Written by journalist Christopher Leonard, Kochland is a book about Koch Industries and its leader, Charles Koch.
Koch Industries was founded as Wood River Oil and Refining Company by Fred C. Koch, Charles Koch’s father. It was originally a refining company, along with a few random businesses Fred Koch invested in.
After Fred Koch’s death, Charles Koch took over the business, renamed it Koch Industries after his father and took it to what Koch Industries is today.
Kochland is a pretty comprehensive book that covers the story of Koch Industries from the time Charles Koch took over till 2018. It doesn’t only cover the history of the company, but also its fingers in many things that affect the business—the oil industry, trading and derivatives, American politics, climate change, libertarianism, etc.
I thought it was pretty obvious that the author had a narrative he was driving towards, one that he wanted you to believe about the Kochs. But I appreciated that he wasn’t pushy about it, and laid out things as factually as possible.
Here are some of my highlighted passages from the book.
When Charles Koch took control of the company, America operated under a political framework called the New Deal, which was characterized by dramatic government interventions into the private marketplace, empowered labor unions, tightly regulated energy companies, and a shackled financial industry. Charles Koch despised it. He subscribed to the philosophy of Austrian economists such as Ludwig von Mises, who believed that government intervention only created more harm than good.
He created a political influence network that is arguably the most powerful and far-reaching operation ever run out of an American CEO’s office. Koch Industries has one of the largest, most well-funded lobbying operations in the United States. Its efforts are coupled with a nationwide army of activists and volunteers called Americans for Prosperity, along with a constellation of Koch-funded think tanks and university-based programs. Charles Koch’s political vision represents one extreme pole in the ongoing debate about the role of government in markets; a view that government should essentially protect private property and do little else. Political figures on the opposite pole believe that a robust federal government should provide a safety net and contain the power of large corporations.
Charles Koch was intently focused on what made people tick, and he approached the subject with the mind of an engineer: he was seeking to discover discernible laws. He knew that there were laws dictating what happened in the physical world, laws that were well understood by physicists and chemists. He thought there must be similar laws that dictated affairs in the human world. “It’s an orderly world, the physical world is. It follows certain laws. And so I thought: Well, the same thing’s got to be true for how people can best live and work together ,” Koch recalled. “So I started reading everything I could on the subject.” Koch read the work of Karl Marx and other socialist thinkers. He read books on history, on economics, on philosophy, and on psychology.
Charles Koch became enamored with the thinking of economists and philosophers like Ludwig von Mises and Friedrich Hayek, two Austrian academics who did most of their formative work during the 1930s and 1940s. In later years, Charles Koch would be described as a libertarian or a conservative. But these were imperfect labels that didn’t capture his true world view. More than anything, he was an Austrian economist, or a “classical liberal,” as he liked to call it. Hayek, in particular, put forward a radical concept of capitalism and the role that markets should play in society, and his thinking had an enduring effect on Charles Koch.
In Hayek’s view, even well-intentioned state actions ended up causing far more human suffering than the market-based ills that they were meant to correct. His most famous example of this was the policy of rent control, which was big in Hayek’s hometown of Vienna. Politicians put a cap on rent prices to help people who rented homes and apartments. But Hayek described a long list of unintended consequences. The controls made it unprofitable for landlords to reinvest their cash in money-losing apartments, for example, so those apartments devolved into squalor. Because there was no incentive to build new apartment buildings, housing shortages became perpetual.
Big families were stuck in small apartments because they couldn’t afford to move out of their rent-controlled dwellings. Hayek said this proved a simple point: cutting one thread in the tapestry of a free market—even with the goal of helping people—only unraveled other parts of the tapestry. Hayek was almost religious when it came to describing what the market could do when left to its own devices. He believed that the market was more important, and more beneficial, than the institution of democracy itself.
A market was able to mediate all the wishes of everyone on earth. When people entered a market, their demands instantly put a price on the thing they wanted. The market also put a price on the things that they had to offer (like their labor). These prices were not dictated or set by a king. Instead, they were derived from the push and pull of supply and demand. The prices in a free market were the most honest assessment of reality that humans could ever hope to achieve. Government, on the other hand, was never really able to mediate between all the competing needs of its people. It was impossible for everyone in a large society to come to some sort of consensus that the government could then enforce through law. Laws and regulations were unworthy tools to use to deal with problems of the natural world, because the natural world was al- ways changing. Laws were static; the world was fluid.
Only the market could respond to the ways the world rapidly changed, Hayek believed. And if markets were Hayek’s religion, then entrepreneurs were his saints. He saw entrepreneurs as the lifeblood of adaptation and efficiency. They were the ones who spotted new ways of doing things. They were the ones who created new products, created new technology, established new orders when it was time for the old orders to decay.
From the very earliest days of Koch Industries, Charles Koch sought to stock his workforce full of entrepreneurs, employees who would keep their eyes open, learn constantly, and spot new opportunities on the horizon before others saw them.
Varner encouraged his senior managers, like Williams, to think the same way. Williams was told that his job wasn’t just to keep his head down and run his division—his job was to keep his eyes on the horizon, to scan the environment of his business for new opportunities. Even more important, Varner told Williams to pass this mentality on to everyone who worked for him.
Everybody was supposed to act like an entrepreneur who worked in the mergers and acquisitions department. “When you get that idea spread among your people, then you’ve got gaugers out there with their eyes open. The ideas come in. If you’ve got a couple of thousand [employees] looking for things, you’re going to get some stuff that comes in that’ll be all right.” Williams said. Charles Koch and Sterling Varner held quarterly meetings to evaluate how managers like Williams were doing in this regard. Williams was expected to report on his pipeline business and also to bring up new “high-quality investments” that he had spotted in the field. A ritual was formed at these meetings. A manager like Williams would propose the idea for some new investment. And then the questions would begin. Charles Koch’s questions were relentless, seemingly never ending, and the managers understood that they must be prepared to answer all of them. If a manager didn’t have the answers, the topic was dropped until he could return with them.
He built a company that learned constantly from the world around it and prized information discovery above almost everything. It was a company that embraced change and hated permanence, one where every division would be up for sale all the time. He built a structure with centralized control—which emanated from his boardroom—but that also gave managers and employees a remarkable level of freedom. He fused the sophisticated management techniques he learned as a consultant in Boston with the folk wisdom of his mentor Sterling Varner and the free-market religion of thinkers like Hayek and von Mises.
Charles Koch seemed to be praising Paulson to convey one lesson: Paulson had treated the Pine Bend refinery like it was his own company. Paulson didn’t act like an employee; he acted like a small-business owner. Paulson thought for himself, and he treated Koch Industries’ money as if it were his own. And Paulson shared in the glory once it was realized. “He pointed out, ‘This is entrepreneurial,’ ” Paulson recalled. “He said that’s what he wanted the entire company to do. To be entrepreneurs.”
Employees at all levels of Koch were made to feel like small-business owners. They never owned actual shares of stock in Koch Industries—ownership was reserved for the Koch family and a few small shareholders. But employees felt like they owned a piece of Koch Industries. Charles Koch gave them performance-based bonuses and issued them “shadow stock” contracts that paid out as the company’s value increased, but that didn’t confer actual ownership. The real shares of Koch Industries were tightly held by Charles and David Koch, and a small group of relatives and associates.
One of the key lessons that Charles Koch took from the Austrian economists von Mises and Hayek was that markets never stood still. The status quo never survived. Markets always build up and then tear down. It was an evolutionary process that never ended, and companies that tried to fight the process would only be devoured by the forces of change in the end. Charles Koch wanted his company to change and grow with the markets. He wanted Koch Industries to internalize the forces of change and exploit them rather than trying to fight them.
These books seemed to be Charles Koch’s prized possessions. There was a multi-volume edition of the Oxford English Dictionary . There were works by his favorite philosophers, economists, and historians. Charles Koch liked to tell people that “true knowledge results in effective action.” True knowledge was the important part of the equation. Charles Koch aimed to discover the truths undergirding society and business by reading all the books in his library. He wasn’t satisfied anymore to borrow the thinking and methods of people like W. Edwards Deming. Charles Koch wanted to codify his own understanding of the truth. In 1990, he put a name to this effort. His set of rules would be called Market-Based Management.
The words of Market-Based Management were not simple slogans. They were a code of conduct that would guide life inside Koch Industries during the 1990s. This was a decade of explosive growth for Koch; a time when it would take full advantage of economic conditions that favored complexity and bigness. But it was also a time of dysfunction and challenge. Charles Koch liked to say that growing was a lot like the process of scientific inquiry: You came up with a hypothesis, and then you tested the hypothesis against the hard rocks of reality. You did this again and again until you found out what was true.
During such meetings, Charles Koch explained that there were fundamental laws guiding the natural world: the law of inertia, the law of gravity. These were immutable forces that dictated events. And there were also immutable laws that governed human affairs. History showed, inarguably, that the laws protecting individual liberty and free-market capitalism were the only principles that could form the bedrock of a healthy society. The same held true for creating a healthy company. Individual liberty and free-market capitalism were the cornerstones. These principles would guide every action of every employee inside the company. Commitment to these laws was a precondition to employment at Koch Industries. It was also the surest path to a virtuous and prosperous life.
Deep analysis was at the heart of Koch’s trading strategy. Franklin, for example, was hired into the trading unit after working in Koch’s pipeline division. He had impressed his bosses there by developing a software program that could help Koch run its hypercomplex network of pipelines and natural gas processing plants. Franklin’s program synthesized enormous amounts of data about pipeline flows and gauge pressures to simulate how the system could ship the most gas. When he started trading interest rate swaps, he used the same approach. Every trade began with research, which undergirded the trader’s view of how things worked in a certain market. Traders never executed a strategy based on hunches. Koch hired teams of analysts who worked alongside each trader to provide reams of data and analysis. The importance of this analysis was reflected in Koch’s pay structure—the company changed its payment structure so that profits were split between the trader and her supporting team of analysts. This put the analysts on equal footing with the traders. Melissa Beckett, who worked on several of Koch’s trading desks as both an analyst and trader, said Koch was unique in this regard. Other trading shops might consider analyst reports to be an afterthought; at Koch, those reports were the bedrock where a trade began.
All of these information streams were centralized, analyzed, and then shared widely within Koch’s trading group. The purpose of gathering all of this information was to find “the gap,” as Koch’s traders called it: the gap between reality and what the market believed was reality. Koch gathered enough information to get a sharper picture of reality than its competitors. Then it placed bets that would make money when the market corrected itself, closing the gap, and came closer to the real-world conditions.
Charles Koch favored a trading strategy that he called “experimental discovery.” It entailed making a small bet in a new market and seeing if the bet paid off. Even if a Koch trader lost money on the trade, they gained insight. If they made a profit, the bet could be expanded.
Charles Koch addressed a question that had worried him since the 1970s: “Where is free capitalism at risk?” After the crash, it seemed as if capitalism was at risk across the United States. The dominant public narrative blamed the crash on a failure of the free market and private enterprise: greedy bankers had been given free rein and taken down the economy. When it looked for a solution to the problem, the American public turned to the federal government, not the free enter- prise system. First came a giant federal bailout plan, designed and orchestrated by the Bush administration. The price tag for this bailout was placed at $700 billion. The US Treasury used taxpayers’ money to buy bad loans and rotten assets from the very banks that created them.
Treasury Secretary Henry Paulson, a former Goldman Sachs executive, promoted the plan on national television, saying it was vital to stopping another Great Depression. A Republican, in other words, was made a passionate argument for government intervention on the scale of the New Deal. Surprisingly, the strongest resistance to this plan came from Paulson’s own party. Republicans in Congress voted against the bailout in September of 2008. The stock market crashed more than 700 points when they did so. The plan was eventually passed.
Even worse, from Charles Koch’s point of view, was the election of Barack Obama to the presidency in November. Now, Democrats controlled all three branches of government. The mood of America was decidedly running against Charles Koch’s beliefs. The mood was deeply “illiberal,” as he would call it. There was clamoring for more government intervention, more regulation, and more money for entitlement programs. What was unspoken, but what Charles Koch understood, was that all of this would also mean more taxes. In January of 2008, even before the Democratic takeover, Charles Koch warned that too many Americans were putting too much faith in government programs to solve their problems. The result was inevitable: “To support that spending, taxes will escalate,” Charles Koch had written in the company newsletter. Who was always the primary target of higher taxes in American history? The richest Americans and the largest corporations. Charles Koch happened to be sitting atop one of the largest fortunes in the world, and one of the largest private corporations in the country. The Democratic Party had been explicit in its promise to tackle concentrated wealth.
Charles Koch did not believe that markets needed to be tamed. The very fact that so many people subscribed to this belief seemed to prove that most American voters were profoundly misinformed. Even the nation’s CEOs and business leaders were delusional on this point. They refused to accept the most important, most overriding fact: the American economy was not a free enterprise system in the first place. It was not a free enterprise system when FDR was elected, and it certainly was not one now. Government control and intervention were so deeply embedded in the American way of life that people didn’t even see it anymore. People failed to understand that it wasn’t the free market that caused the collapse of 2008, it was overweening government control and interference that caused the crash of 2008, and the crash of 1929, for that matter.
He continued: “[W]e have allowed the free market to be blamed for fos- tering economic crises, when, in fact, a free market did not even exist at the time the crises occurred. A comment on the Great Depression will illustrate this point. Those who believe that the pre-1929 economy, polluted by government manipulations of the money supply, was a free market are defense- less against the charge that the Depression occurred because of unregulated market activity.”
After these crashes, in the most bitter of ironies, the American people blamed capitalism for the problem, and heaped yet more government intervention onto the problem in the hope of solving it. This is what Charles Koch believed happened under FDR, who misdirected the people from the real cause of the crisis and made the problem worse by pushing the New Deal. Charles Koch noted, in a 2009 company newsletter, that the economy was sluggish and dipped into recession during the 1930s after the New Deal was passed. What Charles Koch failed to mention in the newsletter was that the country enjoyed three decades of economic growth where prosperity was widely shared during the ensuing era of the New Deal consensus, which didn’t truly end until the mid- to late 1970s.
The crash of 2008 was caused by “misguided government policies” rather than the shortcomings of free enterprise, he believed. These policies included the Federal Reserve Bank’s continued intervention in the money supply. The Fed kept interest rates extraordinarily low for an extraordinarily long time during the 2000s, in hopes of boosting economic growth. Charles Koch blamed that intervention for lead- ing to the housing bubble, a point of view that was almost inarguably supported by all available data.
On the wall opposite Charles Koch’s desk, he had hung a painting that was quite unpleasant. His daughter, Elizabeth, had painted it. It was a picture of dark hues, heavy on the red, showing the face of what appeared to be a Chinese peasant. The man’s face was bruised and beaten. His expression was one of suffering. The painting seemed to be a reminder, and a warning. It was a totem of life under repressive regimes; the face of Communism, Socialism, and state control. It seems telling that Charles Koch gave it a place of such prominent display, hanging it where it was never far from his view. Charles Koch seemed to believe that the United States was slipping toward tyranny. When he looked out on the horizon, he saw a threat. The power of the state was rising, and Koch Industries was directly in its crosshairs.
While the scientific community was in agreement on these facts, the American public was in doubt. This wasn’t accidental. As early as 1991, Charles Koch and other executives in the fossil fuel industry helped foster skepticism about the evidence of climate change.
Koch Industries, ExxonMobil, and other firms spent millions of dollars to support the idea that there was an “alternative” view about climate change between 1991 and 2009. These groups had a distinct advantage in the de- bate. It took many decades for firm scientific consensus to take shape. Scientists are, by nature, cautious and self-doubting. They were hesitant to push the narrative further than the data would support. And the mechanisms of climate change were impossibly complex and hard to quantify. It was difficult to estimate, for example, just how much carbon the world’s oceans might be able to absorb over time, or exactly how many degrees the earth might warm over a hundred years if the atmospheric levels of carbon reached 400 parts per million. Even as the global scientific community slowly cohered around the understanding that human activity caused cli- mate change, this cottage industry thrived—a cottage industry built to highlight all the points of uncertainty in the scientific debate.
Ideas are the raw material of all legislation. In Washington, DC, there is a surprisingly small congregation of think tanks, policy shops, media outlets, and academic institutions that shape the daily political conversation. Over the decades, Koch Industries became adept at seeding this territory with its own ideas, and its own thinkers, in a way that hid its influence.
The echo chamber tactic began when Koch’s lobbyists would commission and pay for an academic study, without claiming credit for it. That study, seemingly independent of Koch, was then fed into a series of think tanks and foundations that Koch controlled. Finally, the work of those think tanks was weaponized into the raw ammunition of political campaigns. Taken together, it had the effect of making the message from Koch Industries’ lobbying shop seem far louder, and far more popular, than it really was. This, in turn, had a surprisingly strong effect on senators and other lawmakers, who paid close attention to public sentiment.
In 2007, for example, Koch Industries quietly funded the work of a Democratic-leaning think tank called Third Way. The think tank promoted “New Democrat” policies such as those embraced by Bill Clinton: neoliberal policies that sought to combine New Deal goals with free-market methods. Lobbyists at Koch’s office knew that Third Way’s economic study program supported free-trade policies such as NAFTA. Such trade policies were under attack in 2007 because they did not deliver the economic benefits that they had promised to huge swaths of the American population.
The textile industry of South Carolina, for example, was decimated by trade agreements, such as NAFTA. This was stoking opposition to such trade agreements among both Democratic and Republican politicians. Koch Industries supported free-trade agreements and wanted to ensure the passage of future trade deals, while blocking any reversal of existing deals. The possibility of any trade war was dangerous for Koch Industries not just because the company had extensive business holdings around the world.
Charles Koch, who prized long-term thinking and who preached about the importance of creating incentive systems and bonus payments to reinforce it, looked at Congress and saw a dysfunctional system that was riven by toxic incentives. Politicians were just caught up in that system. They almost couldn’t help but do the wrong thing.
The political machine that Charles Koch built was immensely successful—not at fixing this broken system, but at ensuring that it remained hobbled and incapable of passing the kind of sweeping business regulations that defined the New Deal. He applied long-term thinking to a system defined by short-term election timetables, and he won many of the most important fights he cared about.
In many ways, Donald Trump posed a greater political threat to Charles Koch’s political agenda than Barack Obama. Trump was not seeking to fight American conservatism as much as he sought to transform it from the inside. Charles Koch tried to bend the Republican party toward a libertarian view; now Donald Trump was bending it toward a nationalist, populist philosophy that Charles Koch found abhorrent. Trump’s policies aimed to benefit specific populations of Americans, rather than to solely limit government interventions in the marketplace.
When Donald Trump arrived in Washington, he had no connections and no political network from which to draw the hundreds of people he needed to staff positions across different government agencies. Charles Koch, by contrast, had spent forty years building political networks in Washington. He had cultivated experts and operatives through years of employing them at think tanks, lobbying offices, and funded university chairs. When Donald Trump went out to hire people, he almost necessarily hired people who were sympathetic to Charles Koch’s point of view, if not directly beholden to Charles Koch’s largesse.
The balance of power between the Trump administration and the Koch network was still uncertain. Koch claimed some victories, but it was clear that Donald Trump was determined to go his own way. Trump abandoned a major trade deal in Asia and imposed tariffs on goods from Europe and China, policies that Charles Koch vehemently opposed. Inside the Trump administration, there was disdain for Charles Koch because he was considered too ideological, inflexible, and out of touch with American voters.
Enjoyed this? Then buy the book or read more book summaries.