Ok, this time I'm for real. No more guessing. No more changing my mind. This is my final theory and I'm going to stick to it till the bitter end.

The Island is a prison for Jacob and Smokey - but a good prison. Jacob represents Good - Smokey represents Evil. The island keeps Good and Evil in balance by keeping them from leaving. I'm not sure how that allows for Jacob leaving to influence the passengers in the past, but... that's my theory. Seeing the scale in the cave just sealed it for me. Also, I can see Good being ok with being stuck on the Island. I can see Jacob being "ok" with keeping balance in the world, much like I'd imagine God accepting the fact that there must be evil in the world for our lives to have any meaning. Of course, Evil would want freedom to cause as much doom and gloom as possible.

But anyway - that's my theory now: The Island is a way to keep Good and Evil in balance across the world. Lose the balance - on either side - and the world loses something important.