I argued previously that government should not have a scope larger than that of a county or a town. But what makes a town special? Why not go below it and talk about independent town districts and neighborhoods and condo associations and finally private properties? It seems to me that the naturalness of a town as the biggest organization at the level of which government is legitimate lies in the fact that an average town is self-sufficient. Not, obviously (you don't really think I've lost my mind), self-sufficient in the sense that it need not trade with the rest of the world, but simply in the sense that it will have most of the facilities to satisfy everyday human needs. Such as, in no particular order: grocery stores and supermarkets, drug stores, dry cleaners, car oil change stations and mechanics, restaurants and bars, electronics stores, pet stores, clothing stores, malls containing all of the above, movie theaters, FM radio stations, furniture outlets, gyms, Internet service providers, etc. etc. It may also have: a university, an airport, specialty food stores, opera houses, and so on.
In other words, one need rarely venture outside one's own town or, at the most, nearby corporations in order to get most daily errands done. Most consumer goods are available within your own town or city. But, clearly, a lot of things may not be available in, for example, your own neighborhood yet which will be available in your own town.
What makes a town a well-defined community is not only that its businesses serving the public are jointly sufficient to make it self-sufficient but also that each business is to a large extent individually necessary. The division of labor within a town is in this sense fragile. It doesn't take much to turn a thriving town into a dead one: just get the businesses mentioned above to leave, e.g., because of high taxes or trade barriers. Thus, all citizens of a town have a common end: a good political system which will encourage growth and prosperity and high property values. Everyone thus depends on one another in a profound sense. This causes a feeling of community to develop. And this means that even if the local government imposes a 2% income tax, this will not seem like much of coercion or a violation of rights.
In other words, as we go down (in the US) from the federal government to state to county to city, we retain self-sufficiency and therefore community. In fact, we highten the sense of community, because it is much more tempting and easier to loot one part of a country to subsidize another part than to loot one part of a city to subsidize another part. And hampering the free market within a city will do much greater damage than hampering the market within a continent-wide country. But in the process of removing outer levels of government we increase political competition and make the consequences of bad ideology, if it be held by a town government, much more acutely felt. On the other hand, moving from private property owners up to gated communities to districts to towns causes us to recognize that the sense of community is weakened precisely until we get to town, because even if a district is very well run, the surrounding towns's bad government can destroy the felicity of its inhabitants.
Moreover, it is true that in a democracy your vote matters very little, but it matters more on the level of a city than a state, simply because fewer people vote in the former, yet another community-enhancing fact.
Further, city roads (though not highways) are both public goods as traditionally defined (except that consumption may become rivalrous when roads are congested) and limited-space monopolies. This suggests that the local government may be the best entity to build them. Same with the police, because their deterring function applies to the whole area they patrol, and so it is hard to exclude those who would not pay from being protected. (Though I fully accept the possibility that private solutions can be found even in these difficult cases.)
See also Hoppe on this subject.
Interesting post. I don't agree that a state is necessary at any level, but city-states are indeed far likelier, for the reasons you illustrated, to be pro-liberty. I think even the difficult cases of so-called public goods can be handled privately by, for instance, local businesses funding protection and the building of roads to maximize their revenues, as has been the case historically.
Sadly, intense competition has not stopped democratic city governments from capital-consumption. Just look at what happened, and continues to happen, to the city of Detroit.
In order for Hoppe's theory of city-states to apply, the government must also behave competitively, and must therefore have the incentive to accumulate capital. This requires private ownership of the government. We have seen this occur most dramatically, since the publication of DTGTF, in the U.A.E. city-state of Dubai.
The fallacies of intellectual communism, a compilation - On the nature of power
City-states could be a good step toward a free society, but do not constitute a free society in and of themselves. But microstates could be micro enough that private production of defense services and arbitration could outcompete those governments, and eventually begin to suppress the ones that act criminally toward their residents. The result would be a competitively-driven downward trend in state power, until eventually states stop acting statelike.
Pro Christo et Libertate integre!