A Commentary on “Recovery from Catastrophe and Building Back Better (Takeuchi and Tanaka, 2016)” – Structure of Damage of Production Capital Stock on Normative Economic Process

In the field of disaster prevention, disaster loss is often classified into “direct loss” and “indirect loss.” As such, “total loss” is often calculated as a sum of “direct loss” and “indirect loss,” where “direct loss” is defined as a “loss of capital (assets) as a stock” and “indirect loss” is defined as “loss arising out of decline in postdisaster production as a flow.” However, the loss here is calculated twice. The calculation is incorrect if “indirect loss” refers to, in particular, the lost profit of a firm that has lost a production facility that is considered as a stock. The reason is that the “value of capital stock” is nothing but the present value of a product that the stock will produce in the future. Therefore, an “indirect loss” defined in the above manner corresponds to a decrease in stock value. Using a dynamic economic model, this article provides a basic structure, “value of loss in capital stock lost by a disaster” = “total decline of production after a disaster.” This article also presents a relational expression in consideration of the restoration cost of a production facility, and concludes that a more multifaceted and functional damage information system needs to be developed in the future.