Imagine a world in which a household can choose which Commonwealth to be a part of, much the way that you might choose a cell phone provider or a religious denomination or a health insurance company.

Your Commonwealth would collect substantial taxes from your income and property, and would use it to provide retirement savings, health care, disability payments, other social safety nets, education, library access, banking services, unemployment insurance, inheritance laws, and divorce laws, for members of your household. It would be responsible for providing its share of military personnel for the country. They would run parks that non-members could use at an additional fee, all over the country, and political power you had would be through Commonwealth representatives.

Transferring from one Commonwealth to another Commonwealth wouldn't always be easy, because you might have a net debt to your Commonwealth at any given moment and because a new Commonwealth wouldn't want to take on people who would burden it. There would have to be central rules about transfers.

In that sort of framework, what is the bare minimum that a central "federation of commonwealths" for the whole country would have to provide in order for the system to function with a contemporary level of technology.

There are public goods, that can be provided either to everybody in a given territory, or to nobody at all. You cannot exclude those who do not pay their share:

1. Military protection & international relations

2. Environmental regulation

Then there are natural monopolies, i.e. areas where it is not economical to have more than one organization provide the service.

1. Utilities: electricity, water, natural gas

2. Roads (at least local ones)

3. Police and firefighting (since it is easier to protect a general area than specific homes in it)

Public goods have to be provided by a central government.
In your scenario, that central government could be a council of representatives from each Commonwealth. Not sure if that even counts as federal government.

Natural monopolies can be private companies, but to prevent price-gouging, central government has to regulate the price that they charge.

Then there are the laws that govern relations between enclaves, and/or businesses, and courts that enforce those laws. I think this falls under natural monopoly, since it is easier for everybody if there is only one law of the land.

I'm not 100% clear on what you're asking but some things come immediately to mind as necessary for this situation to be tenable:

• commonwealth members' movements cannot be limited in any way by geopolitical boundaries. This includes not only their person but also their possessions and professions, people need to be able to pick up and go wherever whenever their commonwealth requires.




• the same goes for the transfer of funds across borders only more so. If you can move but your money can't you're pretty much stuck where you are.




• to some extent you need an extreme degree of geopolitical stability, locally and abroad. Without that geographical contiguous states of some sort are a prerequisite for personal security.




• travel has to virtually free, in terms of disposable household incomes. Otherwise the expense of moving around will put geographical limits on the extent of commonwealths.

Exclaves and Enclaves

@Ash has hit on a very important issue: you can't just make geography go away. Contiguous borders are very convenient. They provide easy travel and communication between your people, and a minimal border to control and defend.

What you're proposing is that everyone lives in enclaves and exclaves: territories surrounded by other territories. If they want to get anything physical done they must negotiate with their neighbors.

For example, my house has hookups for roads, water, sewer, gas, and electrical. These will necessarily have to pass over and under my neighbor's property who may be in other Commonwealths. I need physical access to and from my property to get supplies and visit friends. What if my neighbor doesn't want that? I'm effectively blockaded and my Commonwealth will have to negotiate peacefully or with force to keep me alive.

Hopefully the utility companies will do that negotiating for me, but they will rapidly tire of having to negotiate with thousands of little Commonwealths each with their own political structures and wants. It's not an environment conducive to business. And when they get it all sorted, maybe somebody decides to change to a Commonwealth they don't have a treaty for and they have to start the process all over again.

Similarly, how does a geographically fractured Commonwealth physically protect its members? With potentially every citizen in their own exclave its surface area is huge! They can't post a guard in each exclave. When someone breaks into my house, how far away will the police be? Will they have to negotiate with my neighbors to come to me?

Finally there is public safety. My neighbor's house catching on fire puts my house in danger. My neighbor burning tires puts my health in danger. My neighbor shooting guns puts my life in danger. This is why we have building codes and environmental laws, we all breath the same air and drink the same water. What happens when I watch my neighbor in a different Commonwealth do some really dodgy wiring, smoke in bed, burn their trash, and poop upstream from me?

This means Commonwealths must negotiate treaties with other Commonwealths in order to function. Not just their immediate neighbors, but they must negotiate a contiguous network for utilities and transportation. There's two ways this could happen...

Corporations

Let the Corporations handle it. This is kind of like what is done today in the US where governments use their power of Eminent Domain to seize land (with compensation) for the public good to build roads, utilities, parks, etc. Normally this land must be used by the government alone for the public good, but delegation to a third party is also possible. For example, governments often seize land and hand it to utility companies and railroads to run their lines. For Commonwealths this might also include police, medical, and firefighting.

The danger is this would, effectively, hand much of the power of a Federal government over to Corporations. Similar to the issue of multi-national Corporations today, but on a much, much, much larger scale. Successful Corporations would be able to cross Commonwealth borders and scale far, far, far larger than any single Commonwealth.

On the upside, this would make them more efficient. On the downside, this would make them larger and more powerful than any Commonwealth. It would give the Corporations coercive control with no regulatory oversight. Rather than fight each other for Commonwealth contracts, the few largest corporations would divvy up the market and form a coercive monopoly to maximize profit for themselves. A modern example is the US Internet market where 2/3 of the population has 2 or fewer options.

If you think End User License Agreements are bad now, wait until there's no government oversight. Your Internet company would be free to spy on everything you do. Don't like it? No Internet. One might think "I'll just use encryption and darknets", nope; if you use anything but the approved encryption (complete with Corporate backdoor) you're banned. Net Neutrality goes right out the window, you're stuck only contacting the Corporate approved Internet services that they have profit sharing deals with.

How about water? Don't want to pay their prices, your Commonwealth dries up. At the extreme end, you are invaded by a Corporation's overwhelming private security firm.

Confederation

If they don't want a cyberpunk corporate dystopia, Commonwealths would form a Confederation to function. Rather than simply negotiating with each other, Commonwealths would join a Confederation (there need not be only one). They'd delegate some of their powers to it, and gain some power to influence the decisions of the Confederation. Exactly how influence is distributed is up to the Confederation.

For example, members of a Confederation might delegate their right to border control to the Confederation resulting in free passage for their members between all other member's territory like the Schengen Area. They might agree to a single currency, like the Eurozone, and delegate some of their monetary policy to a central bank. They might negotiate a common security and defense policy. Water and power security. A transportation system...

The Confederation also acts like a co-op or trade union. It leverages the collective bargaining power of the Commonwealths against other Confederations, Commonwealths, and Corporations. This multilateral bargaining power gives each Commonwealth power far beyond its own small power. The whole is greater than the sum of its parts.

Yes, this is starting to sound like the European Union for a good reason. The EU is really a collection of treaties between its members. CGP Grey does a good breakdown of its structure.

Commonwealths, Confederations, and Corporations

It's not either Confederations or Corporations. It's both. Multinational Corporations will form and exploit the divisions between the Commonwealths. Commonwealths will band together into Confederations to increase their collective utility, bargaining, and defensive power against other Commonwealths, Confederations, and reign in the Corporations.

Beyond just property and defense, it is in each Commonwealth's long term best interest to ensure their neighbors are also stable and healthy. Disease, fire, pollution, bullets, and unrest know no borders.

Conclusion

Commonwealth members have two choices in the long term.

They can go it alone and live in a world of armed, walled enclaves trying to ignore the problems of their neighbors. To get services they'll hand more and more power over to the Corporations. Like a modern gated community, everything will be fine so long as their wealth holds out.

They can band together into Confederations for collective security and mutual benefit. All for one and one for all. Each Commonwealth contributes to the Confederation and the Confederation supports each Commonwealth. The Confederation can have their own utilities and services, or can bargain collectively with Corporations reducing the threat of Corporate take over.

The third option, have a single Commonwealth that is large enough and resource rich enough that it can go it alone, is unstable. It is effectively a Confederation with no governing body. Any single member can decide to switch to a new Confederation possibly throwing the whole situation into chaos.

This is doable - but the role of Confederations would be much smaller than one that American state system plays today.

Currently, in USA or or other typical confederacy, central government, at the minimum, takes care of things that can not bu successfully fractioned, like national security and defense. It may go further and engage in management of other things like postal service, healthcare and pensions, but strictly speaking, neither federal nor local government is required to do that.

States and municipalities usually manage:

• Infrastructure, particularly roads and bridges;


• Law enforcement, including judiciary duties;


• Fire and other emergency services;


• Business licensing and regulations;


• Education, particularly primary and secondary;

Those duties will have to be largely diminished.

• Infrastructure is usually financed as "public works", from taxes or special bonds. "Patchwork" confederation would have little incentive to engage in it. Today, a state may see the need to build a road that connects two town, because it goes entirely through the state and would benefit people of the state. For confederacies, the road would go through many jurisdictions and none would see it as justifiable. On the other hand, corporations can be successful in building toll roads;


• Law enforcement is particularly tied up to geographic locality. It is a common trope for people who are chased by law enforcement agents to seek sanctuary in a foreign embassy. Unless law enforcement can operate without territorial bounds, every house in a neighborhood can become such sanctuary. which means that law enforcement should either become a federal function, or be carried over an extraterritorial agency. In any case, confederacy lose this responsibility.


• Fire and emergency services follow the same rules as law enforcement. We can't let one house in town burn if it belongs to a different municipality;


• Business licensing and regulations are designed to protect consumers and environment. If we switch to a non-geographical model, it will force a "race to the bottom", when any business would choose a confederacy with the least taxes and regulations. This, imho, is not viable, but objectively speaking, libertarian model can potentially work. Anyways, government role in collecting taxes and setting up regulations will significantly diminish.


• Education, like many other duties, can be carried by private institutions. In addition, confederacies may make agreements that would allow children to attend each other's schools.

Overall, the confederacies would be almost insignificant. As I mentioned, during the "race to the bottom", everyone would seek the most permissible confederacy to join, because non-geographic confederacy would not be able to provide significant benefits to its members.

What you're describing is not all that dissimilar from the way certain groups of hardcore religious nationalists have attempted to view the world historically.

One way they work this out is by defining citizenship in terms of participation in the cult. For example, during the reformation in Europe in the 1500s, a person in a catholic territory had certain state-offered rights if they were members of the catholic church, and that membership was established or revoked on the testimony of the members of the local congregation. In territories with a denominational patchwork (wherein peace was typically short-lived in those days), there would be gathering places for each denomination, and the congregations would vouch for their members.

We have a similar thing happening in the extremist parts of the Islamic State. Even if you ignore the command to convert their neighbors, their law necessitates controversy by saying things like, if a woman doesn't dress extremely modestly then she might cause a man to sin. With this way of thinking in place, they can't easily live in close proximity with any group of people which does not share that clothing restriction.

So, in short, this works out if everybody agrees on what makes a citizen, and if the local laws are not intrusive in any commonwealth. It starts to fall apart when person A from a commonwealth B commits a crime in commonwealth C, and then declares himself a citizen of commonwealth D and demands protection there. So the minimum federal or confederal government would have to include rules about whose laws are enforced and how to justly bring restitution to the victim of this kind of crime, as well as requirements on how to be a citizen of any given commonwealth, and it would have to maintain a constantly up-to-date list of commonwealths.