Adam Smith’s conjecture and the American Independence

Politics and Economy

[...] there is not the least probability that the British constitution would be hurt by the union of Great Britain with her colonies. That constitution, on the contrary, would be completed by it, and seems to be imperfect without it. [...] That this union, however, could be easily effectuated, or that difficulties and great difficulties might not occur in the execution, I do not pretend. (Adam Smith, The Wealth of Nations, Book IV, Chapter VII, Part III, p. 140).

Before the American Revolution, the American colonies were very prosperous. They had relatively inclusive institutions and paid much lower taxes than other subjects of Great Britain. The revenue collected in the colonies was not nearly enough to cover the cost of their defense. Nevertheless, the British Empire had demonstrated its willingness to protect the colonies in the Seven Years War. After that war, new taxes to finance fundamental public goods (e.g., defense and public order) were unavoidable. Although France and other British rivals in continental Europe were expected to provide military support, rebellion was nonetheless a dangerous and expensive enterprise for the American elites. Why did the American colonies mount a rebellion? Even more puzzling, Americans elites were willing to accept further taxation on the condition that they were granted political power. Why was so complicated to reach such an agreement? For example, why did the British do not agree to permit American representation in the British Parliament and quickly settle the dispute, a proposal considered by Adam Smith in The Wealth of Nations?

In our paper titled “Why not taxation and representation? British politics and the American revolution”, we develop a formal model of the institutional regime that governs the political relationship between a metropolis and its colony, and we then employ it to offer a new perspective on the American Revolution.

The model formalizes the forces that make a stable colonial regime unsustainable and, more importantly, the determinants behind the transition to different post-colonial regimes. We devote special attention to gaining an understanding of when a colonial regime will lead to independence and when it will lead to the political incorporation of the colony (which could take the form, for example, of granting representation to the colony). In order to do so, we combine two dynamic bargaining games that capture both the conflict between the metropolis and its colony and the internal conflict taking place within the metropolis.

Specifically, in our model, there are a colony and a metropolis made up of two groups. Under colonial rule, the metropolis selects how the combined surplus generated by the colony and the metropolis is to be divided among the colony and the two groups existing in the metropolis. Sometimes the colony can mount a rebellion, and, in such cases, there is a window of opportunity for changing the colonial regime or, at least, for obtaining temporary concessions from the metropolis. In equilibrium, when the chances that the colony would defeat the metropolis in a war of independence are low, the cost of fighting a war for the colony is very high, and the temporary concessions offered by the metropolis are relatively generous, the colonial regime persists. Otherwise, a stable colonial regime becomes unsustainable and two possible regimes emerge in equilibrium: a series of rebellions and wars interspersed with periods of harsh colonial rule (i.e., no concessions) that ends when the colony finally wins its independence; or the political incorporation of the colony. The mechanism that triggers a change in the colonial regime is a commitment problem. The concessions offered by the metropolis can easily be reversed as soon as the rebels are placated, and the metropolis regains control of the colony. A credible way in which these concessions can be made permanent is for the metropolis to grant political representation to the colony.

Indeed, if there is no conflict of interest in the metropolis or, more generally, if the new representatives do not challenge the political balance in the metropolis, representation is a simple solution that avoids independence and the expense and waste associated with a war of independence. In such cases, in equilibrium, the colonial regime transitions to the political incorporation of the colony. On the other hand, when parliamentary representation of the colonies could destabilize the political balance in the metropolis, it is possible that at least one of the two groups in the metropolis would prefer to fight a war rather than accept the entry of new representatives. A crucial problem is that the colony cannot commit to not forming a coalition with one of the groups in the metropolis, should it be granted representation. In this case, the internal conflict in the metropolis could block representation, leaving only two extreme options for the colony: accept its colonial status or fight a full-scale war of independence. In equilibrium, the colonial regime is followed by a series of wars interspersed with periods of severe colonial rule, until the colony eventually wins its independence on the battlefield.

Our model points the way to a new perspective on the American Revolution. Why did the American colonies mount a rebellion? We argue that the combination of colonial elites increasing demands for sovereign economic policies and internal political changes in Great Britain explain why the American elites had motives to rebel. The Seven Years War removed France as a threat to American colonies, allowing the rebels to safely count with French military support without fear of falling into the hands of France. Americans had a window of opportunity to mount a credible rebellion against British authorities. Motives and opportunity, however, do not immediately explain why the rebellion evolved into a war of independence. Indeed, several other proposals for resolving the dispute that did not involve gaining independence were being put forward during that period, with the proposals made by Thomas Pownall and Adam Smith being two excellent examples. Both Pownall and Smith felt that it was mutually beneficial for Great Britain and the American colonies to find a mechanism for sharing the costs of the global public goods provided by the Empire (i.e., defense) in exchange for political power and representation for the colonies. Moreover, Adam Smith was convinced that the introduction of American representation would have had a neutral effect on the political balance of the Empire. In his view, the strength of Parliament would have increased in proportion to the size of the American contingent in Parliament, while the strength of the Crown would have grown in proportion to the amount of new revenues being received.

Thus, the puzzle is why did not the British agree to American representation? We argue that the political calculus in Great Britain was more complicated than the one envisioned by Adam Smith. American representation would have shifted the balance of power within Britain in favor of radical political reform. Fearful of this outcome, the British chose to go to war rather than offer parliamentary representation to the American elites.


Galiani, S. and G. Torrens (2019): Why not taxation and representation? A note on the American Revolution. Journal of Economic Behavior and Organization, Volume 166, pages 28-52.   

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