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Mr Khan said:
The icelandic thing was replicating state functions on an ad hoc basis, though. This is viable for a society with a very small population like medieval Iceland, but one still notes that there is a higher legitimacy to which people must submit themselves for the enforcement of individual rights, albeit through a purely voluntary structure.

Modern society, meanwhile, demands a state in order to enforce the rights of individuals. Any interaction between humans needs some form of legal structure with enforcement capability (a state-like entity) in order to enforce the rights of individuals without having to revert to tribalism.

Anarchy isn't the absence of law or government. If participation is 100% voluntary, then the entity is not a state. States are by definition forceful. In Iceland one mustn't submit oneself to the will of the Godor, but if one does not his own Godor will not protect him from rightful retributative force. It was entirely voluntary. 

This is how it worked: You harmed me, pay retribution. (I have a right to use force to make you pay, because you used force against me.)  If you answer no, then I must consider whether or not I can force you (practically.) If I am not able to force you, then I'd have the Godor or my family or somebody else reach a settlement or force you. You would then have your Godor or family pay retribution, or reach a settlememant. If they choose not to, then the other Godor will force you to pay. If you can't pay, or choose not to pay, you can work off your payment. If you choose not to do that, then your family/Godor will pay, but not associate with you anymore and everybody else will know of your reputation. You will be voluntarily banned from that portion of society. Because that is a risk which most people aren't willing to accept, there is a motivation to play by the rules. Godor were not forced onto people. People could've lived without them, but many people chose to pledge to them or to sell their retribution rights to them (which is profitable for the Godor.) 

Now let's look at a modern setting. There is no reason why private companies can't sell protection just as the Godor had. If you can't pay, then they'll buy the protection rights off you, and seek the rewards. This is generally called dispute-resolution. You make the claim that a society needs a centralized system when the population grows, but can you support this with evidence or deductive logic? 

http://en.wikipedia.org/wiki/State_(polity)

The most commonly used definition is Max Weber's,which describes the state as a compulsory political organization with a centralized government that maintains a monopoly of the legitimate use of force within a certain territory.