Destroying central planning with a Banana

One of the topics that helped grow my interest in economics is that of chaos theory. The idea that a complex system made up of interdependent part quickly becomes so complicated and unpredictable that it is impossible to calculate.  Global weather patterns are a good example of this, as small changes in the weather can lead to massive and unexpected weather events later down the track. This should sound familiar to anyone who has head of the butterfly effect. 

Another good example? The economy. You know, the system which dictates the progression of society, which governments and corporations claim they have control over. We have regulations intended to effect planned behavior, manipulated interest rates, tariffs and fees to force society to behave in a particular way, and five and ten year plans, which the government uses to plan the future of the global economy. 

When has this ever been effective though? When have forward projections ever been accurate? When has a regulation ever had its desired effect without causing some unintended after effect? An unplanned ripple in the pond that people shirk responsibility for by claiming that no one could have predicted that would happen.

Obviously anything with the word 'complex' is going to make for a  'complex' topic, but that shouldn't make it impossible for the 'lay' man to disseminate.  Complex issues are always easier to break down with real world examples that are close to home. As someone who has grown up in a family owned supermarket I find it easy to relate complex topics in economics to the fruit and veg trade. 

Imagine trying to buy a banana in two different countries. One with a decentralized economy, and one with a centrally planned economy. For the sake of argument, lets assume that the people in charge of the centrally planned economy are really smart, even though the notion is laughable. 

How would this work in a capitalist country? You go into a shop, much like my family business, walk up to the shelf and pick out a nice bunch of bananas. You look at the price, which is something around $2 per kilogram. You subconsciously decide that at that moment of time your opportunity cost, or the value that you place on the bananas are around $6 per kilogram, so you buy them, happy that you got them for such a good price. But where did the $2 price come from? Who decided that? Well much like the famous story I, Pencil, there are many factors, that operate in harmony with each other without anyone pulling strings. The grower has an opportunity cost, or 'reserve price' after paying for the machinery, packaging, fertilizer etc from producers that have their own opportunity costs. He sells the bananas to the wholesaler who also has his reserve price on how much he wants to sell it for based on his costs, he then sells it to the shop, who has his reserve price which needs to cover his expenses, and opportunity costs, which is the price you see on the display. 

Now say there is a cyclone that wipes out three quarters of the banana crops in Queensland, which has happened more than once. The Grower has a new, much higher reserve price for the stock he has left, as he needs to cover all of his losses in order to stay in business. This filters down to the shop, with a new price of say $15 per kilo.  You go to the shop, you see the price. As your reserve price for bananas are around $6, they are clearly too expensive for you, and you will purchase some lovely apples instead. Good on you for being so healthy.  The cafe next door however, needs bananas for a recipe that is on their menu. As such they are willing to pay up to $20 per kilo for the sake of keeping their menu intact and their customers happy. This is an example of efficient allocation of a good. 

Now say we are living in the centrally planned society. The smart fellows at the banana allocation office decide that bananas will be distributed according to need, as is the way of such departments. As such,  you get your allocation of bananas, and the cafe next door gets its allocation. Now say the same cyclone that hit our capitalist pigs next door also wipes out most of this country's noble forced labor farms. The planners will have to distribute a much lower amount of bananas, which have now been produced at a much higher cost. Everyone gets allocated according to their need, but of course as there is no reason to be honest, everyone states that they NEED bananas. The logical thing for these smart fellas to do is ration the bananas out. Problem here is no matter how smart, even if they have the most powerful supercomputer in the world, there is no way to accurately calculate what everyone's (or anyone's) opportunity cost is for bananas is for any given time. 

You will receive your allocation of bananas, and so will the cafe. However the cafe has a greater demand for the bananas than you do at the moment, so giving bananas to you over the cafe is inefficient. The result is some people get more than they demand, some people get less, and there is either over-or under production. 

This happens in real life, look at Venezuela, at the rampant shortages of food and other essentials, much like the shortages experienced by those living in communist Russia. 

This is an overly simplistic example, as it overlooks a number of things, that makes effective central planning even more impossible. Such as the fact that not even you know what your opportunity cost is for a given item ahead of time. You have no way of knowing that if you walk into a shop to buy a banana, you might suddenly see a nice apple, changing your opportunity costs in relation to not only the banana and apple, but everything else. 

If central planning can't even manage to regulate something as simple as fruit distribution, how can it be expected to manage far more nuanced part of the economy, such as financial markets and essential services? 

If a government can be taken down by a banana, what hope is there for the 5 year plan?