Today I'm once again venturing into the often ridiculous field of extrapolating gameworld reality from arbitrary mechanical conventions. For a long time I have operated under the assumption that spells level are roughly indicative of the power output the spell. Cure serious wounds comes after cure light wounds for a reason, after all. But it takes only a casual perusal of a few spell lists to call that definition into question.
Let's look at the first edition PHB to see what I'm talking about. How many players of fifth level magic-users would pick flame arrow over fireball? Certainly we can construct scenarios where flame arrow would be the more useful of the two, but that doesn't change the fact that fireball is the one to pick in general adventure situations. Similarly, newly minted fist level magic-users generally want sleep or magic missile or charm person.
Mending is also a first level spell and though useful, it doesn't exactly resonate with power the way setting people on fire with burning hands does. I suppose you could argue that magically reassembling a shattered coffee cup actually requires more power than setting someone on fire, given that an act destruction is generally easier to accomplish than an act of creation. But that doesn't stop mending from being a lame choice for a 1st level M-U.
I suppose spell level could measure the energy input required to activate the spell. First level spells are first level spells because of the minimal mana needed to achieve those specific effects. Flame arrow is a third level spell simply because it is an inefficient transformer of mana into fire. But neither of these ideas gets me anywhere towards understanding why Phantasmal Force is a 1st level Illusionist spell but a 3rd level M-U spell.
Looking for a Vancian analysis, I think we could posit that spell levels as a measure of formulaic complexity. The properly trained M-U brain can only hold so many sonnets, whether they were written by sophomores or Shakespeare. Different classes learn different mnemonic exercises, allowing for different storage capacities of various types of spells.
If spell levels measure energy input or formulaic complexity then the ramifications for your campaign are enormous. Under these schemes there's nothing particularly fixed about the fact that fireball is a third level spell. The PCs might discover an ancient scroll with a previous version of the spell that's fourth or fifth level. They might then figure out that the fireball in the book merely represents the current state of the art in pyro-sphere technology. I don't know about your campaign's magic-users, but I'd personally blow a lot of time and gold pieces trying to crack the code for a second level version of fireball.
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