I totally agree with you about the flag as an example, but there is a such thing called towny war. Something that this server would not benefit from, but is a part of the towny plugin. Lets just say towns can be destroyed and taken in a matter of hours, if you want to learn more, look it up on the minecraft wiki or you can always ask.

Well, politics (and probably diplomacy) are nice ideas, but I think every nation (not town, a nation with different political systems would be "strange") should have the right to actually choose it`s own system of goverment.
Thie also gives the opportunity to play out the nations a little more (with assemblys, rituals, parades, ... whatever fits to the nation).

Let`s look at three examples (therefore the names of nations that do not exist on the server):
- The big empire Yggdrassil with 7 citys might choose to allow senat votings for each citycouncil. These  councils might discuss issues or ideas (and in conjunction with the mayor make according decisions) and ask the mayor to take care of these. But these councils only make decisions on the "town-level". The decisions on "nation-level" in this particular nation are made by an emperess or emperor and her/his orders are to be followed (unless you want to "leave" the nation). Of course at each emperors birthday there is a big parade to be held in his/her honour to which every town send a number of parade troops, lots of visitors. While other friendly or neutral nations send dignitaries (mayors and TAs as guest of honour for the empress) and instead of paradetroops tourists.
- The Republic of the North with lets say 3 citys allows a thing (nordic assembly, Wikilink) for each of it`s cities. Each city is led by some sort of nordic chieftain (the mayor). These mayor either choose one of their as the leader of a nation who has to consult the other leaders on nationwide decisions or they choose to pass the rule of a leader each month to the next in order,  so each of the 3 leaders will lead every 3 month, the change of rule indicated by some sort of monthly ritual (for example: the town of the current leader can place the "stone of ruling" on a pedestal at it`s spawn and the leader will pass it on to the next one each month).
- The monarchal citystate of Munako is ruled by it`s beloved King (mayor and cityleader). The Kings wish is also his loyal citizens wish and command, for he is wise and tends to his peoples needs. This citystate is a monarchy with one ruler and his loyal lords (TA`s) and citizens (knights, scholars, merchant, ...). As long as the King and Lords care about the peoples needs it`s actually as most servertowns today). This citystate can play out as a proud little monarchal citystate. There were succesfull citystates all over history, like medieval Venice, classical Athens and Sparta, mesoamerican Chichen Itza or the modern Singapore (which has a military and economic strength than can compete with nations like Sweden, ireland or New Zealand), therefore there is nothning to be ashamed of by "only" being a citystate (instead most citystates were always very orud about their independence and always very active in trading and interacting with other nations. And most of them even had a very well trained and equipped army (like modern Singapore that has a more modernized army than some european countries; or of course "Spaaarta!"  .

So yes, politics could a very nice additon on town and nationlevel and not only boost the meaning of the nation but also the interaction between cities (for example by "rituals" and event like menitoned above). it also could boost the communal spirit of some cities.

And hey, it`s a good excuse for parades and festivities.

I don't think changing the theme of current Noobstown, to a mega business / industrialized state would work out so well...