Ozil has been plagued by criticism since he joined Arsenal from Real Madrid in 2013 and was widely condemned for his performance on the right wing in the club's disappointing 2-0 defeat to Borussia Dortmund last week.
A return to his preferred number-ten role against Aston Villa, however, saw the midfielder turn in one of his best performances in an Arsenal shirt to date. He opened the scoring before providing the assist for Danny Welbeck to make it 2-0.
Smith admits that Ozil's performances have not been up to scratch in this campaign, but the former Gunner believes that a run of games behind the striker would see the German fulfill his enormous potential.
"He's a quality player, we tend to forget that sometimes and the price tag has worked against him," Smith said on Sky Sports News. "He has been poor in some matches this season but he will now be feeling better about himself.
"We shouldn't be using him as a scapegoat for what was a really poor performance, but it was a combination of displays from Mesut Ozil.
"Players were able to get behind Ozil and attack Bellerin [against Dortmund], and that's what you're working with when you play Ozil's type on that flank.
"He's not the type of player who sees the entire picture defensively. He thinks as an attacker, not as a defender. That's why you think he may be better inside, where he hasn't got to do that kind of work.
"For the moment I would play him there [behind the striker], if he continues to perform like he did at Aston Villa, why wouldn't you? The benefits clearly are that he can get more involved, he can go left, he can go right and make those runs that we saw at the weekend.
"If he is in the middle he can get into pockets of space and get close to Welbeck or whoever is playing up top. I would imagine now Arsene Wenger will stick with that for a few weeks and hope that he can bed in and really show his top form."
With difficult Premier League games against Tottenham Hotspur and Chelsea and a Champions League tie with Galatasaray coming up, Arsenal fans will no doubt hope that Ozil can carry his form through and continue to justify his price tag.