Democrats taking US to serfdom, Republicans catching up: Charles Koch

Image: Jamel Toppin for Forbes

Charles Koch recently sat down with Forbes to talk about next year’s presidential election, the course of American politics and his new book, Good Profit, which attempts to explain the homegrown business philosophy he calls Market-Based Management. That philosophy, an amalgam of libertarian political theory and Austrian economics, helped Koch build Koch Industries from a handful of oil-related businesses into the nation’s second-largest private company, with $115 billion in annual revenues. It also made Charles and his brother David extremely wealthy (Charles has two other brothers, Bill and Fred, who are not involved in the company). David and Charles have fortunes estimated at $41 billion apiece, good for a fifth-place tie on The Forbes 400 this year.

Following are excerpts from a wide-ranging conversation with Koch. A longer version of this interview is available at www.forbes.com/kochinterview .

POLITICS
In January, at the Freedom Partners semiannual conference for rich conservatives, Koch exhorted the more than 400 attendees to spend $900 million over the next presidential election cycle. About a third of the money will go to politics, Koch says, and the rest to influence policy on everything from criminal justice reform to eliminating laws requiring special licences for occupations like hairdressing and taxi driving. Koch sounded unenthusiastic about the GOP’s role in this process. In fact, he has stated: “I am not a Republican.”

Q. What are your goals in this election?
My view of the political realm, not just now but for many decades, is that the Democrats are taking us down the road to serfdom over the cliff at 100 miles an hour and the Republicans are going around 70 miles an hour. What I want to do is reverse the trajectory of this country.

Q. If Donald Trump is the Republican candidate for president, will you support him?
We’re not going to talk about that.

Q. Who do you like in the GOP field?
I’ll let somebody else decide that. I’m not going to talk about personalities or the individuals.

Q. What are the key issues?
There are a lot of topics we could talk about, but two really big ones. One is, we have out-of-control, irresponsible spending by both parties that is taking us toward bankruptcy as a country and as a government. Related to that is, we’re headed toward a two-tiered society.

We’re destroying opportunities for the disadvantaged sections and creating welfare for the rich. This is coming about by misguided policies creating a permanent underclass. It’s crippling the American economy and also corrupting the business community.

Q. How do you fix poverty?
Our priorities are criminal justice reform and eliminating the barriers to low-income people starting a business or even getting a job.

Q. Is it true you’re spending almost a billion dollars on the 2016 campaigns?
No. The billion dollars is for all these things we do including policy initiatives like simplifying taxes and opposing ObamaCare.

Q. How much of that money will be from you and your brother?
A small fraction. Most of what I give is to my foundation and the Charles Koch Institute. Almost all of what I give personally [to political action committees like Koch PAC and Freedom Partners PAC] is public, and I’m fine with that.

Q. We now know that organisations affiliated with you, including Freedom Partners, spent over $200 million in the 2012 cycle. Will we have to wait two years to find out what you’re spending on this one?
We’re estimating around $300 million. But it depends on what [outside] donors want to give.

Q. The whole $200 million wasn’t you and David writing cheques?
No, absolutely not. No.

Q. Have you had any impact on the Republican party?
It’s tough. Not nearly what we’d hope. I take a much longer view. My brother David is much more interested in the political side. I’ve been doing this over 50 years, as you know. I’m more interested in the understanding, the education, the cultural aspects. Because I think that’s what’s going to drive what kind of country we have and whether we can really change the trajectory of the country. To have a white knight come in and save us, that may help a little, but you’ve got to change the hearts and minds of the people to understand what really makes society fairer and what’s going to improve their lives.

Q. So will this presidential election decide anything? It doesn’t sound like you’re enthusiastic about anybody.
My ideal candidates would be a Calvin Coolidge or a William Gladstone. [Gladstone served as British prime minister four times between 1868 and 1894 and helped eliminate tariffs, cut budget deficits and increase government transparency. Coolidge was the famously frugal American president from 1923–29.] Look at what Calvin Coolidge did. He cut government expenditures in half. Cut tax rates by two-thirds, reduced the national debt by a third and cut unemployment from 12 percent to 2.4 percent. Now, the only thing I hold against him is he didn’t run again, so we got Herbert Hoover, who turned a recession into a great depression with his policies.

Q. You mentioned a white knight. What about Trump?
Yeah, I mean, he’s … I’m not the only person who’s frustrated with what’s going on in both parties. But I would hope there would be somebody who would capture that frustration and do what Calvin Coolidge or William Gladstone did and change the trajectory of the country.

Q. What about Reagan?
In his first term, the growth of government was slightly less, but in the second one it was right on target, up there with what the Democrats had done.

Q. George W Bush?
We got this seminar group [now the semiannual Freedom Partners summit] started in opposition to the Bush 43’s policies. We started in 2003. Bush was running on free enterprise and then he grew the government more than Clinton. And increased regulation more than Clinton and got us in more wars than Clinton.

So I mean, what are we doing? He is a fine person. I’ve met him and know something about him trying to do the right thing, but he must have had bad advisors or something.

Q. So you won’t name a favourite?
I want someone who’s going to change the trajectory of the country in the direction that I mentioned earlier, away from the two-tiered society and away from bankrupting us. And who has the glib and who has the most popular appeal has not proved to be very good evidence for bringing that about.

Q. Your conferences in California have been criticised for secrecy, so you invited the press this year. Was that a mistake?
We did the last two. As far as I’m concerned, we could be completely open on everything. We have participants, donors to this, who aren’t as comfortable with being public. And who can blame them? They don’t want to get the kind of abuse I get, the death threats I get. I had 153 death threats last year. Now al Qaeda has me on their hit list. So others don’t want that. They don’t want their names exposed.

Q. Why do you generate so much hostility?
These ideas, the idea that people are going to be better off when they control their own lives rather than have somebody in power [telling them what to do], this threatens people in power. So I understand it perfectly.

BUSINESS AND POLICY
Koch’s management philosophy is a unique combination of personal experience and an engineer’s obsession with measurement and analysis (Koch has master’s degrees in chemical and nuclear engineering from MIT), along with a large dose of libertarian economic thinking. His Market-Based Management is based on “five dimensions”: Vision, Virtue and Talents, Knowledge Processes, Decision Rights and Incentives.

Q. Explain Market-Based Management in 20 words or less.
It’s a way for organisations to succeed by helping others improve their lives. Now, that sounds like left-coast psychobabble, and it normally would be, but not if you base everything on it. And that’s who you are. You don’t just have posters on the wall and put all this stuff up for show and don’t implement. [MBM drives] whom we hire, the training, having leaders who live up to our values and then testing everything for results.

Q. How would Market-Based Management work in the White House?
Oh, my God. You can just go through the five dimensions. You start with the vision. What capabilities do we have to create superior value and help make other people’s lives better? What can we do better than our competitors? Well, that’s the first thing the White House needs to do.

What is the nature of government? Government is a social agency of coercion. It has a monopoly of force in a given geographic area. So for what kind of activities does force work better than voluntary cooperation and competition? That’s what governments ought to be limited to.

Q. Koch Industries has been a compound growth machine, growing from $4 million in earnings and a $50 million net value in 1967, when you took over, to a value of more than $100 billion today. How do you separate winning investments from losers?
Well, you get a lot of losers. What all this comes down to is, you need an experimental discovery culture and model. You can study these things till the end of time and not know, because the future is unknown and unknowable. We try to do experiments at a level that we can afford to lose.

Q. If the government can’t pick the winners, how can a big organisation like Koch?
We don’t do it from a politically correct or bureaucratic standpoint. We run experiments all the time. And those that prove out, we do. You limit the amount, and then if it doesn’t work, you kill it. Whereas in the government, if they get something that’s politically correct and it doesn’t work, then they say, “Well, we need to spend more money on it.” So you never kill it.

Q. How do you evaluate an employee who backed a concept that utterly failed?
We look at: How was the decision made? If you have a failure and you’ve applied good experimental methodology, then that’s fine. Okay, you lost something. Whereas if you plunge in and do a bunch of stupid things, then, yeah, we don’t want to give you the property rights, the authority, the decision rights to do more of that.

Q. How do you succeed at Koch Industries?
If you want to be a leader here, you have to build a challenge culture. If people don’t challenge you, then you’re not a good leader. You can’t be, because you’re not using the knowledge of your people. And if you’re an employee and you’re not challenging, what good are you? We’re better off getting another computer.

Q. You’re in a lot of carbon-intensive industries. Global temperatures and CO2 concentrations are rising at the same time. Is there a connection?
It’s highly probable that CO2 has contributed to that. Is it good science to conclude humans are the cause? It’s not settled; it’s not certain. Anybody who says some- thing this complex is settled is not using good science.

Q. Is current energy policy too focussed on fighting carbon emissions?
The present policies of subsidising and mandating inefficient alternatives are counterproductive. The enormous cost and unreliability of wind and solar are making people’s lives worse. They’re increasing the cost of energy, corrupting the business community, increasing corporate welfare—and they’re counterproductive.

SUCCESSION AND PERSONAL LIFE
Koch turns 80 in November, and while still very much in charge at Koch Industries, he has to think about succession. His son, Chase, 38, a graduate of Texas A&M, runs Koch’s agricultural division, which develops crops that use fewer resources like water and fertilizer. His daughter, Elizabeth, who graduated from Princeton, runs a boutique publishing company called Catapult.

Q. You’re 79—what can you tell us about your son, Chase, and succession?
I’m proud of him.

Q. Typically, you move somebody being groomed for top leadership around more in the company.
He’s worked in a number of different groups. We try to run a meritocracy. Whatever position Chase has he has to earn. He has to be the best one to hold that position and get whatever compensation he’s getting. We have succession, we have a lot of great talent in the company, the best we’ve ever had, with great values, so we’re in good shape if I should vanish tomorrow.

Q. Your daughter, Elizabeth, is building a publishing company. Does she have your management chops?
I don’t know. She’s a much better writer than I am. She is terrific. I’m proud of both our kids. They have great values; they treat others with dignity and respect. They have humility and a work ethic.