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The Derivations of Charles Koch

REVIEW ESSAY
Kochland: The Secret History of Koch Industries
and Corporate Power in America
by Christopher Leonard
Simon and Schuster, 2019, 705 pages

“Not all mental models reflect reality,” observes Charles Koch in his 2007 book, The Science of Success. As if to illustrate the point, albeit not in the way he intended, Koch goes on to praise Christopher Columbus for challenging the mental model “that the earth was flat.” Yes, that’s right: MIT graduate Charles Koch was apparently unaware that the earth’s sphericity had been known since the ancient Greeks. (Ironically, where Columbus did challenge his contemporaries’ mental models, he failed to overturn them: his voyages refuted his own fanciful computation of the earth’s circumference and confirmed the consensus estimate of the astronomers.) Not surprisingly, when in 2015 Koch expanded and republished The Science of Success as Good Profit, he quietly replaced Christopher Columbus with Galileo, who challenged the mental model that “the Earth was the center of the universe.”

Despite himself illustrating their pitfalls, Koch has dedicated his life to constructing mental models. “He thinks he’s John Galt,” says one colleague, comparing Koch to the philosopher-hero of Ayn Rand’s Atlas Shrugged. Koch’s writings do little to dispel that assess­ment. In The Science of Success, Koch claims to have discovered, well, the science of success. Just as the natural world operates in accordance with fixed laws, Koch explains, so do fixed laws govern human well-being. Those same laws apply a fortiori “to the miniature societies of organizations,” such as Koch Industries, the company his father founded. By adopting the correct set of management principles, an organization can prosper. “What is Koch’s secret?” Koch asks in Good Profit. Answer: “I believe it is Market Based Management, our unique business management framework.”

Koch has indeed thoroughly imposed his philosophy, called Mar­ket-Based Management (MBM), on Koch Industries. According to Christopher Leonard, author of Kochland, a history of the company, Koch has for forty years personally led a series of MBM seminars for his senior executives, who in turn repeat the lectures to employees. All new employees undergo mandatory MBM training sessions. At Koch Industries headquarters, MBM’s ten “Guiding Principles” are printed on the walls and the disposable cups. Executives who hope to rise in the ranks learn to speak Charles’s MBM argot.

For decades, Charles kept out of the public eye. That changed in the mid-2000s, when Charles and his brother David formed a consor­tium of nonprofit organizations, known collectively as Americans for Prosperity, that coordinates with GOP officials—often in invita­tion-only meetings closed to the press—to influence Republican policy. That is to say, billionaire ideologues formed an opaque politi­cal network dedicated to defending fossil-fuel emissions, unraveling the social safety net, and defeating America’s first African American president: a Hollywood screenwriter could not have dreamed up a better pair of villains. After an unflattering profile in the New Yorker and denunciations by the Obama administration, Charles, by his own account a tedious homebody, now receives hundreds of death threats a year, drives in armored vehicles, and travels with a team of body­guards.

But for all the scrutiny of the Kochs’ political activism, comparatively little has been written about the family business. Kochland aims to fill the gap, and largely succeeds. Leonard spent nine years poring over public records and interviewing hundreds of current and former Koch Industries employees—including Charles Koch himself—busi­ness partners, regulators, and even prosecutors. Out of the welter of material, Leonard has composed a readable and even-handed account of the major events in the company’s history since Charles assumed control in 1967.

Not every question is answered. By keeping Koch Industries in private hands—indeed, since 1983, essentially just three shareholders, Charles, David, and J. Howard Marshall—Charles Koch was ahead of his time. Since the late 1990s, publicly traded companies have dwin­dled, with many firms choosing to go private rather than remain subject to SEC-mandated registration and reporting. Koch claims that private ownership has freed Koch Industries from the tyranny of quarterly earnings reports, so that it can focus on long-term growth. It has also prevented outsiders from ever answering the big questions, such as how much money Koch Industries actually makes and where. Koch Industries keeps its financial results a closely guarded secret, including to Leonard and his readers.

Nevertheless, Kochland tells an engaging story that reveals insights into business strategy and how the modern American economy actu­ally operates. Kochland also brings its central protagonist, Charles Koch, to life. Though known as a businessman and political activist, Koch wishes—desperately, it appears—to be remembered as a sage.

Market-Based Management

It seems that no audience Koch has ever held captive has escaped a lesson in MBM. In the 1980s, he attempted to introduce MBM at the Cato Institute, the think tank he cofounded with libertarian gadfly Murray Rothbard. The effort baffled its intended beneficiaries and led to Koch’s alienation from Cato. When his children were as young as eight, Koch would sit them in his library every Sunday and grill them for hours on the tenets of his worldview. (Evidently, results were mixed. One child did not take to the lessons, while the other grew up to shun her father’s creed.) Now eighty-four years old, Charles is writing a third installment in his MBM trilogy. The latest, Leonard reports, will be a guide not only to managing companies but “for operating entire societies.” As Koch explains in Good Profit, he is willing to share his secrets, “because all of us benefit when others profit in a principled way.”

Yet for most of its history, Koch Industries managed to thrive without MBM. In the 1920s, Fred Koch and his partners pioneered a more efficient oil refining process. (In a superb instance of euonym, the Koch process reduced the coke residues that clog refining equip­ment.) In time (though not without decades of litigation, including a judicial bribery scandal), their invention brought their competitor, Universal Oil Products, to its knees.

Since Fred’s death, Koch Industries has neither invented new products nor pioneered new businesses. Instead, as Leonard relates, it has used the huge cash flows from Fred’s business to expand into complex but essential sectors of the modern consumer economy. Koch Industries still refines oil and distributes fuels, but also now produces nitrogen fertilizer, paper, plywood, and plastics. In each new industry it enters, Koch Industries makes the material but not the end product: nylon but not the stockings, high-strength fibers but not the airbags, gypsum but not the housing. On top of production and distribution, Koch serves as middleman trader of dozens of commodities and minerals. If Fred blew a gale of creative destruction over the capitalist economy, Charles has instead chosen to infiltrate it.

Charles modestly disclaims credit for Koch Industries’ success. MBM, he explains, “works independently of Charles Koch, of honest Midwesterners, inherited wealth, or any of the other misguided theo­ries that fly around Koch Industries’ success.” Still, Koch invites his readers and his employees to challenge their mental models. In that spirit, Koch’s theory—whether as a guide for other organizations or all humanity—deserves a critical evaluation.

Among his favorite pastimes, Koch writes in Good Profit, is “studying praxeology.” Koch does not disclose what he means by that recondite term; he takes it for granted that his readers (perhaps most of whom are employed by Koch Industries) are as familiar with “studying praxeology” as practicing forehands or solving crossword puzzles. In fact, “praxeology” is a shibboleth. Adopted by dissident economist Ludwig von Mises to describe his system, the word refers to no less than the science of all human action. Today, it retains currency exclusively among Mises’s disciples. Koch is one of them: elsewhere in Good Profit, he reveals that reading Mises’s monumental treatise Human Action was “life-changing.”

If praxeology has failed to catch on outside of a small circle of Mises admirers, one reason is that it prescribes an unusually rigid set of mental models. Praxeology, for Mises, was a purely deductive science whose theorems follow logically from a handful of ineluctable axioms. As such, Mises boasted, it can neither be verified nor falsified by experience. Like Oliver Wendell Holmes’s Calvinist deacon, who built a horse carriage that would never break down except all at once, Mises erected a logically unassailable set of doctrines.

Despite his a priori method, Mises drew dire practical implications. In the hypothetical pure market economy, Mises argued, there is no conflict of interest, rightly understood. “The market economy makes peaceful cooperation among people possible in spite of the fact that they disagree.” If we will not have peace and cooperation, then we will endure violence and conflict. Real-world deviations from the pure market economy, therefore, do not merely produce deadweight loss. On the contrary, warned Mises, they lead to “wars and civil wars, ruthless oppression of the masses by clusters of self-appointed dictators, economic depressions, mass unemployment, capital con­sumption, famines.”

In short, Mises served a potent cocktail of dogma and catastrophism. (This cocktail and related liquors have long intoxicated the American Right; hence the hysterical reaction of many movement conservatives today to even the mildest criticism of free market liberalism.) Koch indulges in it not only for recreation but also as a performance-enhancing drug. After studying Mises, he recalls, “I began responding [to business challenges] with the principles of a free society in mind.” Koch even imports into MBM the definition of praxeology: “MBM is the Science of Human Action applied in an organization.”

Despite its importance to Koch, few outside of Koch Industries have taken an interest in the “science” he pioneered. Journalists who have written books and articles on Koch—among the richest and most powerful Americans alive—skirt the topic. None has attempted to summarize or explain it. Koch receives hundreds of annual death threats but approximately zero interest in his self-proclaimed philo­sophy.

Perhaps that is because—as readers of The Science of Success or Good Profit can attest—accounts of MBM tend to leave readers both bored and bewildered. Certainly, one will not find in MBM anything resembling praxeology as Mises understood it. Mises, out of methodological scruple, refused to draw supply-and-demand curves, the meat and drink of mainstream economics. But even eschewing mathematics, Mises could at least deduce some basic theorems of welfare eco­nomics and trade. These theorems, Mises argued, followed apodictically from the reality that human beings make choices and exhibit preferences.

In contrast to the method of deductive logic, MBM employs what may be called the method of capitalization. In MBM, that is, capital Roman letters highlight the importance of a select number of com­monplaces. Thus, rewarding employees for good work becomes “In­centives,” defining an individual’s responsibilities becomes “Decision Rights,” and sharing information becomes “Knowledge Processes.” These constitute three of the five dimensions of MBM. The other two are Vision (determining where profits can be made) and Virtues and Talents (hiring and promoting the right people).

Portentous tags to the side, MBM’s five dimensions express tru­isms familiar to all. Every organization, for instance, hopes to create productive “Incentives.” The question is how. Koch Industries, Koch explains, employs an elaborate bonus pool system: each business unit is first evaluated and a bonus pool awarded to it; then each employee in that unit is allocated a portion of the bonus based on his or her perceived contribution.

One can see how that system can work for Koch. As Leonard explains, Koch Industries under Charles Koch’s leadership has essen­tially operated as a private equity firm that buys up new businesses and seeks to make them more profitable for shareholders. As at other private equity firms, employees at Koch are rewarded with a percentage share of the earnings.

In other contexts, awarding unequal bonuses causes rifts and wasteful gaming of the compensation system. In the legal profession, for example, law firm profitability is inversely proportional to the degree to which attorneys are rewarded for their individual contributions. The most profitable firms share earnings equally based on sen­iority, while the less profitable attempt to poach rainmakers through promises of outsize compensation shares. While many partners at lockstep firms could double or triple their earnings by switching firms, most decide to stay. The best lawyers prefer membership in an equal partnership with the highest reputation over the financial re­wards of being paid solely for the business they generate. The “Incentives” dimension does not explain how compensation should actually be calibrated in a given enterprise.

Koch himself all but admits the vacuity of MBM’s core concepts. An organization cannot achieve success, he acknowledges, merely by applying MBM’s concepts or procedures. Indeed, MBM ceases to be MBM when “applied bureaucratically as a rigid formula or a prescriptive process.” Despite Koch’s own fondness for mental models—The Science of Success includes a partial list of about seventy-five of them—Koch inveighs against “meaningless buzzwords” and inordinate focus “on the words, the terminology and definitions.”

How, then, does one distinguish between the true MBM, which giveth life, and the rote, mechanical MBM, which killeth? Essentially, through hindsight. As Koch tells it, failures occur because employees did not internalize MBM; successes emerge from employees exemplifying the principles of MBM. But one cannot distinguish between the two in advance. As the philosopher Karl Popper (a Koch favorite) might have observed, the efficacy of MBM is not falsifiable.

But MBM’s explanatory power is not its only selling point. It also offers the participant moral uplift. MBM’s five dimensions are sup­plemented by ten Guiding Principles, each of which denotes an injunction. The principle of “Integrity,” for example, means employees should conduct all affairs lawfully and ethically; “Respect” means they should treat people based on their individual merits; “Fulfill­ment” means they should work with intensity and passion for what they do. (The ideal employee, Koch fantasizes, “wakes up at night with ideas.”) In short, following MBM makes one a better human being. Indeed, borrowing from Abraham Maslow, Koch avers that MBM seeks the self-actualization of the employee.  “MBM strives to create a spontaneous order of self-actualizing people,” he writes in Good Profit.

Not only do MBM’s followers improve themselves, they also contribute to the betterment of humanity (including, but not limited to, shareholders Charles and David Koch). Koch Industries, Koch writes, strives not merely for “profit” but “good profit,” defined as making a contribution to society rather than extracting money by force or fraud. Like Robert Owen, the wealthy industrialist founder of the New Harmony socialist utopia, Charles Koch sees Koch In­dustries as a model community. Employees live in accord with the tenets of a free and prosperous society, and thereby create an example of how the rest of the world should live. If Kansas had a hill, Koch Industries would be the shining city on top of it.

In the end, MBM is not a “Science” but a gospel of personal and social uplift. While The Science of Success and Good Profit introduce (amid much rumination on the nature of human freedom and flourishing) a smattering of elementary insights from economics—from comparative advantage and opportunity cost to time preference and division of labor—these serve not so much to lay analytic founda­tions as to borrow prestige. After all, Koch’s libertarian ideology has no monopoly on economics. Economists running the gamut from Marx to Keynes all accept, say, that the division of labor is efficient. And while basic economics, like algebra, may sometimes prove useful on the job, it does not amount to a comprehensive creed. Koch pre­sents economics as the parade float of the MBM festival, but it is more like the superfluous confetti.

The Inheritance of Supernormal Returns

So much for what MBM is. As Charles himself says, the question is whether it works. Koch attributes his company’s success to MBM, which assumes, of course, that the company succeeded in the first place. And Koch’s success, on certain levels, is undeniable: Forbes magazine estimates Charles’s net worth today at over $40 billion.

On the other hand, Charles was already fabulously rich when his father died in 1967. The company’s annual sales at that time made it one of the largest private companies in America (a distinction that Koch Industries has retained, thanks in part to Charles’s policy of reinvesting 90 percent of earnings to expand the company). Sixteen years later, after an acrimonious fight for board control, Koch Indus­tries redeemed the shares of Charles’s brothers Bill and Frederick and their allies for $1.1 billion. (Bill accused his brother of concealing the company’s true performance and later sued, unsuccessfully, to void the deal.)

While Bill has remained on the Forbes 400 list, his elder brother’s fortune reportedly dwarfs his. Perhaps this is evidence of MBM’s virtues in practice. Or perhaps not. Whereas Charles and David believed in reinvesting profits, Bill and Frederick both wanted more money to spend. Without access to private information, it is impossible to untangle how much of the brothers’ wealth difference is ex­plained by the decision to reinvest rather than consume.

It is equally difficult to determine how much more profitable Koch Industries has become since Charles imposed MBM. In both The Science of Success and Good Profit, Koch compares Koch Indus­tries’ performance to the returns generated by the S&P 500 index since 1960. In the later book, Good Profit, Koch discloses the source of his data, which form an improbably smooth, upward-thrusting curve: Forbes magazine’s annual rankings of the wealthiest Americans. As Koch Industries’ financial results are not public, Forbes relies on data provided by Koch himself. In other words, despite the appearance of independent evaluation, Koch has self-reported his own success. While Koch Industries may indeed have outperformed the equity markets since Charles invented MBM, by how much re­mains a secret.

According to Leonard, Koch Industries made perhaps its most lucrative investment before Charles even started at the company. In the 1950s, while Charles was finishing school and starting his first job as a consultant in Boston, his father, Fred, bought a minority share in the Great Northern oil refinery in Minnesota near Pine Bend. Shortly after Fred’s death, Koch Industries bought out the other shareholders, and has remained the sole owner of the refinery ever since. After Koch broke a labor strike in the early 1970s, the Pine Bend refinery has yielded riches worthy of Golconda.

By Koch’s own definition, those riches hardly constitute “good profit.” After Koch Industries acquired majority control, the Clean Air Act of 1970 imposed limits on how much pollution oil refiners could release. Those limits have effectively prohibited con­struction of new refineries that could compete with Pine Bend. Meanwhile, Pine Bend enjoyed grandfathering exemptions that gave it unique rights to expand operations. To exploit this regulatory ad­vantage, Koch Industries has developed an unrivaled expertise in environmental law. Charles today demands “10,000 percent compliance”: 100 percent compliance 100 percent of the time.

Before the Clean Air Act, few refineries existed in the upper Midwest. Oil for refining could be imported from Canada, but Ca­nadian oil’s higher sulfur content made it more expensive to process. Yet shipping gas up from the Gulf of Mexico turned out to be still more expensive than refining Canadian oil at a large facility in Min­nesota. Pine Bend, with its larger scale, soon put its rivals out of business and became the sole distributor of gasoline throughout the midwestern United States. As a result, writes Leonard, Pine Bend became a “perpetual profits machine.”

In Pine Bend, in short, Koch Industries has a state-enforced mono­poly of the sort that Koch professes to abhor. Long before Koch introduced MBM, Koch Industries had been earning supernormal cash returns thanks to government restrictions. The true benchmark of Koch Industries’ profitability, therefore, is not, as Koch proposes, a comparable investment in the S&P 500 index. It is, rather, a guaran­teed, compounded above-market return equal to the one Koch Indus­tries has enjoyed. That comparison Charles does not vouchsafe to provide.

In 1981, Leonard recounts, Koch rejected a proposal from Morgan Stanley to take Koch Industries public. If Koch Industries registered with the SEC, Koch explained, its commodity traders could no longer operate as profitably, as their counterparts would discover how much money they were actually making. Forty years later, not surprisingly, commodities trading remains a core component of Koch Industries’ business.

Koch Industries profits from trading because it has access to better information than other market participants. Any information that might affect commodity prices circulates from each Koch Industries satrapy to the trading desk. When Koch decided to stay private in 1981, Koch produced petrochemicals and cattle. With each new busi­ness acquired since, Koch Industries has obtained more real-time, inside information on supply and demand. Now Koch trades in dozens of commodities, from fertilizer chemicals and woodchips to nickel and natural gases.

In other words, Koch Industries has a coherent business strategy. It has two competencies that other firms lack: first, compliance with complex webs of government regulation, and, second, centralization of information. Much as the Walt Disney Company turns each new animated princess into cruise vacations and sparkly toothbrushes, Koch Industries turns each new commodities business into trading margins. Koch Industries would have these strengths with or without MBM.

A Useful Oxymoron

Though Koch Industries’ success was built in from the time Charles Koch took the helm, MBM does serve a function beyond satisfying Koch’s predilections. To recall what Carlyle said of the 1848 revolts, Koch’s faith in MBM must have some meaning or else it would not exist. What is that meaning? The putative roots of MBM offer a fruitful hypothesis.

Political theorists have long been aware of the seeming paradox that Mises’s economic liberalism slides rather easily into political il­liberalism. For Mises, individuals with differing beliefs and aspirations can only cooperate peacefully through the free market system. Yet the free market system itself, in order to survive, requires political support. In the democratic long run, no system can survive without public opinion on its side. Thus, Misesian liberals often commend the rule of a benevolent autocrat, who guarantees the rights of property and exchange, whether his subjects approve them or not. From Scho­penhauer to Kuehnelt-Leddihn, liberal defenders of property rights have favored hereditary monarchy as the best or least bad form of government.

Charles Koch has faced a similar paradox in managing his business. The five dimensions of MBM, Koch explains, mimic the advantages of the free market system. The price system in the free market, for exam­ple, disperses information to millions of different actors and thereby makes economic calculation possible; likewise, Knowledge Processes in MBM attempt to disburse knowledge to the employees who can make best use of it. Profits in the free market reward those who create value for consumers, and Incentives in MBM reward employees who create value for the company.

Yet Koch never explains why employees at Koch Industries should settle for MBM’s facsimile of a free market rather than the free market itself. Rather than submit to the Koch yoke, employees could, if they are persuaded of the merits of the market, deploy their Virtues and Talents elsewhere. Then they could exercise their own Decision Rights, free of interference, and allow the free market’s Incentives to shower them with wealth, all without Charles Koch extracting a share of their Good Profits. Market-Based Management is not, as Koch would have it, an imitation of the free market but an oxymoron. Freely choosing individuals in a spontaneous order would not need to be managed in the first place.

As oxymoron, however, MBM is by no means useless. Koch In­dustries apparently practices an unusually brutal system of compensation and employee evaluation. The Knowledge Processes dimension of MBM demands that each business unit continuously measure and defend its performance. Like the Oneida community—another prof­itable enterprise, notwithstanding its communism and free love—whose members practiced a collective discipline known as Mutual Criticism, employees and managers must face, as Koch calls it, “continual questioning.” The Incentives dimension translates into unequal compensation based on management’s estimate of each unit’s and each employee’s value. Where one colleague at any time might openly question another’s worth, hostilities may erupt, cooperation may disintegrate, and skilled employees may quit.

In one instance, employees unaccustomed to MBM did walk out. In 1997, Koch Industries paid $670 million for the animal feed manu­facturer Purina Mills. According to Purina founder William Danforth, well-being consisted in a balance of the physical, social, mental, and religious. (Hence Purina’s checkered logo, with its four white squares.) Purina’s corporate culture provided security and rewarded loyalty. To rebuke or punish any employee for failing to create value would upset the balance that was literally Purina’s trademark. Need­less to say, Purina’s executives did not take it kindly when Koch Industries executives explained that internalizing MBM was a pre­condition of continued employment. Rather than stoop to become MBM catechumens, most retired or moved on.

Those who remain at Koch Industries surely do internalize MBM. In the pure free market system, some may starve without succor from the state, while others win wealth beyond the dreams of Croesus. These outcomes ought not be resisted, Koch teaches, for they follow naturally from a system that promotes human flourishing. The treat­ment of employees at Koch Industries merely mimics the functioning of the market. MBM rationalizes a harsh corporate culture.

In short, MBM does serve a function, namely, to reconcile em­ployees to their jobs serving Charles Koch and his co-shareholders. According to Koch, MBM furnishes a suite of tools for business success. But the particular slogans of MBM do not themselves do the work. Virtually any set of slogans, drilled into employees, would achieve the same results. Koch may as well have adopted Juche or Scientology as his management philosophy. Any philosophy that ob­scures the tedium of work, smooths over rivalries, and inures employ­ees to the fear of failure would serve the same purpose.

Political activism

Despite MBM’s apparent importance to Charles, it is Koch’s decades of political activism that attract the most attention. Though often hostile, media accounts typically credit him with both deep conviction and strategic foresight. A 2016 article in the New York Times typifies the genre. Charles and David Koch, the Times reported, were preparing for the “long war” following Trump’s nomination for pres­ident. Thus, Americans for Prosperity was running a “leadership academy” for activists, which began with lessons in the “principles of economic freedom” and ended with a weekend seminar at headquarters. The academy, the Times wrote, would raise the next generation of free market champions.

Yet Koch’s books unwittingly undermine the standard account of his politics. It is true enough that Koch never lets his political princi­ples get in the way of profit: Koch Industries’ very business model, which exploits complex regulatory regimes and government-imposed monopolies, daily betrays Koch’s professed liberal ideals. But hypo­crisy is not the sole or even primary reason that nobody thumps the MBM bible unless employed to do so. The Science of Success and Good Profit reveal MBM as a jumble of bromides having no relationship to Mises’s philosophy other than Koch’s own dogged insistence that they go together. Employees trained in MBM invoke the princi­ples of human freedom the way ancient Egyptian bureaucrats invoked the Pharaoh’s manifestations of Ra: not because it helps them do their jobs but because it pleases the boss.

Koch’s ideals likewise have little bearing on his political activism. Mises’s Human Action fills nigh a thousand pages defending a simple proposition: when government expands, then liberty, peace, and pros­perity contract; when government retreats, human beings are eman­cipated. Conservatives in the anglophone world once found this stark opposition compelling, especially at mid-century when the vogue for central planning reached its zenith. Even today, movement conservative stalwarts such as Jonah Goldberg and George Will still labor to plot all political reality onto the Misesian coordinates of freedom ver­sus gov­ernment.

Not surprisingly, political reality refuses to conform to the func­tion Mises posited. For one thing, given political constraints, the supposed opposition between freedom and government rarely dic­tates an actual policy choice. To take an example, in the Misesian pure free market—which, like all ideal types, has never actually existed—the state would not subsidize health care for the elderly. But politically, Koch and his allies have no more hope of abolishing Medicare than repealing the law of gravity. As an alternative, Republican health care wonks typically favor a system of “premium support”: that is, replacing medical insurance from the government with vouchers for purchasing subsidized policies from private companies. This so-called “market-based” solution is presented as the next best thing to a free market.

But even if it is true, as Mises would contend, that government should not assist the elderly in obtaining health care, it does not follow that the next best alternative is a “market-based” mechanism for distributing government largesse. Since Lipsey and Lancaster pub­lished their 1956 paper on the theory of the second best, economists have known that the next best policy does not necessarily approximate the ideal policy, for the same reason that, as philosopher Joseph Heath observes, flying 99 percent of the way to Hawaii does not necessarily approximate a tropical island vacation. The only correct response of the Misesian liberal to debates over Medicare reform is silence.

A second defect of the Misesian opposition between freedom and government is that capitalism and the riches it generates require more government than the Misesian free market would allow. The joint-stock company, for example, facilitates the pooling of capital by sev­ering ownership from management and limiting owners’ liability to the amount of their investment. (As Leonard notes, Koch Industries itself erects elaborate corporate structures to limit each division’s exposure to claims against the others.) This corporate form is a juridical fiction that, as Mises acknowledged, corrupts the pure mar­ket economy by shielding owners from claims for damages, even in tort. Yet without limited liability, few would risk their capital at all, much less in enterprises managed by others.

Bankruptcy laws are likewise incompatible with the pure free market yet vital to the capitalist economy. By permitting a debtor to file for bankruptcy, the state allows him to walk away from his promises and obligations. This, too, violates pure free market princi­ples, as Mises, once again, forthrightly admitted. Were it not for the state’s willingness to occasionally nullify contract rights, the only ways out of insolvency would be death or peonage—as indeed they often were before the modern bankruptcy discharge. Needless to say, few would take entrepreneurial risks faced with such Incentives.

The examples do not end there. Federal deposit insurance has eliminated bank runs and reduced both the frequency and severity of financial panics. Social security systems have provided insurance against the hazards of disability and old age, and thereby encourage entrepreneurial risk-taking. (They may also have less salubrious side effects—but that is a topic for another time.) Contrary to the Misesian opposition between prosperity and government, the market has flourished as government has inno­vated ways to pool or meliorate risk.

Mises himself, to his credit, candidly renounced many of these core institutions of the modern economy. His apostles today, such as Charles Koch, do not follow his example. Despite their rhetoric, Misesian liberals favor many modern government interventions in the pure free market. They just do not explain why the interventions they happen to favor should be preserved while all others should be opposed.

Finally, Misesian liberalism has nothing to say about the manifold functions that government cannot plausibly abandon. Modern gov­ernments, for example, maintain roads, bridges, and ports; they supply water and convey sewage; they control the supply of money; they punish and confine criminals; they naturalize foreigners; they decide who may cross a nation’s borders and on what terms; they raise revenue through the tax system. To speak of less government in any of these contexts is not only nonsensical but misleading. Citizens whose government, for example, refused to defend the nation’s bor­ders or to collect taxes would be living not in a libertarian paradise but under a failed state. On most questions of public policy, the rele­vant question is not whether government will be larger or smaller but whether it will be competent or incompetent.

And even the question of competency is incomplete. It overlooks the most fundamental question in politics: cui bono? The well-founded suspicion that, from trade and immigration to crime and labor law, governments are not actually siding with their own citizens is now roiling the politics of almost all Western nations. In determining whom the government should actually serve—citizens? the world’s poor? the economy?—the Misesian framework is useless. Indeed, Misesian liberals often hesitate to declare their own loyalties. They instead wring their hands over the rise of nationalism and bemoan the popular demand for government of, by, and for the people.

Given the shortcomings of the Misesian framework, it is no surprise that Koch’s politics no more follow from Mises’s Human Action than his philosophy of business management. As the Italian sociologist Vilfredo Pareto usefully observed, humans may not behave logically, but they have a craving to believe that they do. To satisfy it, they invent ideologies or, as Pareto called them, “Derivations” that purport to rationalize their behavior.

Koch’s career as a political activist defies easy summary but can usefully be divided into three phases of activity. The first was direct intervention. In 1979, Charles coaxed David into running for vice-president on the Libertarian Party ticket. Although the ticket ap­peared on the ballot in all fifty states, it earned only 1 percent of the popular vote. (In fairness, this dismal result was still the Libertarian ticket’s best-ever showing, to be topped only in the annus mirabilis of 2016.) Plagued by infighting and chronic electoral impotence, the Libertarian Party has proved useless even to its sympathizers. The Kochs wasted no further effort on it.

The second phase was institutional. What little apparatus there is for organized libertarianism in the United States is largely the work of the Kochs, from the Cato Institute and Mercatus Center think tanks to the Institute for Humane Studies, which sponsors seminars for collegians, and the Institute for Justice, a public interest law firm. Earlier efforts were more colorful: in the 1970s Koch staked Roy Childs, a morbidly obese libertarian essayist, with money to run Libertarian Review, the libertarian answer to National Review. Koch also funded a network of campus activists, Students for a Libertarian Society, modeled after the New Left’s Students for a Democratic Society. Both copycat projects fizzled in the early 1980s.

The ultimate impact of institutionalized libertarianism is difficult to assess. The Institute for Justice (IJ), for example, has scored court victories, but generally in pedestrian cases such as over the constitutionality of cosmetology licenses. IJ quixotically hopes that by van­quishing a handful of egregiously protectionist regulations, it can somehow induce courts to subject economic regulation to heightened constitutional scrutiny. The Supreme Court would need four more Clarence Thomases before it would even entertain that proposition.

Although the Cato Institute and the Mercatus Center have provid­ed academic and policy platforms, many scholars have since qualified or rejected the libertarian label. A group of former Cato Institute scholars left in 2014 to form the Niskanen Center, which describes itself as moderate or nonideological and calls for an ambitious agenda to address climate change. Economist and prolific public intellectual Tyler Cowen, who directs the Mercatus Center, recently described libertarianism as “hollowed out.” Some libertarians have moved left; others have abandoned the Misesian freedom-government opposition altogether; a younger underground has turned neoreactionary. The loose social networks that the Kochs’ donations have helped form, especially among students, may ironically have catalyzed movements away from doctrinaire libertarianism.

The final phase of Koch’s activism, which has earned them their notoriety, is penetration. After decades of funding libertarian causes, the Kochs formed Americans for Prosperity, dedicated to mobilizing interest groups and activists. AFP began in the mid-2000s as an exclu­sive social club, hosting “seminars” at expensive resorts where GOP mega-donors would have the pleasure of fraternizing not only with fellow billionaires but also with their pet politicos and intellectuals. Koch operators, such as Marc Short, would coordinate donations and mobilize activists on discrete issues. Alumni of the AFP network soon began to join the staffs of GOP politicians, and a revolving door between the party and AFP became the norm. As Harvard political scientist Theda Skocpol has written, “the AFP federation has been able to penetrate GOP career ladders.” Short himself is a case in point: after years in the Koch network and a brief stint consulting for Marco Rubio’s presidential campaign, Short boarded the Trump train as Mike Pence’s communications director, became the Trump White House’s first director of legislative affairs, and now serves as Vice President Pence’s chief of staff.

So AFP has influence. Where does it spend it? Famously, the Kochs failed to stop the Affordable Care Act, and they squandered over $100 million in a doomed attempt to defeat President Obama in 2012. But these are far from the only investments in the Kochs’ portfolio of policy positions—of which many have just so happened to align with their business interests. In 2010, for example, AFP helped ensure that a cap-and-trade bill died in the Senate after passing the House. According to Leonard, Koch had concluded that the bill—which otherwise suited Koch Industries’ expertise in mastering complex regulations—unfairly targeted oil refineries. The Senate then moved on to so-called comprehensive immigration reform—a blandly nonspecific label for granting amnesty to illegal aliens, in­creasing legal immigration, and ensuring that enforcement would never take priority—policies that promised a massive wealth shift from the owners of labor (workers) to the owners of capital (such as Koch). AFP supported the effort, which ultimately failed.

Several years later, it was Republicans whose agenda AFP thwart­ed. In 2017, House Republicans sought to pay for a corporate income tax cut with a disguised value-added tax, known as the “border adjusted cash flow tax,” which would have taxed corporate revenue from goods sold in the United States. The BAT, as it was called, directly threatened Koch Industries, as it would have taxed their revenue from sales of Canadian oil. AFP mobilized to take the BAT off of the tax reform agenda. It succeeded. By the end of 2017, when the Tax Cuts and Jobs Act passed, Koch Industries had received a massive corporate tax cut, and Charles and David enjoyed a spike in net worth.

Earlier in 2017, a Republican bill to repeal and replace Obamacare had died in the Senate, thanks to a grandstanding vote from Senator John McCain. Surprisingly, the Koch network had opposed the bill. The Kochs offered no policy reason to save Obamacare other than purity. It was better, they argued, to keep Obamacare than to endorse the principle of universal health care coverage. Leonard plausibly suggests that the main goal was tactical: by saving Obamacare, AFP could prove to Republicans that it was still a force to reckon with, even in the Trump era.

Perhaps also surprisingly, AFP supported the First Step Act, a criminal justice reform bill that passed the Republican Congress in 2018. Despite funding “tough on crime” candidates for years, Koch evidently concluded that any convicts released by this bill would not manage to breach the walls of his Wichita mansion. As Leonard finds, the bill successfully softened the Kochs’ public image: now AFP is forever linked in the media with George Soros’s liberal Open Society network. (Koch also joined Soros in funding the foreign-policy-fo­cused Quincy Institute in 2019.) Given the overall unpopularity of libertar­ianism at the moment—and the failure of Koch’s other ideo­logical projects—salvaging its funder’s reputation may be one of the few viable strate­gies remaining for AFP.

Throughout his career, Koch has sought to sideline allies in order to maintain personal command over the organizations he has support­ed. In the mid-1990s, Koch tried to wrest control of Citizens for a Sound Economy, an organization that helped defeat Clinton-era health care legislation, from Dick Armey. Earlier, Koch had lost interest in the Cato Institute after Ed Crane, the Institute’s strong-willed president, had refused to defer to him. Decades later, after the death of William Niskanen, an original Cato Institute shareholder, gave the Kochs an increase in votes, Koch demanded to replace the board with AFP loyalists. As Cato insiders pointed out, a Koch takeover would have eviscerated whatever credibility it had as an independent think tank. Koch offered no further explanation. He eventually entered into a grudging compromise.

In none of the foregoing episodes did Koch’s priorities follow from Misesian principle. The imperative to reduce the size of government does not dictate whether to replace the corporate income tax with a value-added tax, or to replace one system of subsidized health insurance with another. Nor did it even say whether to oppose cap-and-trade. In classical-liberal heaven, polluters would be held liable for all the damages they cause. But it is impossible to assess liability for the global harm of burning fossil fuels (as well as other environmental harms too diffuse for the legal system to deal with). Cap-and-trade is little more than an attempt to make imperfect reality better approximate the pure free market of liberal theory. AFP mobilized anyway, all the while thundering against threats to the free market.

Despite the many ironies of Charles Koch’s two careers in business and politics, it would be a mistake to write him off as less than a sincere believer in his mental models—Guiding Principles, bas­tardized Misesianism, and all. The best justification for one’s actions is always the justification one can believe in. Yet even the most persistent devotion to this ideology cannot obscure the fact that Koch’s behavior is not logical in the Paretian sense. Indeed, when, in AFP, he finally hit upon a formula for exercising real political power, Koch used it to defend his wealth and win feuds. It is not that the reality of Koch Industries and AFP falls short of Koch’s ideals. Rather, Koch’s ideals have no relevance to that reality to begin with. Like a late Soviet apparatchik mouthing the Marxian slogans of a failing regime, Koch exemplifies the spuriousness of his own ideology.

This article originally appeared in American Affairs Volume IV, Number 1 (Spring 2020): 171–89.

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