Politics fails when the system is too big and the politics life is not getting affected by their choices. In a city or county they live there together with all others. It usually works
Discussion
You are right that local politics works better than say national. But you can't have just local politics. You need the larger structure because its the only way to do war effectively when there's already other big players. And if your local municipality works so well it might attract enough people until its not that small anymore.
Economic reality doesn't go away.
I understand that. I moved for my convenience in a country with 1.5 millions people. The government stay little because every single citizen can reach the parliament in 1 hour by car. It looks like little dimensions are the only parameter that works. For war there are alliances.