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 paper 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 excessively 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, eventually 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.
Mark Koyama (2026) studied this question.