Why Doesn't Iceland Have A Military?

One of my classmates, Jeremy, comments in my recent post on Icelanders and happiness:

Iceland also has no military. That would make me really happy, ceteris paribus.

I just got done reading The Federalist for my Founder's Constitution class. In The Federalist #41, James Madison comments on how liberty developed in Britain in large part because it was blessed by being an island nation. As a result, Britain was able to defend itself almost exclusively by naval power. In contrast, Continental European powers proximity to one another and share boarders necessitated standing armies withing their own boarders for self-defense. Almost without exception, these armies eventually turned their guns inwardly to violate the liberties of the people. Britain alone had the good fortune of geography that allowed them the luxury of not needing a standing army, which created the fertile soil from which notions of liberty grew.

Madison intentionally argued for a strong union between the States so that the US would be one nation isolated from hostile foreign powers -- similar to Britain, rather than co-equal powers which could threaten each other militarily -- resembling Continental Europe. Madison saw this as a critical requirement for maintaining the liberty of American people.

Interestingly, America's isolation is what allowed them to develop without maintaining large standing armies (outside of times of war) for most of its history. Today, neither Japan nor Iceland have standing armies -- both being island countries with no hostile forces on any of their borders. (They are also both have the luxury of being protected by other powers.)

Question: Is geographic isolation a prerequisite for a nation doing away with having a standing army? How does technological development in weaponry and transportation affect the influence of isolation in this regard?