Comment: Premise is wrong

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Premise is wrong

This leads to problem #2, which is that in the economics of division of labor, feudalism is vastly more cost effective than 'private security and insurance'

Fuedalism, or any collectivist socioeconomic organization, is vastly less cost effective at a macro level. The more free the market the more efficient. There's a reason feudal societies didn't have the exponential capital growth we see in more liberal societies.

It's true that for the ruling class it's more efficient, but it depends on lies, to tell the prey class they aren't slaves, and guns when they stop believing the lies.

The rest of your commentary is ok. Yes one possibility is slow, if bumpy, recursive balkanization and decentralization.

Existing institutions, some of them, can become market firms. We need police, if vastly fewer in a world without made up 'crimes' of trying to compete in the market, or intoxication. Same with courts. Far fewer lawyers, I'm not sure if the profession would really exist in a free society. Who would subscribe to a legal system that you had to pay more to get a fair shake? Answer, you won't. Honest people will subscribe to the one whose judges are known for equity. Dishonest won't subscribe. If the court system makes a bad blunder, they will lose subscribers. Sure it might be tempting to rule in favor of the rich guy willing to bribe you. But then you lose everyone who isn't rich.

Freedom wins by default. Because yes, as you point out we aren't trying to replace anything.

To paraphrase Thomas Sowell. What do you replace the state with? That's like asking what do you replace cancer with.

The problem is the bad guys are gearing up with the plunder they have stolen. A slow and peaceful dissolution of evil is becoming less and less likely with every bearcat and drone.