This chapter constructs a formal model of our hypothesis from Chapter 9 about the rise of Uruk. We assume there are many open sites where people can obtain food by foraging, farming, or pastoralism. There is also one site controlled by a local elite. We start from an equilibrium with mild stratification, reflecting the conditions of the ’Ubaid period. A climate shift toward increasing aridity reduces the productivities of sites dependent on rainfall but does not affect the productivity of the elite-controlled site where irrigation is based on river water. This lowers commoner food income and shifts population toward elite-controlled land. The declining standard of living for commoners makes it profitable for the elite to create urban workshops producing textiles and other goods, where manufacturing has aggregate increasing returns to scale. The taxation of manufacturing allows the elite to enforce monopolistic output restrictions, driving up the price of manufactured goods and driving down the wage. Organized elites may want to establish city-states based upon manufacturing even if they lack interest in public goods, because taxation can be used to enhance private elite consumption. The key tradeoff for the elite involves profit from manufacturing versus land rent from agriculture.

After an introductory section that frames some conceptual issues surrounding the emergence of city-states, most of the chapter is devoted to a chronological narrative describing the case of southern Mesopotamia. This includes sections on the pre-’Ubaid period, the ’Ubaid period, the Uruk period, and the post-Uruk period. The key puzzle is how to explain the transition from scattered villages and small towns in the ’Ubaid period to large city-states with tens of thousands of residents in the Uruk period. Following the main narrative, we review causal hypotheses on this subject proposed by archaeologists and economists. These include ideas about climate change, migration, food production, manufacturing, trade, warfare, and culture. We also offer a synthesis of our own. In our view, the prime mover was increasing aridity, which motivated migration from outlying areas toward the south. As this process unfolded, commoner living standards fell, which enabled local elites in the south to employ commoners at a lower wage. When the wage had fallen far enough, urban manufacturing became profitable. Elite taxation of urban manufacturing was probably easier than taxation of rural agriculture, and this provided the fiscal foundations for early city-states like Uruk.