"The Sovereign Individual" (1997): What Davidson and Rees-Mogg Got Right and Wrong

In 1997, an American investor and a British newspaperman argued that the nation-state was headed for collapse, not through revolution, but through the same mechanism that once broke the power of the Catholic Church. Almost three decades later, the claim can actually be checked.

This article puts "The Sovereign Individual" in historical context: its original thesis, the specific predictions, the 2020 reissue with a preface by Peter Thiel, and what actually happened afterward. The second half covers the Five Flags Theory, a related but considerably older and more concrete framework that gets mentioned in the same breath, even though it comes from a completely different corner.

The 1997 thesis

James Dale Davidson, an American investor and political advisor, and Lord William Rees-Mogg, longtime editor of the Times, published "The Sovereign Individual" in 1997. Their core argument: the information revolution would make nation-states structurally obsolete, "in the same way the medieval Church declined after the printing press." That's not a metaphor for gradual reform. It describes the collapse of an information monopoly that had propped up an entire form of power.

The analogy has real internal logic. For centuries, the Church controlled access to knowledge because copying texts by hand was slow and expensive. The printing press made that control worthless, not overnight, but permanently. Davidson and Rees-Mogg mapped the same pattern onto the modern state: its power rests on the ability to track and tax people, wealth, and information within geographic borders. Once digital networks let all three slip past those borders, the argument goes, the same kind of monopoly breaks down.

The specific predictions

Concretely, the authors made several claims that read far more radical in 1997 than they do now. Cryptographically secured digital currencies would challenge state-issued fiat money, since value would no longer depend on a central bank. Location-independent knowledge work would become possible over global communications networks, well before video calls and home broadband were routine. The year 2000 marked, in their framing, a civilizational inflection point, the shift into a fourth stage of human social organization.

A less-quoted but central part of the thesis concerned how states themselves would react. Davidson and Rees-Mogg expected rising state authoritarianism, not as a contradiction of their core argument but as its logical consequence: as cybercommerce eroded the tax base, they argued, governments would try to secure whatever revenue remained through harsher means.

The 2020 reissue: Thiel's preface

More than two decades after its first release, the book got a second life. A 2020 reissue carried a preface by Peter Thiel, co-founder of PayPal and Palantir. Thiel describes "The Sovereign Individual" as one of the most formative books on his own thinking, and his preface helped push it back into wide discussion within Silicon Valley circles.

What's notable is what Thiel himself concedes in the same breath. He states plainly that Davidson and Rees-Mogg got some central questions wrong, particularly their read on where China and Hong Kong were headed. A prediction publicly walked back by its own most prominent champion is a rare thing, which is exactly why the book's overall track record is worth a closer look.

Scorecard: what held up, what didn't

Almost 30 years on, the thesis isn't just a matter of debate anymore, it can be checked. The table below sets central predictions against what actually happened.

The sharpest academic critique came in 2022 from economists E. Glen Weyl and Jaron Lanier. They described the book's forecasts as "full of factual whoppers" and argued that the pseudoscientific-sounding predictions served less to describe an inevitable future than as a rhetorical device, a way to prop up a political conclusion the authors had already settled on.

Other critics point to Rees-Mogg's own personal track record. Writer Quinn Slobodian, in a 2022 New Statesman piece, recalled the Guardian's assessment that Rees-Mogg "famously gets things wrong": in earlier columns, he had predicted that Colin Powell would become America's first Black president, and that Margaret Thatcher would survive the 1990 leadership coup against her. Neither happened.

Five Flags Theory: a separate concept

"The Sovereign Individual" and the Five Flags Theory show up in the same forums, podcasts, and reading lists, often as if they were two chapters of the same idea. Historically, they aren't. Five Flags Theory is a good three decades older, far more concrete, and was never meant as a grand philosophical claim about the death of the nation-state. It's a practical framework for spreading passport, assets, residence, and time across multiple countries, developed long before anyone was talking about cybermoney.

Origins: Harry Schultz and three flags

The idea traces back to Harry D. Schultz, an American financial writer who published "How to Keep Your Money and Your Freedom" in 1964. Schultz described three "flags": a second passport or citizenship, a safe offshore location for one's assets, and a legal address in a tax haven. The underlying logic was simple: no single country should hold power over a person's identity, wealth, and residence all at once.

W.G. Hill and the five flags

In the 1980s, writer W.G. Hill expanded the framework with two more flags: where the money is actually invested, and where the person lives and spends their time, often called "playgrounds" in the offshore scene. This expansion also produced the term "Permanent Traveler" (PT), a lifestyle concept still cited in offshore and expat circles today, usually shorthand for someone who deliberately avoids settling in any single place long enough to be fully claimed by one state.

Why the secrecy assumption has grown fragile

The whole framework originally rested on an unspoken assumption: an account in country A stays invisible to the tax authority in country B unless you tell them yourself. That assumption has largely stopped holding across much of the world since 2014. That year, the OECD adopted the Common Reporting Standard (CRS), a system under which banks automatically report account data to the tax authority of the account holder's declared country of residence, every year, without anyone having to ask.

As of 2026, according to taxopilot.com, 116 countries and jurisdictions participate in the CRS. An account opened in a classic "tax haven" now routinely and automatically generates a report back to the account holder's home country, the exact opposite of what the third and fourth flags were originally built on. Secrecy as a strategy is no longer a realistic foundation for most taxpayers in participating countries.

The US trap: worldwide taxation

For US citizens, the classic "a second passport solves it" logic runs into a hurdle of its own. The United States taxes its citizens based on citizenship, not residence: anyone holding a US passport remains liable to the IRS no matter where they live or how many additional passports they hold.

Formally exiting that system, by renouncing citizenship, triggers a specific tax for certain people: the "exit tax" under Section 877A of US tax law. It applies to what the IRS calls "covered expatriates." By IRS definition, that includes anyone whose average annual net US tax liability exceeds 206,000 US dollars (2025 figure), or whose net worth is 2 million US dollars or more, among other criteria.

This content was created with AI assistance, primarily for research and drafting. Reviewed and approved by our editorial team.