I love your concepts for this wonderful world and they spark all sorts of nifty things in my head. I really enjoy the time frame, the fantasy world, the journey, and the backbone you are constructing. I've no idea if these thoughts fit with your flow, but here are some hodge-podge ideas this thread and your idea sparked. Still, what I wanted to 'play' with wouldn't work with the traditional definitions. So, off to a dictionary to find what I wanted. I highlighted them.
Free dictionary defines a monarchy as:mon·ar·chy (mnr-k, -är-)
n. pl. mon·ar·chies
1. Government by a monarch.
2. A state ruled or headed by a monarch.
And a monarch as:
n.
1. One who reigns over a state or territory, usually for life and by hereditary right, especially:
a. A sole and absolute ruler.
b. A sovereign, such as a king or empress, often with constitutionally limited authority: a constitutional monarch.
2. One that commands or rules: "I am monarch of all I survey" (William Cowper).
3. One that surpasses others in power or preeminence: "Mont Blanc is the monarch of the mountains" (Byron).
4. A monarch butterfly.
First to MClark. Monarchies aren't always bad, but the 'heirs' often are. The problem with monarchies is succession. That's why I went to the definitions, because I didn't know if you could have a monarchy that was not by genetic line. Apparently, you can. Perhaps autocracy is a better term for where my mind drifted.
2nd: As to the concept of trials, there is no guarantee that succeeding at trials will evolve a true moral leader. Besting others in magic schools and physical power might assure power, but not necessarily just and wise rule--unless trials test more than 'might'. (Somehow that bores me.) I saw your world as a threatened utopia.
3rd: I'm especially drawn to the secret society option, but as others have pointed out, this has as many inherent problems such as the might = right problem. Still, I was so drawn that I had to figure out a way to make it work within your world. See below.
4th: Lost Stars and Astrology-very exciting.
Further, I've assumed that you begin with a utopia that is threatened. In other words, this system has worked well for thousands of years. (I'm always a fan of Lost Horizon stories.) How does it work well?
Also, 'breaking out of the insulation of wealth and power' is another favorite plot line for me, i.e. succeeding over poverty or wealth or power into a higher consciousness. Then I always want that soul to attempt ascension to leadership, bringing the society with it. Usually it fails in the story, but the glorious flight to the sun ending in crash is still a favorite.
MClark: Yes to princess and yes to your male or female sovereign.
The Deposed King: Yes to the pilgrimage. Hero's journeys work. The Alchemist will always be a favorite of mine.
Suggest opening your Guild (economic) and your House (political) conflict concept needs to be expanded to include the Magic Schools (seats of knowledge/history/occult).
As to taxes, you mention the Guilds and the Houses, but don't overlook the Schools. They could be your 3rd pillar. Just because they are schools in you magical society they probably have power and money and thus should be taxed as well.
Key question to answer is, "Why does the society follow this monarchy system?" You've given and been given some ideas. My idea goes backward from those since I begin with an utopia and see it threatened. And you are right, you need the villain. It's essential. On the other hand, this is such a cool world to play in! I further see it as a world of knowledge without need for money, but that doesn't mean there isn't political intrigue. Why? Because I'd prefer to pursue the ethics of leadership over the mundane of economy in this world. That's just me--or because I'm so wrapped up in economic turmoil in my current WiP... :-) It can get a tad boring to make exciting.
So, what if... The schools, the guilds, the houses (geographical over genetic line houses) select, via their own various tests, five-year-old children who enter the 'monarch school'. This school is isolated from the world and all students give up cast and their families. Raised by super monks or Buddhist-type isolationists, these 'talented' young children will feed the upper echelons of the schools, and perhaps the guilds and houses. The finalists slip into the other magic schools at high levels to be tested. The top finalists are sent out on the journey penniless to prove their wisdom (or to gain their wisdom). The monks have no influence outside the school other than to monitor the finalists so there is no threat they will influence the future heir. When the final selection is made--it is made by those who cannot influence the future leader---train and release concept.
Yes, this is sounding like a familiar plot line, isn't it? Goldie Oldie. Then I'd interweave the conflict as background as the journey is made. Let the evil be seen as a creeping blight upon the people these individuals meet--frightening and seen to be growing. Any battles are small at first and individual growing in depth and ever growing populace. As they gain their wisdom, they are also being exposed to what they must learn to fight. Some would fall to the evil, others would fail and fall away back into the masses, a few will succeed only to lose, and one... only one becomes the lost star to lead the world. In a way, these 'lost stars' are like comets--some burn out with specatular bursts of beauty, some never get close enough to see, but a rare one will brighten the night sky with hope. These concepts sound christian, but are actually universal theologies and fulfill universal needs within all of us.
Uhm... That I would like to read. Good luck, my friend.