Discovery Newsletter: Perspective, Charles Koch

January 1, 2015

min read

Last year was Koch Industries’ third-best ever, trailing only 2013 and 2012 in terms of net income. 

The value of the company has now grown 4,600-fold since 1961, including distributions.  By comparison, the S&P 500 is up just 160-fold (on the same basis) during that same period.

I attribute much of our growth to the understanding and application of Market-Based Management®.  By providing employees throughout the company with principles and tools for capturing opportunities and solving problems to better serve our customers, MBM® has helped us grow exponentially. 

The widespread adoption of its five dimensions has made the company better — not only more productive, but more principled.  Similarly, I believe society as a whole would benefit from having a comparable framework and set of tools for evaluating institutions and policies.

Although the idea that such a framework could benefit our country may seem improbable, this approach is one that has been validated in our company for decades.

MBM is based on the principles of a free society and I am confident that a systematic application of the same principles in society can have a beneficial and transformative effect on overall well-being.

Five dimensions

As with MBM, the framework for a free society has five dimensions, beginning with vision and ending with incentives.

Just as we have established visions for KII and each Koch company, we need to articulate a vision for a free and flourishing society.  A free society is rooted in a complex and inter-related set of ideas and values that provide long-term peace, civility and well-being.

Today (and throughout history) these ideas and values are under attack from those with radically different points of view, some of whom endorse violence and terrorism, while others promote over-reaching policies that lead to decreasing freedom and opportunity, and increasing dependency and poverty.

Contrary to these viewpoints, societies that are organized around a vision of freedom have proven to be the most successful at enabling widespread well-being, especially for the least fortunate. 

Second is the dimension of culture.  A free society requires a culture based on principled entrepreneurship, in which people succeed by helping others improve their lives.  They are cultures of integrity, responsibility and tolerance.

The foundation of such a culture is respect for the moral dignity of all people, no matter what their race, creed or station in life may be.  A free society requires and reinforces the qualities of personal responsibility and self-control.

Individual rights is the third dimension.  Foundational to free societies are secure individual rights, including property rights, with equal protection for everyone under the law.  They must remain so to encourage the efforts and investments that make free societies so innovative and productive.

The role of government is limited to those activities for which coercion works better than voluntary cooperation and competition.  This includes protecting our persons and property, defending the country against foreign aggression, enforcing legal decisions and contracts, and protecting against significant externalities such as epidemics.

The fourth dimension involves free speech and market signals.  The open flow of knowledge leads to innovations and the best use of resources, increasing well-being throughout society.

Realizing these benefits requires an environment that fosters learning through freedom of speech and thought.  This cannot exist if we are prevented from challenging the status quo or stopped from voicing our dissent. 

Free markets, undistorted by subsidies or anticompetitive regulations, transmit knowledge of how best to satisfy people’s needs through a system of prices and profit and loss.

Incentives is the fifth dimension.  When individuals are rewarded for helping others improve their lives, people throughout society benefit.  Whether someone’s motives are altruistic, self-interested or a mixture of both, free societies encourage this mutually beneficial behavior.  They discourage individuals from attempting to gain at the expense of others by cheating or manipulating the laws and regulations.

Applying this framework

As with MBM, all five of the dimensions in this framework must be applied holistically to achieve meaningful results.  The best incentives in the world can’t offset a lack of vision, and society as a whole loses if the law treats one group differently than another.

For decades, I have studied what conditions, culture and structure bring about the most benefit for all.  I’ve learned that governments and organizations, like people, should stick to their comparative advantages.  

To advance a free and flourishing society, I believe we need a framework like the one outlined above.  To make it a reality, we need to encourage people from all walks of life to join us in the effort.

As Frederick Douglass said 160 years ago, “I would unite with anybody to do right; and with nobody to do wrong.”  I would like to see all of us devote ourselves to doing what is right.