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Wei_Dai comments on Thomas C. Schelling's "Strategy of Conflict" - Less Wrong
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The part you didn't quote addressed that: once this policy doesn't work out as planned, it crumbles and the development of nukes by everyone interested goes on as before. It isn't an alternative to MAD, because it won't actually work.
Well, you said that it had a "good chance" of failing. I see your point if by "good chance" you meant probability close to 1. But if "good chance" is more like 50%, then it would still have been worth it. Let's say MAD had a 10% chance of failing:
Then EU(MAD) < EU(NH) if U(world destruction) < 10 U(one city destroyed).