I recall seeing it a long long time ago in a printed reference book that
probably predated the existence of HTML and Harry Potter.

It's also possible that I oversimplified a little, as well. For example,
when you use Auto, Word doesn't add spacing before the first paragraph in
the document. Also, it doesn't really make the spacing between paragraphs
exactly equal to the point size being used. Rather, as I recall, it uses the
point size of the tallest character's "envelope" in the font being used. So,
using Arial 12, for example, when you use Auto, that's effectively the same
as using Before/After spacing of 14 points -- not 12 points. The
relationship between those two numbers varies by font and by point size. As
I recall, the ratio (14/12 in this case) tends to get smaller as point size
increases.

But, the basic point (so to speak) is that when you choose Auto, you [the
user] don't have to futz with it. Somebody else has already futzed with in
designing the fonts and providing the metrics that Word should use.

This also works in conjunction with one or more of the Compatibility
options. Notably, "Auto space like Word 95", "Don't add extra space for
raised/lowered characters" and "Don't add leading (extra space) between rows
of text" seem like likely candidates for things that would be in the back of
Auto's mind as it decides whether it needs more space.