Charles Koch vs. Crony Capitalism

“Good profit can only result from creating value for the consumer. It is the manifestation of the entrepreneur’s respect for what the customer values.”

– Charles Koch, Good Profit (New York: Crown Business, 2015), p. 244.

“Documents Shine New Light on Koch Brothers’ Early Efforts to Abolish the Department of Energy,” reads the headline of a new report about Charles and David Koch by Desmog Blog. This organization/site also announced a Koch Network Database,

a new new resource library built by DeSmog to assist journalists, academic researchers, and the public to learn more about the backgrounds of individuals and organizations associated with billionaire fossil fuel industrialists Charles Koch and David Koch‘s free market approach to a broad spectrum of civic issues.

As just a compilation of individuals and groups and their purpose and work, “guilty as charged” would apply. I have blogged on this for myself, Derrick Hollie, and John Christy, but why continue? I don’t think Desmog can accuse any of us of not being able to intellectually defend ourselves and having good intentions. Human betterment via fossil fuels, anyone?

Back to Koch. The above August 7, 2019, article uncovers little that is not known by at least some of us. Federal regulation of oil and gas in the 1970s remain, some forty years later, one of the most salient examples of distortion and unintended consequences in US history (see Robert Murphy here, as well as these posts at MasterResource). And note just how wrong Joe Romm was here.

The US Department of Energy, created in 1977, was a ripe candidate for abolition. President Reagan promised to do so but did not, and it was a plank of the Libertarian Party (of which David Koch was running as Vice President). There was little radical about eliminating DOE then–and it should be an easy reorganization and cut now.

Charles Koch: A Different Business Executive

I met Charles Koch in the early 1980s at Koch Industries in Wichita, Kansas. It was a research trip for what would become Oil, Gas, and Government: The U.S. Experience. Charles shared the story of one of the scariest moments in his business career when a visitor from the DOE threatened to levy a fine that would have bankrupted Koch Industries (it involved an arcane price control matter that would be settled).

Another data point was told to me by William Johnson, who in the mid-1970s was deputy to William Simon of the Federal Energy Office (later Federal Energy Administration).

Simon as top energy regulator received many visits from oil-company heads demanding regulatory this or that. Many wanted more entitlements credit (a federal program) for their refineries. But Koch Industries had come by to just ask the federal government to leave them alone—to allow price signals to allocate crude oil and petroleum products. It was a meeting that Simon and his office would not forget.

Foe of Crony Capitalism

In Charles Koch’s The Science of Success, (2007), the classical-liberal described heroic, moral capitalism as “maximizing long-term profitability for the business by creating real value in society while always acting lawfully and with integrity.”[1] Real value came from the economic means of consumer service, not the political means of special government favor (see here).

Koch has written much before and after the above book on cronyism. Other quotations follow, beginning with Charles’s follow-up book, Good Profit (2015).

“Good profit comes from making a contribution in society–not from corporate welfare or other ways of taking advantage of people.” [p. 4]

“We don’t lobby the government to mandate or subsidize what we’re selling. That creates bad profit. Instead, we earn profit by creating value–for customers, society, our partners, and every employee who contributes. That is good profit.” [pp. 5–6]

“Companies are always lobbying for special treatment…. They did so quite effectively [during the Great Recession of 2008]– but at the expense of taxpayers and consumers, and to the rigged disadvantage of their competitors.” [p. 7]

“Market-based Management emphasizes Principled Entrepreneurship over corporate welfare, virtue over talent, challenge over hierarchy, comparative advantage over job title, and rewards for long-term value creation over managing to budgets.” [p. 7]

“I have spent a lot of energy and resources speaking out about the dangers of profit by coercion, which is the antithesis of our Market-Based Management philosophy.” [p. 7]

“Bad profit comes from disrespecting customers by making them subsidize our business with their tax dollars and higher prices, siphoning away the good profit other companies could have earned. This is why our company opposes government subsidies, such as special tax breaks, import tariffs, restrictions on exports, mandates, anticompetitive regulations, and bailouts–including those that would seem on the surface to be beneficial to us. [p. 7]

“Corporate welfare relieves recipients of the constructive pressure to innovate and create value for society, hinders the unsubsidized competition by coercion, and limits the choices available to consumers.” [p. 7]

“As Adam Smith noted three centuries ago, many people have tried to protect their businesses through political means–but always to the detriment of society as a whole.” [p. 55]

“The role of business is to respect and satisfy what customers value (even if it’s other forms of merchandizing) rather than lobbying the government to mandate what can or cannot be offered. Such activities are the ultimate form of disrespect for customers.” [p. 55]

“… logic–and history–tells us that market-driven creative destruction is much better than government limiting progress by protecting established businesses.” [p. 58]

“When an unprofitable business is supported by subsidies or protected by political means (like the French book-shipping law), it is not using resources efficiently.” [pp. 58–59]

“Artificially propping up businesses is bad for consumers, and ultimately bad for the employees of those businesses, since change is inevitable.” [p. 59]

“The political means of profiting transfers goods, services, or money from one party to another by force or fraud–for example, by laws or regulations that redirect consumer choices or that violate Vernon Smith’s rules of exchange and fail to hold accountable those who don’t fulfill their side of a contract.” [p. 62]

” … a business that continues to be unprofitable should be restructured, sold to a better-suited owner, or shut-down. If a business requires subsidies or protective laws to survive or employ more people, it is not generating good profit.” [p. 66]

“Creating value for society requires Principled Entrepreneurship–not political or other forms of entrepreneurship, such as corporate welfare or fraud.” [p. 125]

“There are plenty of those who argue that many CEOs are paid too much. I agree, in the case of COEs who owe their profits to corporate welfare.” [pp. 123–24]

“I am certain that every business should profit solely by creating real value for others, and not at all by attempting to slow down ‘the perennial gale of creative destruction.” [p. 251]

Past Quotations

“The tragedy was that [freedom] wasn’t consistently applied…. And it wasn’t applied to get rid of corporate welfare and cronyism. People who had special connections got special deals from the beginning.” (2016)

“All the corporate welfare … goes from cash payments to debt, to regulations on the competitors, to restrictions on trade, to mandates. You name it, anything so that business doesn’t have to do a better job of creating value for others — they can just get the system in their favor.” (2016)

————————–

“I think one of the biggest problems we have in the country is this rampant cronyism where all these large companies are into smash and grab, short-term profits.” (2014)

“… ‘We don’t want [the government to allow firms] to export natural gas because of my raw materials’ [like Dow Chemical]… Well, you say you believe in free markets, but by your actions you obviously don’t. You believe in cronyism.” (2014)

“I think it’s in our long-term interest, in every American’s long-term interest, to fight against this cronyism. As you all have heard me say, the role of business is to create products that make peoples’ lives better while using less resources to do it and making more resources available to satisfy other needs.” (2014)

“When a company is not being guided by the products they make and what the customers need, but by how they can manipulate the system — get regulations on their competitors, or mandates on using their products, or eliminating foreign competition — it just lowers the overall standard of living and hurts the disadvantaged the most.” (2014)

———–

“Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”
(2012a)

“The role of business is to provide products and services that make people’s lives better—while using fewer resources—and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.” (2012a)

“Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.” (2012a)

“We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (2012a)

“We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn’t ordinarily buy.” (2012a)

“Because they have the advantage of an uneven playing field, crony businesses can drive their legitimate competitors out of business. But in the longer run, they are unsustainable and unable to compete internationally (unless, of course, the government handouts are big enough). At least the Solyndra boondoggle ended when it went out of business.” (2012a)

“By subsidizing and mandating politically favored products in the energy sector (solar, wind and biofuels, some of which benefit Koch Industries), the government is pushing up energy prices for all of us—five times as much in the case of wind-generated electricity. And by putting resources to less-efficient use, cronyism actually kills jobs rather than creating them. Put simply, cronyism is remaking American business to be more like government. It is taking our most productive sectors and making them some of our least.” (2012a)

“The effects on government are equally distorting—and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.” (2012a)

“Subsidies and mandates are just two of the privileges that government can bestow on politically connected friends. Others include grants, loans, tax credits, favorable regulations, bailouts, loan guarantees, targeted tax breaks and no-bid contracts. Government can also grant monopoly status, barriers to entry and protection from foreign competition.” (2012a)

“Whatever form these privileges take, Americans are rightly suspicious of the cronyism that substitutes political influence for free markets. According to Rasmussen, two-thirds of the electorate are convinced that crony connections explain most government contracts—and that federal money will be wasted ‘if the government provides funding for a project that private investors refuse to back.’ Some 71% think ‘private sector companies and investors are better than government officials at determining the long-term benefits and potential of new technologies.’ Only 11% believe “government officials have a better eye for future value.” (2012a)

“To end cronyism we must end government’s ability to dole out favors and rig the market. Far too many well-connected businesses are feeding at the federal trough. By addressing corporate welfare as well as other forms of welfare, we would add a whole new level of understanding to the notion of entitlement reform.” (2012a)

————-

“Today, many governments give special treatment to a favored few businesses that eagerly accept those favors. This is the essence of cronyism…. One obvious example of this involves wind farms. Most cannot turn a profit without the costly subsidies the government provides.” (2012b)

————-

“Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay.” (2011)

“Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.” (2011)

“The purpose of business is to efficiently convert resources into products and services that make people’s lives better. Businesses that fail to do so should be allowed to go bankrupt rather than be bailed out.” (2011)

“For example, because of government mandates, our refining business is essentially obligated to be in the ethanol business. We believe that ethanol—and every other product in the marketplace—should be required to compete on its own merits, without mandates, subsidies or protective tariffs. Such policies only increase the prices of those products, taxes and the cost of many other goods and services.” (2011)

————-

“The majority of businessmen today are not supporters of free enterprise capitalism. Instead they prefer ‘political capitalism,’ a system in which government guarantees business profits while business itself faces both less competition and more security for itself. (1978)

” … much of the government regulation which plagues us today has come only after businesses have begged and lobbied for it. Nearly every major piece of interventionist legislation since 1887 has been supported by important segments of the business community.” (1978)

“Our credibility cannot be regained if we [business people] continue to file, hat in hand, to Washington while mouthing empty, insincere platitudes about free enterprise. We cannot continue to have it both ways. Government will not keep granting us favors on the one hand, while allowing us to run our own businesses as we see fit, on the other.”
(1978)

“We [business people] must stop defending existing interventions and demanding new ones. This might well diminish the impetus for new regulations and win new allies for us among intellectuals, legislators, and the general public.” (1978)

————-

“The majority of businessmen prefer power and government-guaranteed profits to philosophical consistency; they are more than willing to trade off market principles for a system that promises less competition and more security….  Almost every major piece of interventionist legislation since 1887 has had important business support, and certainly regulation in the oil and gas industry is no exception.” (1977)

————-

“[The Powell Memorandum] contained a fundamental error … the assumption that the most influential segments of the American business community actually believe in capitalism….” (1974)

“… not only are we [business persons] ineffective in countering the anti-business critics; we ourselves have abetted the destruction of the free enterprise system.” (1974)

“… business has consciously assisted the government in destroying the free market.” (1974)

“Past history indicates that, once a businessman has gained political influence, he typically attempts to use it to gain an advantage over his competitors.” (1974)

The above fifty or so quotations are not exhaustive. But they clearly show how unique this titan of business is, not only in terms of the success of his company but in a management philosophy that goes beyond, simply, profit maximization in the mixed economy.

References

2016 Jim Tankersley, “‘I don’t like the idea of capitalism’: Charles Koch, unfiltered.” The Washington Post, August 1, 2016.

2014 Kellen Jenkins, “Charles Koch: Business Giant, Bogeyman, Benefactor and Elusive (Until Now).” Wichita Business Journal, February 28, 2014.

2012a Charles Koch, “Corporate Cronyism Harms America.” Wall Street Journal, September 9, 2012.

2012b Charles Koch, “The Importance of Economic Freedom.” Voice for Liberty. August 17, 2012.

2011 Charles Koch, “Why Koch Industries Is Speaking Out.” Wall Street Journal, March 1, 2011.

1978 Charles Koch, “The Business Community: Resisting Regulation.”Libertarian Review, July 1, 1978

1977 Charles Koch, “Let’s Try a Free Market in Energy.” Libertarian Review, August.

1974 Charles Koch, “Anti-Capitalism and Big Business.” Institute for Humane Studies.