Although this is a completely theoretical thing, I think that there are good ideas in here. In other words, I think as highly of my ideas as any other person thinks of his, so my ideas probably have holes in them that I don't know of. And then there's parts that I can't seem awkward but I'm not sure how to fix. I'm also posting this because summer vacation has given me too much free time.

Population Levels

So, when I was thinking about how to make cities, and a couple other things, I realized that I would need to start here. The npc population of a general area is dependent on factors such as safety, available facilities, and exploitable resources (i.e. rare metal mines, abundant harvests). When the population level is high enough in a region, they will consolidate into a city. Constant violence and instability in turn lowers population.

Cities

In addition to supplying things such as manpower and tax money to the owner, a city is also trade hub, and is responsible for the safety of the surrounding area.

Markets

Each city has a market at which players and NPCs can buy and sell goods. Unfortunately, markets are bound to the city, so the accessibility of different goods varies with the

Security

Cities are able to control groups of npc guards in a certain area. These guards are able to teleport a certain distance in the case that a crime, such as a player going on a killing spree, although the teleportation has a long cooldown such that it can't be used for retreat. The guards are managed through the barracks similarly to how other NPC soldiers are managed.

Crafting

Resources

Different resources (and different crafting methods) are different.

1. They require different levels of skill to use optimally, and thus lower-level materials can result in stronger equipments than higher-level materials in the hands of an average craftsman.

2. They give different bonuses, thus making them optimal for different playstyles and classes. To give an example, a city surrounded by materials which give bonuses to finesse, which is only usable by fencers, will naturally have a higher fencer population.

Methods

Crafting is an open-ended process. There isn't a list to tell the player that distilled Lassleworth applied onto a Rebeen plate encased with Stallium can create a battery that stores magical energy, or that Foxweed enhances the healing capacities of a Ironwood staff. This means that players who experiment may find that differing combinations may produce unexpected results. However, there should be a logic to this. In other words, the code shouldn't say "Item A + Item B = Item C", but rather "Category A + Category B = Type C". Think something like how the elements are in an orderly periodic table but that doesn't make chemistry class any easier. One benefit of this would be that an expert player could use his understanding of the system to know when to replace Metalium with Alium in battery crafting when the typical materials aren't available.

Progression

Leveling

Grinding will not be a feasible method of character progression. The exp required to level up will require extended amounts of gameplay. However, gaining exp will not be limited to killing mobs. Exp can be gained in reasonable amounts by crafting or traveling. The exp gained by any activity will eventually slow, not to the extent that a player if forced to take up other tasks to level, but to the extent that

Stats (and Titles)

Players will gain a mediocre amount of stat points from leveling. However, their stats will also benefit from equipment and titles (and certain other things like potion use). Titles and stats are gained from achievements or special quests or instanced events. However, only a certain amount of titles and stats can be equipped at once, generally dependent on the character's level. This means that a player with a wider variety of adventures will have more titles and thus benefit more from leveling, whereas a higher level player will have more slots for titles and stats and thus will benefit more from good titles.

PvP

Sin

Players who kill other players (and npcs to a lesser extent) will receive sin. Sin increases the death penalty and reduces the amount of sin players get for killing you. Of course, killing allied players next to a city creates way more sin than fighting in a war. Still, fighting against other players isn't free, so even if you can win a war it may leave you in a weakened state.

NPC soldiers

Players could hire soldiers at cities (although players need barracks or forts to stash them at to control a considerable amount). While players can respawn, npcs are somewhat expendable. However, even if the population of a city is 20,000, you don't get 20,000 soldiers. For one thing, it costs money to maintain soldiers, thus limiting the military force players can draw at any time. In addition, hiring soldiers and losing soldiers can reduce the morale of the npcs, which may make it difficult to hire npcs. Drafting may temporarily override this limit but will lower morale even further, which will have negative effects in the long run.

The game would provide means to command npcs from garrisons and cities by moving pieces on a map.

Events and stuff

While some events may be caused by npcs, players can fill in any role. In other words, a player might get a challenging quest to open a portal to the dark realm, and upon succeeding, may be given control of an army of demons which must be sustained by actions which make life harder for everyone else. Or he may become the chosen hero of the light and be responsible for spearheading an invasion into a new realm.

1) "Market" and "Leveling" sections are incomplete sentences (as in, they just suddenly stop). Might wanna finish those.
2) The concept of your crafting process is similar, somewhat, to Divinity: Original Sin. You should check out some videos about it and get a sense of how exactly you want to design the process. That game has an excellent system, so it is productive inspiration.
3) The entire concept of "sin" that you've mentioned seems like a detrimental game design concept. Many of the activities people enjoy in MMOs is the PvP and if there is a higher penalty for killing other players, the game won't be enjoyable. The way you describe it makes it seem like any and all PvP activities will be something that only pulls players down rather than rewarding them, regardless of the context. Since most of the people are LOOKING for that kind of content, you would be losing most of your intended audience right there. I suggest having such a system only outside of duels/multiplayer matches, etc.

Is there an overall objective, purpose, story, theme, player experience, or something that brings all the elements together? Is there something in particular you'd like to discuss or examine?

The thing I've always found interesting about MMOs is the way they need to emulate systems (like justice and economics) that humans have developed as we've become "civilized" while ensuring that players are entertained. I've wondered if perhaps a system of justice could act sufficiently as a sort of quest or content generator as players get into PvP situations. Is there a form of justice that can be enacted upon a character and player such that other players might be able to act as law enforcement agents, the offending player isn't penalized in an un-fun manner (such as might be possible), and the injured party has the potential for some form of restitution? I imagine that the system could open the potential for abuse but could you also take that potential for abuse into account such that you again allow players to use and work within the system to maintain order in these cases as well?

The thing I've always found interesting about MMOs is the way they need to emulate systems (like justice and economics) that humans have developed as we've become "civilized" while ensuring that players are entertained. I've wondered if perhaps a system of justice could act sufficiently as a sort of quest or content generator as players get into PvP situations. Is there a form of justice that can be enacted upon a character and player such that other players might be able to act as law enforcement agents, the offending player isn't penalized in an un-fun manner (such as might be possible), and the injured party has the potential for some form of restitution? I imagine that the system could open the potential for abuse but could you also take that potential for abuse into account such that you again allow players to use and work within the system to maintain order in these cases as well?

I like it. I have thought of similar systems. For example, there could be sort of elected judge or a jury system. The game could suggest a range of punishment options if found guilty, and the actual punishment could be chosen by the judge/jury/victim/offender. Punishments may be a mandatory quest (e.g. kill a dragon to get parts to make a replacement suit of armor for the victim), or exile (transported to a far away high level area, have to walk back), a handicap quest (do quest x without any projectile weapons) or similar. They should probably be eligible for any achievements and side loot earned in the process (carrot). If they try to run away or ignore the punishment you probably need a high level NPC to hunt them down or something (stick).

From an interesting in the virtual-social interactions in MMOs, I really enjoy the idea of players judging and ruling themselves. However, the potential for abuse is very present.

There's an interesting story from a lesser-known MMO called 'Nexus: The Kingdom of the Winds', where players had a very self-governing roles. Two players ended up working their way up to be the heads of different branches of authority (that were meant to balance each other out), and it turned out that both players were husband and wife, and used their positions to dominate the game.
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Wikipedia: [Talk: Nexus - Kingdom of the Winds]

In April 2005, the US division of Nexon Inc. split from the head branch. They renamed their new company Kru Interactive, and still own and operate the NexusTK game servers. Prior to this change, the GM of NexusTK who went by the in-game name "Eldridge" was laid-off from work. Before he signed off for the last time, he made a series of announcements that "The game will have no new updates" and "The servers will only run until they crash". He also made a series of "Goodbye" posts which were posted on the in-game message board system.
It is interesting to note that the President of KRU Games, Sang-Baek "Scott" Lee, almost immediantly logged in on his GM character "Wony" and removed the posts made by Eldridge. Eldridge's statements were proven to be invalid when the game was updated with a Jewelry craft, the completion of the "Staff of the Elements" quest and the release of a new event launching a war with a shapeshifting race.

"Wony" then turned over all Game Master activities to "Marama", a longtime Archon player in NexusTK. It is important to point out that all Archons are in fact players who volunteer to help do some administration activities inside the game, much like Assistant GMs in other MMORPG games; as volunteers, they are unpaid for their services.

The only difference here is that a player was given all the responsibilities of a Game Master and the power which comes with it, such as to make amendements to the laws of the game.
What was even more disturbing that was "Marama" was actually "Sarina", the Diviner Elder, and was a player well-known to mis-use her positions for her own interests. Shortly after Marama was given Archon Primogenship, Marama raised several of her Diviner Guides to Eldership, among these the player Airess as Archon Jeamin and Simbel as Archons Synova and Poems. Marama also gave Archonship to her husband, the player "tip", who took the role of Archon Puella.

tip is also the Head Judge of the in-game Justice system, which puts the complete control of the game's Justice system in the hands of the two players who are husband and wife.
Almost immediantly, waves began to be made throughout the community as Marama began making amendments to the in-game Laws in an effort to justify the jailing of other players she had developed grudges against over the years.

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This kind of concept pleases me, because it makes very interesting and very real "government problems" in-game, but players also need a way to outright revolt and overthrow corrupt "government" officials. Ofcourse, if the government then suppresses the people, players will just get bored and leave. So it seems like it'd be very hard to make such a government system remain enjoyable for the bulk of your players.

This kind of concept pleases me, because it makes very interesting and very real "government problems" in-game, but players also need a way to outright revolt and overthrow corrupt "government" officials. Of course, if the government then suppresses the people, players will just get bored and leave. So it seems like it'd be very hard to make such a government system remain enjoyable for the bulk of your players.

I think it would be a matter of just not giving characters special powers over the rules of the universe. I'm not familiar with the game you mentioned but it wouldn't be fair say to teleport offenders from wherever they might be straight to jail nor would it be fair to teleport (or control the ability to teleport) an armed squad to bring an offender in like suggested in the OP. Unless those are abilities that any character could potentially have.

If all characters are equal in the powers they can obtain, then two players rising to power and abusing their position isn't a game killer, it's a campaign opportunity. Though I suppose it might require players who have sufficient knowledge of what can be done in-game to form a resistance and lead the charge.

As for appropriate punishments, I think what would work best might be confiscation of possessions and property. But not necessarily in a complete and automatic way so that a player might take the opportunity to hide stuff somewhere just in case he gets caught, Those those things probably aren't very secure,