Would anarchy work?

In the scale free government post, one of the completely unresolved issues was what to do about the federalism axis. There are two scale free extremes to choose from: completely uniform democracy and pure libertarianism (i.e., anarchy). This post will ramble about the anarchy option without getting anywhere very useful. Anarchy would only work if the universe is such that the middle ground can be efficiently simulated by ad-hoc coordinated groups.