The Curious Task

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” –FA Hayek, The Fatal Conceit: The Errors of Socialism, pg 76

Hayek wrote these words back in 1988, but they could apply just as easily today.

The past two months have demonstrated in no uncertain terms just how little some men know about what they imagine they can design. The so-called “Liberation Day” tariffs were supposed to usher in an era of unparalleled prosperity for the US. Not only were we going to be freed from the evil machinations of foreign governments, but prices would fall, stocks would rise, the dollar would strengthen, interest rates would fall, the debt would fall, foreigners would come begging to deal with Trump, and America would stand on top of the world. This plan was endorsed by Very Smart People™ with advanced degrees from Harvard (Navarro, Miran) and Yale (Cass). Invoking an odd combination of MMT and bizarrely-understood strategic trade models, everything was going to be perfect. Why, the model even had fancy Greek letters in it, so you know it was legit!

But since the announcement, absolutely nothing has worked out as the central planners intended.

The stock market lost trillions of dollars worth of wealth, and the S&P 500 had its worst performance in a president’s first 100 days since the 70s. The US dollar plummeted in value. Interest rates, especially treasury yields, have risen, as investors have looked for alternatives to America. Debt is likely to rise due to more interest payments at higher rates and the administration’s plan to bail out industries negatively affected by the tariffs. Foreign governments are giving lip service to Trump while coming up with alternative deals (mainly involving China). What “deals” have been announced involve higher tariffs on Americans.

America, rather than standing atop the world, has become a dangerous prospect in both politics and economics thanks to Trump’s capricious nature and his apparent tendency to be influenced by the last voice that talked to him.

Despite the fancy mathematics, the ivy league degrees, and the assurances of the elite, “Liberation Day” has failed in a spectacular fashion. In fact, it’s failed so spectacularly that the Trump Administration is already setting up scapegoats. After all, the one thing the central planners can never, ever do is admit fault or that they were wrong. Just like the failure of Fauci et al’s central plans to stop COVID didn’t fail because the plan itself was flawed (why, it too was endorsed by Very Smart People™ and had fancy Greek letters!) but because of the unvaccinated, Trump is in desperate search of scapegoats.

Why has this plan failed? The math was perfect. They failed to account for one thing: economics is a social science. Ultimately, we are not dealing with mindless automatons. There are not, to borrow Adam Smith’s famous metaphor, pieces on the chessboard to be directed by the visible hand of the player. The economy is not top-down, with incentives acting as computer inputs, directing behavior. Economics is the study of human action and human behavior. We are dealing with people. People with hopes, dreams, desires. People who want to live their best lives. And those hopes, dreams, desires are in direct conflict with the Central Plan. They are impossible to coordinate with the Central Plan. In short, these men misunderstood the very nature of the system they imagined they can design.

Just like every planner before him, the Trump Administration will find it has to resort to more and more restrictions, regulations, threats, tariffs, taxes, etc., to get what it wants. Scott Sumner said it best: this is very much Trump’s “Great Leap Forward” moment ). Let us just hope it ends before the consequences get disastrous.