Smith prided himself on describing man as he really was, not as we might want him to be. His conception of man was not as an intrinsically good creature corrupted by society, nor was it man as irredeemably evil except by the grace of God. His project was to take man as he actually was and to make him more like what he should be, not by the power of government and not primarily by preaching, but by discovering the institutions that made men tolerably decent and might make them more so.
…Smith’s great analytic motif was the unanticipated consequences of human action. In The Wealth of Nations, this theme is pervasive. Indeed, the book is almost an encyclopedia of the role of unintended consequences in human affairs, a phenomenon (or analytic perspective) which fascinated Smith.
Fighting the intention heuristic is an economist’s full-time job.
Carlo Ludovico Cordasco writes,
This is like analysing the invention of the printing press under the assumption that the only books worth reading are the ones that existed in 1440. The model can represent monks getting worse at calligraphy. It cannot represent the emergence of the scientific journal.
He is criticizing a recent paper by Nobel laureate Daron Acemoglu and others. If Cordasco is correct, the paper’s mathematical formulation hides the intuitive reason behind its result. I see this as a common problem. It is inherent in the custom of using math and theorem-proving. Mathematical modeling is supposed to make economics more rigorous than verbal arguments, but it can easily do the opposite. You don’t make better arguments. You just make it more difficult to unpack your arguments.
The last few years have not been a story in which every firm with access to models suddenly transformed itself. Quite the opposite. Access spread much faster than effective use. The scarce factor turned out to be not merely the model, but the surrounding institutional capability: who can redesign workflows, build data pipelines, evaluate outputs, create trust, and reorganize production around the tool. Varian saw that early because he was looking at complements rather than at the headline technology alone.
Hal Varian has been the go-to economist on the impact of computer technology since the early 1990s. He saw that the Internet was going to take over communications from the telephone system, because the cost of packet-switching was falling faster than the cost of circuit-switching. And as chief economist for Google, he saw the applicability of two-sided auctions to the “platform” model.
The optimists attack the case for traditional markets and decentralization from multiple directions: AI can match or exceed the information-processing advantages of markets, capture knowledge embedded in human judgment, simulate competition without running it, assess outcomes markets model badly through proxies, or simply replace the human participants whose limitations created the problem in the first place.
Despite their diversity, many of these arguments fall into the same traps. They routinely misstate the case for decentralization and flatten the distinction between different kinds of knowledge, while treating any unsolved problems as an engineering detail.
He carefully picks apart the argument that AI makes central planning workable. He concludes,
The fundamental obstacle was never processing power or data collection. It was that the economy a planner would need to model is constitutively shaped by the expectations and interpretive frameworks of the people who participate in it. Those frameworks shift in response to the very act of observation and intervention. There is no fixed economy waiting to be measured.
The system that a planner would need to model is the same system that the plan would destroy.
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"Predictions are hard, especially about the future."
When I first read about central planners, I did not understand how deeply they thought they could plan. The whole idea is preposterous. Even assuming they had enough compute power and knew everybody's skills and what resources were available, none of that is static. People go on vacation, change jobs, move, get married, have children, retire. All of those could plausibly be controlled by a central planning government. But people also get sick, have accidents, and die. Resources dry up, new ones are found, nature throws in occasional surprises, and none of that can be controlled or anticipated by central planners. People like to think and improvise and find better ways of doing things; suddenly better steel can be made cheaper and faster, changing and eliminating and creating jobs, and none of that can be controlled or anticipated by central planners.
Central planning could only work in a static society of robots isolated from weather, and even then, resources would dry up and need exploring. It's a preposterous concept that shouldn't take more than a few minutes to discard. Trump couldn't even anticipate predicted reactions to his tariffs, and those were simple and obvious. Anyone who thinks central planning is plausible is a moron.