One thing I’ve already come across even at this early stage in my studies of economics is something called the Broken Window Fallacy. This seems to be quite an interesting bit of economics, which is relevant in discussions of the recent government stimulus packages, the economic effects of the Japanese earthquake, and the economics of war. I dare say there are many subtleties and complexities that I have yet to grasp, and hopefully will know all about by the time I’ve finished my studies, but I think I understand the basic points already.

This morning, while I was out for a run with my partner Carolyn, we were running along a very pleasant path by the side of a river, when I saw there was a perfect opportunity to explain the Broken Window Fallacy to Carolyn. Our conversation went something like this.

Carolyn: Look, there’s a mattress in the river.

Me: Oh yes, so there is. That’s really not a good place for it.

Carolyn: What sort of an idiot would do such a thing? I think people who throw mattresses in rivers should be thrown in themselves.

Me: Indeed. Although there is a school of thought that says that it may help the economy to throw mattresses in rivers.

Carolyn: But how can that be?

Me: Well, consider this. If people throw mattresses in rivers, the local council will need to employ people to get them out again. Let’s say the person who gets the mattresses out is called Dave. Currently, Dave has a steady job, he’s able to feed his family, and he can afford to go out and spend money, which also helps the businesses where he spends it. If no-one ever threw any mattresses into the river, Dave would be out of a job and wouldn’t be able to spend money any more.

Carolyn: But the council hasn’t got any money!

Me: Ah, exactly. You are clearly a wise student, and have already seen the fallacy in the argument. The argument I have given you was indeed flawed.

Carolyn: I thought it sounded fishy.

Me: In fact it’s so flawed, it even has a name in economics. It’s called the “Broken Window Fallacy”. The original version was based on an example of a boy who breaks the glass of a shop window. It’s conceptually the same as the present example, but you have to imagine that Dave is a glazier, rather than a mattress-retrieval technician.

Carolyn: So how does the fallacy work exactly?

Me: Well, suppose that no-one threw any mattresses in the river. Dave would then be out of a job. But the other side of that equation is that the council would no longer need to pay him, so they could use the money saved to reduce our council tax.

Carolyn: Yeah, right. Like they’d actually do that.

Me: Bear with me: this is economic theory. I’m talking hypothetically.

Carolyn: OK, let’s say for the sake of argument that they reduce our council tax.

Me: Well in that case, we’d have a bit more money to spend, because we wouldn’t be paying so much council tax. We might, for example, decide to go and spend it on an ice cream. Then with the extra demand for ice creams, Dave could go and get a job making ice creams.

Carolyn: So it doesn’t really make any difference then? It sounds like either way, Dave has a job.

Me: Well it does make a difference, because if people throw mattresses in rivers, Dave has a job, but we have no ice cream. If no-one throws mattresses in rivers, Dave still has a job, albeit a different job, but we now have something we value, namely an ice cream. So if no one throws mattresses in rivers, there is extra value in the economy in total, because although everyone has as much money as they did before, we now have something we value, namely an ice cream

Carolyn: Yes, I see. We do indeed value ice creams. In fact, I’d really quite like an ice cream.

Me: Sorry, you can’t have one.

Carolyn: Why not?

Me: Because there’s a mattress in the river.