often running for paragraphs of sheer brilliance, but then disappointing when it veers into libertarian ideology contrary to empirical evidence.

Property Is Violence

The authors resonate with me in departing from libertarian orthodoxy about the inherent goodness of man and embracing the reality that all social order relies on violence or credible threats of violence. Such a discarding of utopian delusions is, in my view, necessary to any realistic appraisal of the political economy of fallen man. My own views on this are not quite so hyper-Calvinist, for while man is totally depraved, he is not utterly so. The more realistic view is that in any human population, however generally cooperative most people might be, there will be a sufficient number of violent individuals such that some sovereign will have to exert force to restrain them from evil.

This percentage matters a good bit empirically, in terms of the resources necessary to control the violent and the social taxation on peaceful citizens in the precautions they must take to avoid being a victim. In Denmark, for example, it is easier to have nice things when only 0.067% of the population requires incarceration, compared to the 1% of my native Louisiana, the highest of any democratic polity on Earth¹. Still, the vast majority of Louisianans are peaceful, good people, but even this small percentage imposes significant costs. The power law distribution of criminal offenses is well-established, as just a few bad apples commit the vast majority of crimes.

The necessity of defensive violence being established, it becomes apparent from experience that, like electric utilities, defensive violence is a natural monopoly. Better to pay protection money to one “criminal,” the state or sovereign, than risk random predation by many criminals. All states begin as a sort of warlord that conquers the other criminals through superior organization. Unlike the libertarians, I believe this can evolve into a fundamentally symbiotic and ennobling relationship as security in status and, most notably, the Christian religion, soften the hearts of sovereigns towards their subjects. As Hans Hermann-Hoppe has documented, traditional monarchies, in owning their sovereignty, were and are less exploitive than democratic states, whose politicians merely rent and are thus incentivized to short-term plunder over long-term capital appreciation.

The Sovereign Individual argues that the key to understanding history is the marginal returns of violence relative to scale. When the efficient scale of violence is small, as in the medieval era, states would tend to be small and less exploitative. When the efficient scale of violence rises, as in the modern era, the most efficient states are the largest states, which face less competition internally and more competition externally, and thus tax and confiscate more than their medieval forebears. Further, as these states grow, they become captured by their own bureaucrats. Thus, from the medieval era to the modern era, governments went from being privately owned to employee-owned. “Employees” in this case include both the bureaucrats and the dependent clients the government services in exchange for votes. Employees having more perverse incentives than owners, it is natural that modern states have become more exploitative. This is all well and good, and an analysis I agree with completely.

The authors, however, dared hope, in that starstruck dot-com optimism of the late 90s, that digital technologies would change everything, reverse the modern course of history, and lower the efficient scale of violence such that sovereignties would splinter. These smaller states would face more competition, and function as customer-driven, on behalf of property owners with maximum benefits for minimum cost, rather than run as either private or, worse, public monopolies. In this, they commit the typical libertarian errors of betting too much in the goodness and rationality of man, with a dose of techno-utopianism thrown in for good measure.

Human Nature Means Nothing Ever Happens

I remember a mentor of mine who, circa 2005, started sounding a little crazy about government surveillance. He claimed the government was spying on everyone all the time, and was adamant that everyone he knew learn how to use PGP encryption for emails and put their phones in Faraday cages. He sounded crazy, but subsequent Snowden revelations showed he was correct. The thing was, though, no one really cared. I didn’t care enough — PGP was hard to use (about as user-friendly as Bitcoin, i.e., a geek hobby with poor UI), and I figured the government was too busy to read my rather boring communications — and if I didn’t care, I certainly knew the average person wouldn’t care.

Davidson and Rees-Mogg, likewise, storm into the breach with claims of how the Internet and its democratizing, open-source technologies would revolutionize the power of individuals against the state. Some of their predictions were plain wrong, for example, their claims that cyberwarfare would come to dominate large-scale traditional warfare, that secure specialty of modern states. I suppose this was an understandable enthusiasm in the milieu of the Y2K-driven predicted digital apocalypse.

Since cyberwarfare was, at the time, mostly the domain of small groups, they reasoned that the lumbering nation-states, with their great armies, could easily be brought to their knees by hackers anonymously ensconced on some Caribbean island. And thus, they would be tamed to respect others’ sovereignty for fear of mutually-assured cyber destruction of their infrastructure. Great thesis, except it didn’t happen. Cyberwarfare is now most efficiently conducted at scale by those same large nation-states, and its impact is limited. Mostly, security technologies have evolved with the threats and except for a few million a year paid in ransom for those who forget to patch software or use two-factor authentication, cyberwarfare appears to be mostly at a stalemate. It can certainly be done, but only on a targeted basis by state actors at a moderate scale.

I suppose the authors today would point to the predominance of drone warfare in the Russia-Ukraine war in making many existing military technologies obsolete. But I think this has more to do with technological evolution, akin to carriers and battleships, than a change in scale. The endgame of drone warfare will likely be very expensive AI swarms of drones and counter-drone defenses, and AI is perhaps the most scale-dependent tech to date. The incumbent defense sector might be obsolete, but it will be replaced with better, but not necessarily cheaper or less scale-sensitive, disruptors like Anduril. If America fails to adapt and keeps subsidizing fattened, lazy behemoths like Lockheed with cost-plus contracts due to political lobbying, it will be a strategic mistake exploited by other large nation-states, not a fundamental change in the scale of warfare.

The Sovereign Individual was even more prescient in predicting, at the early date of 1997, that digital technologies would lead to geographic flexibility in conducting knowledge work, particularly for wealthy individuals not subject to the demands of an employer. It took 25 years and a pandemic to get older customers and clients to download and use the Skype / GoToMeeting clone Zoom, despite video chat being viable tech for 15 years prior, but the remote work era is clearly here, whatever its downsides for productivity, innovation, and work relationships.

They further predicted that, freed from geographic proximity to economic opportunities, sovereign individuals would use the emerging 90s tax-avoidance domiciles to optimize their wealth. The math, as the authors demonstrate, is undeniable. Paying a 50% marginal rate vs. a 10% marginal rate over one’s lifetime has a net orders-of-magnitude impact on final net worth. Wouldn’t every rational wealthy person take advantage of such an opportunity?

It turns out, very few do, and it doesn’t even require, as the authors recommend, renouncing citizenship, moving to a dodgy charter city in some third world tropical polity, negotiating a private tax treaty with Switzerland, or giving up the protection of the United States Marine Corps. As I write this, any American can move to Puerto Rico, live there six months and a day out of the year, and pay zero federal income taxes. It’s a backwater, a bit like the typical midsize city, but otherwise a nice place with nice beaches, yet very few wealthy individuals are willing to move there for the tax break.

The authors fail to account for the declining marginal utility of wealth and the extreme human preference for nice amenities, nice climates, and the feeling of being near the physical center of elite activity, things that cannot be bought. But for family and other social obligations, which I find binding as a matter of duty, I would much prefer to live somewhere cooler than Texas. My ideal location balancing culture, climate, geography, and tax policy is probably East Tennessee. But most people with options find these of little consequence, and are more likely to move based on climate, perception of elite status, and amenities than tax policy or family proximity. Even highly-taxed wage earners like physicians are loath to move from somewhere nice to double their take-home income.

The asset-wealthy in particular already have options for paying very few taxes regardless of geography — such as the buy, borrow, die strategy — but voters who might be inclined to support higher taxes are too ignorant to know the difference. They see Democrats proposing higher marginal rates and think they are sticking it to Bill Gates when it’s really harming the newly minted oncologist struggling to pay off medical school debt. The legal details are too arcane for sound bites, so the political equilibrium is a headline policy that sounds progressive but allows politicians from both parties to have fewer powerful people angry at them and less likely to support political challengers.

The real sovereign individuals are those who hire good legal counsel². The most profitable decision of Peter Thiel’s life might have been “wasting” three years in law school, because his legal education likely gave him the foresight and technical skills to properly set up the world’s largest self-directed, alternative-asset Roth IRA when he was still poor on paper at PayPal; as a result, he lives rent-free in California. Similarly, startup founders don’t usually pay much in taxes, ever, due to the QSBS loophole³. Business owners also have the enviable position of self-reporting their income based on the opinions of lawyers and CPAs who work for them, rather than ratted to the IRS, on a gross basis, free of legal but creative deductions, on W-2 forms.

The exploitation of modern states is not so much of the very wealthy, the imagined sovereign individuals oppressed by confiscatory taxation, but rather the moderately successful, asset-poor, but high-income W-2 upper middle class. Given this, it’s only natural that any revolutionary class, as Sam Francis predicted, would have to come from the abused middle, and that is exactly what we sort of see in Trump, though his crassness has induced a sort of false consciousness in the very upper middle class wage earners who ought to care most about extending those tax cuts⁴.

Digital “Assets”

The authors also predict the rise of digital assets that would allow sovereign individuals to escape the necessity of submitting to government taxation. And yes, Bitcoin was a huge prediction in 1997, a full decade before its genesis and 20 years before its mass popularity. But Bitcoin’s public ledger makes material tax evasion by ultra-wealthy owners of it harder, not easier. If you’re rich and want to avoid taxes, you’d rather do it legally with hundreds of pages of arcane documents and a team of 130-IQ tax lawyers squaring off against middling, overworked IRS bureaucrats than betting the FBI can’t link you to your public transaction keys.

Regardless, my opinions on Bitcoin remain unchanged. I subscribe to Robert Kyosaki’s accounting taxonomy: an asset is something that produces income. Since Bitcoin produces no income, it is not an asset. At best, it might be digital, fiat gold, but as discussed in my Bitcoin post, the intrinsic value of fiat currency is historically stolen from the world of the gold standard, in debt instruments and tax liabilities linked to assets denominated, when originated, in gold-backed dollars. It is a “one-time” theft of value that is arguably not available to other fiat currencies like Bitcoin, however limited in supply.

Gold has and had intrinsic value for industrial and decorative uses, though admittedly, much of its value is as a store of value built on top of its intrinsic value. A string of pseudorandom digits must always have zero intrinsic value, however much speculation is built on top of trading it. The great question for Bitcoin is whether a form of money can originate with zero intrinsic value and still work as a store of value if others agree. This is still an unanswered question.

But regardless, as I also mentioned in the Bitcoin commentary, the wealthy do not store value and swim in giant vaults of gold, digital or otherwise, but rather deploy value to own intrinsically productive assets: apartments, mines, forests, factories, and the like. All of these must be protected by men with guns and thus demand a sovereign to whom the owner must pay taxes.

Those most important assets that are “digital,” or at least immaterial, like copyright, trademark, and patents, rely even more upon men with guns to protect their statutory monopolies. After all, if I own an oil well, my competitors must go through the trouble of finding their own oil to compete with me. Trademark rights, by contrast, demand that, in the end, someone point a gun at another human being to prevent them from printing a two-cent label on their competing good. Copyright demands someone with a gun ultimately prevent costless digital piracy, and patents demand someone with a gun prevent a competitor from using publicly available information to enhance their productivity. Ironically, the true “digital assets” are those most sneered at by libertarians as unjust because they are most intrusive to natural liberty and most dependent on the state to enforce their artificial statutory rights!

And it’s critical for wealth building that assets have income. As The Missing Billionaires posited, income from investments is the safest signal of what one’s assets can support in terms of consumption. When asset values are speculative, producing no income, it is nigh impossible to know how rich you really are and how much is an ephemeral wealth effect. The longest-standing wealthy families tend to own natural resources and adjust spending to after-tax income, those taxes being a cost of doing business.

Even conquest from a competing state rarely results in a permanent loss for a great asset owner. Nazi Germany, for example, mostly did not seize multi-generational landed wealth in France nor Poland. Go down one tick in rapacious severity to the previous European tyrant, and we find that Napoleon conducted virtually no private wealth seizures and simply redirected tax revenues to his coffers. Unless your occupiers are ideological communists, even hostile enemies understand that they are better off collecting taxes from a competent owner than risk mismanagement of the assets underlying their tax revenue stream, or disrupt supply chains that could starve millions⁵.

Today’s wealthy have more sophisticated ways of owning income-producing assets, many publicly traded. This makes seizure of those same assets even more politically dangerous. And contrary to the predictions of the authors, there is no “digital asset” out there that produces income and is both free of government control / taxation and not subject to third-party credit risk. If you loan out your Bitcoin, you have to give up custody, and if you don’t get paid back, you end up in the government’s courts again, asking the state to use its guns to enforce your contract rights. The anarcho-capitalist utopia remains a distant dream.

And being free of the government as both a tax rent extractor and protector of property rights has its downsides, even for those skilled or prescient enough to have profited from digital asset speculation. In the crypto vacuum of stateless assets, nature’s war of all against all is reasserting itself. No criminal can kidnap me and force me to give up my real estate or stock market holdings with a contract any government court will enforce. But those foolish enough to publicize their Bitcoin holdings are increasingly vulnerable. I’d rather pay my taxes than have my wealth at risk proportionate to my ability to tolerate having my fingernails pulled out by pliers, Leviathan or not.

Quirks and Quibbles

The authors exhibit some of those typical schizophrenic libertarian tendencies when it comes to collective obligations beyond immediate family. As libertarians, they must believe in inequality, yet seem to yearn for its causes to be moral virtues rather than natural inheritances. They rhetorically, at one point, in disclaiming collectivism of any kind, state that human remains from a plane crash are indistinguishable as to nationality, I suppose to emphasize that we are all fundamentally individuals with differences only skin deep. They assume this, but must not know that physical anthropologists and forensic scientists can reliably determine a person’s broad geographic ancestry from skeletal remains alone.

Similarly, they argue the fundamental irrationality of any kind of nationalism by claiming that state propaganda hijacks our natural love of family to extend it to the arbitrary category of the nation, and work the math naively to show that any random countryman shares only maybe a few thousandths of a given individual’s blood, making national loyalties irrational social constructs. In reality, human pedigrees collapse, else everyone would have more than a billion ancestors, more than the then-existing total human population, even as recently as AD 1000. Some ancestors do double duty in everyone’s family tree, which makes us more related to certain people than others, especially when those ancestors shared a constrained geography before the modern era, i.e., a nation⁶. This would make winnable defensive wars rational in many circumstances, as well as some offensive wars, especially when there’s a defensive pretext, to wrest prime virgin territory from weak, diplomatically and geographically isolated paper tiger opponents, like in the Mexican-American War⁷. Though I share the authors’ general aversion to war as a racket, they tried to prove too much with these inaccurate biological claims.

And in a great demonstration of the frustrating, sometimes contradictory, but occasional sheer audacity of the book, in a closing chapter, they seek to reconcile libertarian ideology with environmentalism by way of eugenics! After previously endorsing the most ideological blank-statism imaginable, they more or less claim that Western aid to Africa “short-circuited negative feedback consequences” to “counterproductive cultures” to produce more children than they otherwise would, wreaking environmental havoc with overpopulation. Their prescription, presumably, is that people who are unable to produce enough food to feed their children should starve, to teach them to change their behavior, or else change their genetics through culling the more imprudent, a bold synthesis of Malthus and Von Mises. I’m against foreign aid, too, but I’m not sure I would be brash enough to spell out the implications so bluntly, and I’m at least partly optimistic people would figure out a solution other than mass starvation.

Coda: Libertarian Nostalgia & the New Right

Many on the New Right, like the old neoconservatives, are libertarians “mugged by reality.” I never had a libertarian phase, but I’m sympathetic to it. And I did love Ron Paul in 2008 and 2012, and who couldn’t, as he was Cassandra in the form of a kindly grandpa. Ron Paul was the most winsome, decent, rational, democratic statesman imaginable, and his rejection by voters caused many of his supporters to move on to political ideas more informed by human nature, and further radicalized by his mistreatment by the GOP establishment.

I think a good deal of support for Trump from thinking conservatives is revenge for the rejection of Ron Paul. We might not get Austrian economics as government policy, but we can at least see Jeb Bush humiliated on national television. This includes Thiel, who now rejects any hope of democracy leading to a healthy society, and likely sees the Trump era as transitional to something more autocratic, in that since the people will not choose liberty, it must be imposed upon them from above.

That there would be some nostalgia for more idealistic times, at the dawn of the commercial Internet, is not surprising, even though most have long moved on. The open Internet itself is dead, with only two of the major decentralized protocols, HTTP and email, in common consumer use. Most content and web traffic is consolidated into the walled gardens of Facebook and Google, not independent websites. Few of the new generation have ever configured a router or built a computer.

All of this should have been predictable given human nature, but for a brief period in the 90s, anything seemed possible, even practical libertarianism. Surely, if it were easy and cheap, people would embrace freedom! The Sovereign Individual is a time capsule of that hopeful spirit.

1. Louisiana, it must be admitted, is better off than other states in having nearly unlimited prison capacity relative to population in her self-sustaining Angola Plantation Prison, a fascinating parallel society, complete with its own internal inmate publications, farm, manufacturing works, radio station, funeral services, and rodeo competition. The state feels no pressure to lighten sentences or parole without good cause. The prospect of being, per the local idiom, “sent to Angola” for a very long time keeps many would-be troublemakers on the straight and narrow.

2. A key piece of wisdom I took to heart early in my business career is contained in the acronym ELAINE - Early Legal Advice Is Not Expensive. Legality is a relative term highly sensitive to initial conditions, and an ounce of prevention is often worth a ton of cure. Similarly, while it doesn’t make a nice acronym, ETAIEP, early tax advice is especially profitable.

3. Poor Elon had to be the world’s largest taxpayer upon his sale of Tesla stock to raise money to buy Twitter because he had the misfortune of taking over, rather than founding, Tesla. While Elon isn’t strongly economically motivated, these loopholes must induce significant distortions in the economy, rewarding flipping or selling companies (untaxed or mildly taxed) versus long-term ownership and collection of income (highly taxed). This undoubtedly disincentivizes long-term innovation and learning curve effects, and leads to the mistreatment of employees and mismanagement of assets under new ownership, who are often optimizing for short-term cash flow to service acquisition debt and return capital to investors on arbitrary timelines.

4. I was told by a very close Trump insider familiar with internal sentiment analysis data that, as amusing as I find his antics, his rhetorical style very much alienates much of his natural constituency, and thus his electoral victories were muted relative to the potential energy of his movement. J.D. Vance, being more polished and less alienating to educated voters, could more easily bring about the real Trumpian landslide in 2028, especially if the Left continues in the wilderness catering to its most extreme elements.

5. Reconstruction in the American South was a modern historical outlier in its severity, requiring incumbent landowners to pay confiscatory property taxes and, when they could not, seizing and selling their property for pennies on the dollar, often to Northern speculators disparaged as carpetbaggers. Many large Southern landowners today, though their descendants may be fully assimilated into the native culture, have carpetbagger roots.

The result of this, combined with general anarchy during the occupation, was indeed mass economic disruption, with food production dropping about 40% by 1867. Something like 25% of the freedmen, and many poor whites as well, became gravely ill or died of malnutrition or disease (often a function of malnutrition) during the Reconstruction period, despite the pre-War South, with its surplus of arable land and milder climate, generally featuring better nutrition among laborers, both free and enslaved, than the working poor of Northern cities.

Further, this overreach undermined public support, North and South, for the broader Reconstruction project, and drove Southern elites, who were mostly moderates opposed to secession before the War, until Northerners beatified John Brown, and accepting of the terms of defeat after it, yet again into the arms of reactionaries. The Radical Republicans violated Machiavelli’s political law that a man will sooner forgive the murder of his father than the loss of his fortune, and this humiliation likely drove much of the Lost Cause mythology that would delay national reconciliation.

6. Genetically, it is rational to die to save three siblings or nine cousins, and maybe fewer, given we often share more genes than a strict half, given common distant past marrying among extended family, like 2nd or 3rd cousins. Likewise, people tend to prefer marrying those who look more like them, as genetic self-similarity theory predicts, as such preferences make rational sense from a genetic perspective, in that one is more related to one’s children the more genes one shares with one’s mate, as long as the match is far enough removed to prevent deleterious mutations forming homozygous clusters common among highly inbred, small, and isolated populations such as the Amish or Hasidic Jews.

Like diversification in an investment portfolio, there is a nonlinear effect where a little goes a long way. Pairings at least as distant as third cousins are statistically indistinguishable in terms of genetic disease risk from those further out. A study from Iceland, a small population where nearly everyone is at least distant cousins, showed increased lifetime fertility among third and fourth cousins, implying a biological benefit for some degree of genetic overlap in parents. The Westermarck effect is an adaptation that prevents closer pairings.

7. During the recent controversy over the selling of public lands, to a friend I dubbed the natural marvels of the West “Polk’s Patrimony” to the American people, a perpetual common gift, held in trust by the federal government, and bought by the blood of the patriots who defeated the Mexican Army at Buena Vista.