IN April 2007, Nassim Nicholas Taleb put forth his thoughts on rare events of substantial repercussions in his book Black Swan. It is an event that has, in the context of existing levels of knowledge in a society, a very small chance of occurring. In technical lingo, it is a `tail-end` event, with a minor probability of occurrence.

This has certain implications, one of which is system-wide overconfidence (the former chairman of the US Federal Reserve, Alan Greenspan, called such sentiments `irrational exuberance` while Taleb labels them `epistemic arrogance`).

A few months after Taleb`s book was published, the global economy was struck with a cataclysm that not even the best financial or economic model had forecasted. The Great Recession shook the global economy to its core; the US economy alone suffered 8.7 million job losses and its households saw $19 trillion of their net worth vanish. The Covid-19 pandemic and the Russo-Ukraine war are other recent examples of black swan events that put the global economy in a tailspin.

Anyways, overconfidence becomes a base for critical decisions, like sizeable investment research and development by entrepreneurs, and stock investors pumping their savings into promising new companies and their products (like ChatGPT), creating a sizeable market in the process. `Irrational exuberance` was reflected in OpenAI CEO Sam Altman`s talk while interacting with his audience on a trip to India. When asked about the possibility of an Indian entrepreneur developing software similar to ChatGPT for $10m or less, Altman brushed it aside (US companies like Google and Microsoft have invested millions and billions of dollars in AI-related developments).

However, one gust from a black swan like DeepSeek blew away that irrational exuberance and jolted the market`s foundations. To illustrate the ramifications, the heralding of this particular event has put $1 trillion worth of technology stocks at risk of being wiped out. The world`s 500 richest people lost $108 billion in a single day.

Costing hardly $6m, DeepSeek has shattered confidence. Altman admitted that it was an impressive feat at the price, and vowed to come up with even better models (former Google CEO Eric Schmidt in early 2024 pontificated that China was at least two to three years behind in creating anything close to ChatGPT. He nowacknowledges he was wrong).

We now move to a dimension of this debate that is critical in the policymaking context: how do phenomena like DeepSeek come about and upend the workings of a market? To answer, we take brief recourse to two specific pieces of writings by arguably the most well-known economist of the Austrian school of thought, Friedrich Hayek.

In 1945, Hayek published one of economics` most famous papers, The Use of Knowledge in a Society, in which he underlines the futility of a central planner trying to act as an all-knowing entity that attempts to enforce its own vision of development from above, an insight that Pakistan`s PSDP-obsessed politicians and bureaucracy abhor (how else, for example, would political loyalties be bought under the garb of `development funds`?). Knowledge and the relevant facts, he argued, are disbursed among thepeople, and prices are the best signal for coordinating decisions.

Later, in The Fatal Conceit (1988), he mocked the person who thought that he could shape the world around him according to his wishes! What Hayek expounded in these two essays is applicable in terms of DeepSeek`s implications.

First, since the advent of the printing press that ended the church`s monopoly on knowledge (books at that time were hard to find outside churches), the dispersion of knowledge has enjoyed an unstoppable march, with the only difference being methodology and the pace of its utilisation. Knowledge of AI is no different: it has spread around the globe, differing only in quality and utilisation. The billions of dollars poured into AI and its applications are those price signals that guide the resource flows (investments). All this happened without a central planner dumping `plans` from above.More telling, though, was the shattering of attempts by leading AI folks in the US and their government to shape the narrative as per their wishes, something that Hayek had prophetically warned against (the CHIPS Act of 2002, which prohibited sophisticated chip manufacturing in China, is one reflection of this attempt, along with Trump`s recent $500bn StarGate).

DeepSeek shattered that ambition, demonstrating that in the age of dispersed information and globally connected markets, forcing someone`s will upon the markets was likely to be a futile attempt, with significant pitfalls. And in shattering the attempted monopoly and irrational exuberance, it unfurled a black swan that has engulfed the AI world.

So from a policymaking perspective, the lesson is that governments should focus on the incentive structure and relative context rather than act as all-knowing entities that want to impose their own will upon the markets and other countries to undermine them. The same is true for entrepreneurs. Unfortunately, not many heed this lesson DeepSeek has been subjected to malicious cyberattacks since its launch.

From a historical perspective, technology has always served as a double-edged sword, with its benefits as well as costs. The age of AI is no different its good and bad consequences can be colossal. The DeepSeek episode is but a reflection of what could be in store for markets. Many are predicting the increased probability or likelihood that such tail-end `black swans` may become more frequent in the future. But then again, probabilities are probabilities, not certainties! The only thing that is certain is that human existence has always been complemented by an element of uncertainty as well as the fact that knowledge in society has never been perfect. From the Justinian Plague to the Great Depression, the Great Recession and Covid-19 it is obvious that there is always a chance that some unforeseen event can upend the normal workings of the world and markets. • The writer is an economist. His current research focuses on cost-benefit analysis of foreign-funded PSDP projects, economic reforms and the history of economic thought.

shahid.mohmand @gmail.com Vlog: @Café Iqtisaad X: ShahidMohmand79