“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
Although Hayek penned these words in 1988, their relevance rings truer today than ever.
The last couple of months have starkly illustrated the profound gaps in understanding among those who believe they can engineer economic outcomes. The so-called “Liberation Day” tariffs were touted as a golden ticket to American prosperity, promising liberation from foreign adversaries with a cascade of benefits: falling prices, rising stock markets, a robust dollar, reduced interest rates, diminishing debt, and foreign nations clamoring for trade deals with Trump. All of this was backed by the esteemed Very Smart People™ adorned with fancy degrees from Harvard and Yale. With a curious blend of Modern Monetary Theory and convoluted trade models, they painted an idyllic picture of economic utopia—replete with Greek letters to lend an air of legitimacy.
Yet, since the announcement, reality has not only failed to meet expectations; it has done so in spectacular fashion.
The stock market has hemorrhaged trillions, resulting in the worst performance of the S&P 500 during a president’s first 100 days since the 1970s. The dollar has taken a nosedive, while interest rates, particularly on treasury yields, have surged as investors seek refuge elsewhere. The prospect of rising debt looms due to increased interest payments coupled with the administration’s plans to bail out industries adversely affected by its own tariffs. Meanwhile, foreign governments are not merely offering platitudes to Trump; they are actively seeking alternative arrangements, primarily with China, and the “deals” emerging include higher tariffs on American goods.
Rather than standing tall on the global stage, America has become a precarious player, caught in a web of political and economic turmoil largely attributable to Trump’s impulsive decision-making and his tendency to be swayed by the last voice in the room.
In spite of the complex mathematics, prestigious Ivy League credentials, and the unwavering confidence of the elites, “Liberation Day” has unraveled with a breathtaking lack of foresight. So much so that the Trump Administration is already on the hunt for scapegoats. The central planners, it seems, can never admit to error. Just as the failures of COVID containment efforts were not attributed to flawed planning but rather to the unvaccinated, Trump, too, is in search of someone—or something—to blame.
Why has this grand vision faltered? The equations may have looked impeccable, but they overlooked a fundamental truth: economics is intrinsically a social science. We are not maneuvering mindless automatons; rather, we are navigating a complex landscape of human emotions, aspirations, and desires. These are individuals striving for their best lives, their hopes and dreams often colliding with the rigid dictates of a central plan. In essence, the architects of this economic strategy have fundamentally misunderstood the very nature of the system they sought to control.
Like every planner before him, the Trump Administration is likely to resort to an escalating array of restrictions, regulations, tariffs, and taxes to achieve its goals. As Scott Sumner aptly noted, this moment could easily be characterized as Trump’s “Great Leap Forward.” Let’s just hope this leap doesn’t plunge us into dire consequences.
