Adam Smith and the Role of the Towns in Feudal Europe

By Mark Koyama.

Abstract 

"Adam Smith’s account of medieval towns in Book III of The Wealth of Nations remains one of the most influential analyses of how commerce transformed feudal Europe. This pa- per formalizes Smith’s argument as a game between kings, lords, and towns. The king-town alliance emphasized by Adam Smith emerges when towns are wealthy enough to offer fiscal and military support but lords remain a serious threat. However, when kings become exces- sively predatory, towns may ally with lords (as in the Magna Carta crisis); when towns are too weak to offer substantial support, kings ally with lords instead (as in Eastern Europe). A dynamic extension shows that the king-town equilibrium is self-undermining: commercial growth erodes lordly military power through Smith’s “diamond buckles” mechanism, even- tually enabling royal absolutism. In contrast, the king-lords equilibrium is self-reinforcing, suppressing urban development and preserving feudal institutions. The framework highlights how small differences in initial urban development could generate dramatically different long- run trajectories and illuminates both the brilliance and the limitations of Smith’s conjectural history."

Also see his Twitter thread. 

"The paper (https://markkoyama.github.io/papers/Public_Choice_Submission%205.pdf) revisits Smith's Book III on how towns drove Europe's movement out of feudalism. Barry Weingast and others have highlighted the implicit game theory: medieval towns allied with kings to break the power of feudal lords.

Smith saw medieval Europe as a three-way struggle: kings, lords, and towns. The king-town alliance emerges when towns are rich enough to offer fiscal and military support, but lords remain a serious threat. I formalize this in a simple game.

The main insight: this is an equilibrium -- but just one of several. Smith's story fits France under Philip Augustus. But history also produced two other coalitions.

Lords and towns allied against tyrannical kings -- the Magna Carta crisis of 1215. And kings allied with lords against towns -- as when Frederick II sacrificed German urban liberties to buy princely support for his Italian campaigns.

Making the model dynamic: the king-town alliance is self-undermining. As commerce grows, lords spend their military capacity on luxuries -- Smith's "diamond buckles" argument. Lords become irrelevant and the game collapses into royal absolutism.

In contrast, the king-lords equilibrium is self-reinforcing. Suppressing commerce keeps towns weak, which keeps the coalition attractive. A poverty trap: towns that start weak stay weak, lords that start strong stay strong. This fits the "second serfdom."

Small differences in initial conditions generate dramatically different long-run trajectories. Western Europe's towns were just developed enough by the 11th-12th centuries. The Commercial Revolution pushed them across the threshold. Eastern Europe didn't cross it.

The framework highlights how "critical junctures" -- the Commercial Revolution, the Black Death, succession crises -- can tip polities from one equilibrium to another. Then self-reinforcing dynamics take over.

Smith's conjectural history is remarkably insightful -- but incomplete. He identified the king-town equilibrium and its self-undermining dynamics. This was one path among several, explaining why Europe's political trajectories diverged so dramatically.

This paper shows how Smith can be still be an input into an active research agenda in economic history (as opposed to simply rehashing old debates)."

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