Argument going on here is government with legal regulation versus libertarian free-market anarchy with voluntary community-imposed regulation. I think you and I are in agreement that government regulation will not stop all instances of "bad," and libertarian organizations (companies, communities) would not sell nukes to random people or use them for same reasons that corrupt unregulated dictators won't.
I see, thanks for clearing that up. Yeah I agree that any police force will never prevent all crime (can happen before they know about it, etc), and neither can a government prevent people outwitting any regulation. That will certainly apply in libertarian societies too. Out of curiosity, do you have a better way to defend against that in a libertarian society? Or will be based on punishment (eg exclusion from the group)?
I don't quite understand how the modern system isn't already the exact natural progression of things from what you describe, though. Governments, regulation, police, armies, all catapulted in size based on transport options and arms races. How do you plan to fundamentally change human psychology to not have the same inevitable outcome?