If you check the halakhah (Jewish law), it says that ANY gentile can live in Israel as long as he keeps the Noahide laws (the laws of basic, righteous conduct, expected of gentiles). And what do the Noahide laws say? Do not hurt your neighbor; do not commit crime. So basically, as long as you're a libertarian, you're allowed to live in Israel, according to the halakhah.
If the halakhah also demanded that Noahides be monotheistic (the first Noahide law is that you cannot be an idolater), and that gentiles cannot wield power in Israel (only Jews are allowed to wield political power in Israel, according to the halakhah, even if gentiles are allowed to live in Israel), it was likely because being a monotheistic Jew was the safest guarantee of being a libertarian.
The same way that religious tests of office in Puritan New England were meant to keep pro-monarchy Anglicans out of office (who would have surrendered the whole community to the king if they got into office), so too, the restriction to monotheists (for gentiles' habitation in Israel) and Jews (for office in Israel) was meant to make sure that only libertarians would populate and run the country.
These are my own thoughts, but I am inclined to agree with Rose Wilder Lane's The Discovery of Freedom: Abraham "had taught his increasing family that men are free." (p. 73) "Abraham said that none of these gods exist. He said that God is the One Creator-and-Judge. God is The Right, he said; Rightness creates the universe and judge's men acts. (As water judge's a swimmer's rightness in swimming, God judges rightness in living.) But God does not control any man, Abraham said; a man controls himself, he is free to do good or evil in the sight of God." (p. 74) "When you think of the pagan world as it was in the historical time when only the Israelites held this truth, you see their preserving it as the great achievement of all history." (p. 75) "They were a very small group, surrounded by powerful pagan empires; Egypt in the south, Armenia, Persia, Chaldea, Babylonia, Assyria, in the north and east, and in the west, Rome. The most promising young Israelites were always falling in love with pagan girls. The pagan achievements awed them all. When you see the incredible walls of Baalbek or Tadmor, in ruins as they are now, and even with the memory of New York's towers behind your eyelids, you are struck dumb. The simple Israelites who saw these gigantic cities in their magnificence, dwarfing their thronging populations, must have been stunned. They would have melted humbly into those pagan multitudes, if their strong men had not stood in the way and driven them back with threats, telling them that they were like no other people, that they were set apart, chosen to know the truth and hold to it. They wanted to be 'like all the other nations.' But to be like any other people, they must forget that men are free. That is the truth they held. Therefore, of course, they were anarchists. They lived and prospered for centuries, with no government whatsoever." (pp. 77f.)
Regarding all inhabitants of Israel having to be monotheist, cf. John Locke's "A Letter Concerning Toleration", that Biblical Israel punished idolaters because, in a unique fashion, God was the immediate Legislator.
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