It's funny cause the math still came out roughly the same lol
Basically, you shouldn't be hitting your city limit unless you're trying to put every resource in that one city and want all the resource modifiers for that city. When you spawn, don't build a city right where you start, build it a little further away, that way you won't get those uber resource cities which seem cool until you find the tile limit.
EDIT: Sounded too serious in the first part lol
The math is more prominent when you're stacking multiple modifiers or resource nodes. 12 x 1.15 x 1.25 x 1.25 x 1.25 = 26.95. It's 23 if you add the modifiers first.
And yes, there isn't any real reason to build everything in a city. Especially if you have resources available. If you have a Lost Library available in a city, you don't need a Study. You get more benefit out of stacking mods on the 5 than the 1; the Study (and similar) is best used in cities you never intend on improving to begin with, that have extra space after wards, aren't producing anything else, or to bootstrap something. You need to get a 500% modifier to make a Study equal to a Lost Library... but for that same cost, that Lost Library will -also- produce 5x more. So you can either try to spend space and money going from 1 to 5 or the same to go from 5 to 25. What's more efficient to you? 
Even without modifiers, a resource node is still much much better than the base building. Especially with city level up bonuses; if there's not much production going on in a city, the tech, arcane or gil bonus won't do you squat. The guardian unit is potentially useful but only on border towns where there aren't resources; it's a cheap way to get a unit on a city that isn't worth much and that you'll probably raze anyway after the war is over.
Heck, if you have extra food and are in a jam but have lots of extra spaces, you could very well build many small cities with a single hut, get the guardian unit, and then raze the city. Likely not a viable strategy for long term warfare or defense, but for the cost of a pioneer and a hut, you could potentially get something useful (brigand archers are nice at the early stages) well beyond the cost of that.... or at least, cannon fodder to inflate a stack. Plus, it can push back the fog of war/tame lands between important cities to avoid random spawns popping up in a pinch.
As far as spawning city, don't think of it as a capital city. THere's no such thing in Elemental. Consider it just aanother city. The only reason you should build up a city is because the resources are available for it. For instance, if you have a refugee camp near a spawn, that's a good place to make a big city since the refugee camp is equal to 2 to 3 huts (3 food). That 3 food and 3 space you save is equal to a market place, an irrigation system, or other 25% modifier. And that 3 space you save is almost enough for a 2x2 building or worth higher level smaller buildings (more mods). Thus by knowing which cities to build up and which are fine at level 1 or 2, you can really maximize your cities to support the sprawl.
And, once a city is maxed out, if you have spare space... hey, go ahead and add those lesser improvements at that point.
What's also important to consider is city location within your empire. If the city is right in the middle of your empire with plenty of space around, there's not reason to wrap defenses around the resource; it's protected by other cities and there's no fog of war for monsters to spawn in. It's also worthwhile to think of cities as a resource, not as an important location unless it is strategically or economically important. They are ways of turning food (the fundamental resource in Elemental) into almost anything.
Another alternative use is to block off land. If you have a mountain pass, you can build a city and use improvements to cover the width of the gap, forcing any one trying to get through to try to get through the city (complete with defensive bonus). Helmsdeep didn't have anything special about it - no resources, had little in way of size and such.. but it was important as a means of defense.
