Governments claim monopoly, but we can choose between them. Flag theory explains how mobility, diversification, and “exit” create a real marketplace for governance.

Political scientists contend that a defining characteristic of the state is its monopoly on the use of force (or violence). Meanwhile, economists are quick to emphasize that monopolies are slow and reluctant to innovate, and they charge higher prices for lower quality goods and services than they would under more competitive conditions. Thus, it is no surprise that we get very little innovation in governance.

However, with cheap commercial flights to almost anywhere on the planet and with the internet allowing for individuals to work and manage their assets remotely, there are geo-arbitrage opportunities in terms of governance. A North American or European can maintain dollar or euro sources of income, while residing in a country with relatively low cost yet high standard of living, lower taxes, and access to beaches. This same person may hold assets in yet another country and bank in another still.

The late Harry Schultz coined the term “flag theory,” which is the idea that a person can maximize personal freedoms by:

• building a portfolio of citizenships and residence visas (or at least one, outside one’s nation of birth)
• holding assets in jurisdictions that offer a combination of the most secure property rights and privacy
• holding tax residency in a low (or no) tax country
• incorporating companies in jurisdictions that have low or no corporate tax
• finding the “playgrounds” where you actually want to spend much of your time.

In sum, flag theory refers to arranging your affairs to optimize for a combination of the best governance (with favorable tax rates playing an important part of that) and lifestyle.

We might add to Schultz’s flag theory by emphasizing the importance of owning assets that are highly portable and outside the traditional banking system (Bitcoin, for example), hosting any websites on servers within countries that are committed to free speech, and communicating – whenever possible – over encrypted and decentralized means. (The Signal app, for example, is encrypted-by-default, yet centralized. The XMPP protocol enables communications that can easily be encrypted and is decentralized, meaning the protocol does not rely on any single app or entity to coordinate users). All of these factors combined work together to describe what authors William Rees-Mogg and James Dale Davidson called “the sovereign individual” in their 1997 book by that title.

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