The Sunk Cost Inferno

There's a certain honesty in watching France's wine regions burn. Not in the tragedy itself—that's real enough—but in what the flames reveal about how markets actually work when the abstractions turn to ash.

On one hand, this is obviously catastrophic. Centuries-old vineyards represent incalculable sunk costs, and when you burn through capital that accumulated over generations, well, that's the definition of irreversible loss. The producers face genuine hardship. Clear-cut moral case for intervention, support, rebuilding.

On the other hand, though—and here's where it gets interesting—this is precisely the moment when markets clear. A vineyard that survives is now more valuable. Its owner has revealed a preference for risk management through location selection that the owner of the burned vineyard did not. At the margin, this reallocates productive capacity toward agents better positioned to manage environmental volatility. That's not cruelty; that's price discovery. The market is working.

But wait. Consider the counterargument: insurance. These producers presumably have fire insurance, which means the loss isn't actually absorbed by the farmer—it's absorbed by the insurance pool, which is actually absorbed by shareholders in aggregate, which is absorbed by all of us at the margin. So the market hasn't cleared at all. We have a negative externality (smoke, destroyed property) being socialized while profits remain private. This suggests the market is *failing*, not working.

Except—and I want to emphasize this is a minor refinement—that's the entire point of insurance markets. Risk pooling only works if losses are pooled. The system is functioning exactly as designed. Farmers get protection, insurers price risk appropriately (or don't, in which case they go bankrupt and new insurers enter the market), and capital flows to whoever manages it most efficiently. This is not market failure; this is market success. The vineyards that burn are the ones where arson and natural catastrophe weren't adequately priced into the risk premium.

Which brings me back to sunk costs. The reason these producers face devastating losses isn't just the fire—it's that they were holding a massively concentrated bet on the assumption that French wine regions wouldn't burn. Every franc left in century-old vines instead of being diversified into a broader portfolio represents a choice to bear that risk. Now the bill has come due. Do we pay it again, or do we let the market teach the lesson?

The answer, of course, is money. Lots of it. In the direction that matters most to whoever has political leverage to direct it.

—Larry