By DAVID MOON, Moon Capital
February 20, 2005
Fitch, the global credit-rating agency, has such a strong reputation in the
bond market that I was surprised to read one of its executives say something so
stupid. Following the southeast Asian tsunami that killed more than 110,000
people (31,000 in Sri Lanka) Fitch vice-president Alastair Corera offered this
weird solace: 'This is an opportunity for growth for Sri Lanka. The much-needed
long-term economic pick-up can start happening if the government adopts the
The tsunami destroyed three-quarters of the country's coastline, wrecked the
roads and railways and left a million people homeless. Nevertheless, analysts,
including those available to Fitch, suggest the reconstruction effort will
kick-start economic growth, perhaps to an annual rate as high as five percent in
I hope you'll excuse the Sri Lankans if they don't clamor for another of
these fantastic opportunities.
The fallacy behind Corera's statement has been around for a long time. French
economist Frederic Bastiat wrote about unseen economic consequences in the early
1800s. If a vandal throws a stone through a shopkeeper's window, he noted, some
of the townspeople may see the act as one of economic development. The
shopkeeper must replace the window. He calls the glass guy. The glazier earns
some additional money which he then spends with the baker, who then buys shoes
from the cobbler, and so on. Those are the effects that are seen. Those economic
impacts are obvious.
Unseen is what the shopkeeper would have done with his money had he not been
forced to buy a new window. He might have purchased a suit instead of a window.
As a result of the broken window, unemployment was shifted from the glazier to
the tailor. But the most dramatic of the unseen effects is the impact on the
shopkeeper's wealth. Had it not been for the vandalism, he would have both a new
suit and a window. Now, however, he only has a window.
This is more than just an intellectual exercise. These silly (and sickening)
claims about the economics of destruction are also made following disasters in
After every hurricane, newspaper articles point to illusionary silver linings
by talking about the economic impact of the upcoming building booms. An
especially perverted New York Times article only days following the 9/11 attacks
looked forward to the new capital that reconstruction would bring to lower
If you destroy something and replace it with a more productive asset, you
create wealth. If you break something merely to create work so you can restore
it to its predestruction state, you have destroyed value. In Knoxville, we have
plenty of examples of both, although there are constituencies that disagree
about which projects fall into which categories.
Perhaps Knoxville should hire Fitch to consult on the revitalization of
downtown. If we could just get Mother Nature to cooperate.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).