Charles Koch: Cronyism Distorts Economy, Undermines Small Business Potential


Conversation with Andreas Widmer and Charles G. Koch | Good Profit Conference: How Profitable Businesses Can Be A Force For Good; held at the Catholic University of America – October 2017

ANDREAS WIDMER: What impresses me, Charles, is —you let me go around in the company and met a lot of people. What I found is that your company is not... one big company. It’s like tons of entrepreneurs. And that reflects the culture, I think, of the values. One in particular is this, that you sort of put the money where the mouth is, in that you don’t really believe in budgets. Is that right? How does this work? How do you give, for example, spending authority and investment authority into projects—how do you delegate that down the organization?

CGK: Well, once again, this is the division of labor by comparative advantage. What—I mean, it’s kind of like a property rights system in a—in a well-functioning market economy. To work, it’s people accumulate property by creating value for others. And so, they have good profit. And then, they have more property. And let’s say they’re really good at making widgets and widgets that people really want and creates value for them. So, they gain a lot of property to make widgets. And let’s say they go into singing opera and they start losing. They’re gonna lose their property rights. And so, that’s what we try to emulate in the company. “You’re really good at these kind of decisions, and you’ve proven that. So, you get more and more authority to make these.” Let’s say you’re in a trading group and you’re really good at trading strategy. So, you’ll get more authority on that. But you’re not very good on hiring and selecting people for the team and managing them. So, you’re not gonna have authority on that. So, once again, it’s trying to really practice the division of labor by comparative advantage.

AW: It reminds me of—it’s a free market, right? It’s a free market in your business. That people with the good ideas, they end up being able to realize them.

CGK: Free market with accountability and responsibility, of course.

AW: And one thing I’d like you to just talk about is your opinion of how are we doing as a world, as a market? Do you think we have a free market right now?

CGK: No.

AW: How don’t we have a free market?

CGK: Because it’s full of cronyism. You look at all the rules and the protectionism—that are destroying opportunity for the disadvantaged. That are leading to this two-tiered society. For some of us, make a lot of money, and others can’t get started. Through regulations like occupational licensure, somebody starting with nothing, that create these huge barriers for them to get started. And then this distorts the whole economy. It distorts price signals—prices and profit and loss—people think of those, “OK, those are incentives,” but their main function—the least equal is their knowledge mechanism. That is, in a properly functioning economy, prices and profit and loss signal to the entrepreneur what will people value and what are the best uses of resources to satisfy those values? And when that gets distorted, then it undermines productivity, undermines a company’s ability to create value for others, to help improve people’s lives.

AW: I recently read that some—for the first time, a few years ago, we had more small companies dying than small companies being founded. Do you think that’s a sign of this ailment—

CGK: Well, yeah.

AW: And where is this going? What should we do about it?

CGK: And we see that in big banks. Because of, in part—part of it’s technology, but part of it is—a big part is the regulatory structure. And the big banks, well—some of the leaders have admitted this—over the last so many decades, the five biggest banks have gone from market share of deposits from 16 percent to over 50 percent. And thousands of community banks have been driven out of business. And

the community banks, these small community banks, are the ones that would lend a few hundred dollars to somebody getting started. And so, this source of capital for somebody getting started has dried up, along with a regulatory structure, and in many ways, a failing education system—is one reason that we’re finding such reception with our work in disadvantaged communities. I mean, it is fabulous to see the potential there and the receptivity to these ideas.


AW: You actually have an organization—Young Entrepreneurs—is that right?

CGK: We—yeah, Youth Entrepreneurs.

AW: Youth Entrepreneurs. Can you tell me about that? Because that would sort of go in that direction, wouldn’t it?

CGK: Yeah. We started this—my wife and I started this in Wichita about 26 or so years ago. And this teaches the ideas of Principled Entrepreneurship in public high schools in sophomore and junior year. And as part of it, we teach these basic principles, and then each of the students writes a business plan. And then the winners get some venture capital to start. And then we get a local entrepreneur to mentor them and hire them part-time. And I mean, talk about transforming lives. This is—I’ve seen so many of these kids, I mean, at the graduation telling their stories—it brings tears to your eyes. I remember years ago this girl was telling how she grew up in a tough family, no father, her mother was on drugs. Dirt poor. Violence everywhere. And so, in high school, she was flunking everything. She saw no hope. She’d given up. And then he heard about this course, that, gosh, maybe you can get some money. So, she got in there and she realized—and this is her telling this story at graduation because she was one of the winners—she said, “Wow, I learned—ooh, if I want to get this money, I’ve got to prepare a business plan and then present it. So, I’ve got to learn to write and speak. And then if I have a business, I’ve got to know what’s working and not, so I’ve got to learn math. And then if I want to have customers, I gotta start treating people with respect. And she said, “I went from making—flunking everything to getting straight A’s.” And she got a scholarship and went off to college. I’ve lost track of her since that, but there’s stories after stories like that, of the power of these ideas. And it, to me—everybody who’s failing, there are two sets of reasons: One is that they have internal obstacles and they have external obstacles. And the way to overcome these internal obstacles that we found—I mean, everybody’s different, but—it’s, change the mindset. Everybody has the—virtually everybody, unless they’re infirm—has the ability to learn, contribute and succeed if they’re given the freedom, opportunity and dignity to do so. So, that’s the starting point. And then the second is, as I say, learn what innate abilities that will enable you to develop a valued skill. And then the third one is apply that to create value for others. And then the external obstacles are getting rid of all these societal barriers that we’ve been talking about. Education system. The cronyism. The regulations, such as occupational... licensure. And so on.

AW: Now, most of the attendees here are business owners. Some large businesses, a lot of smaller and medium-size businesses. And so, we’ve talked about good profit this whole week. And we were actually inspired by your book. Thank you very much.

CGK: Thank you.

AW: And so, we’re all reading this. So, I am a small business owner, medium-size business owner—this may seem a little overwhelming. Like, it took you a while to apply this, right?

CGK: Oh, yeah. … I mean, we had so many failures. We misapplied it every way you could imagine.

AW: So, give us a cue of, how do we start? Where do we—you have the five dimensions as you can see in the MBM, the five dimensions—where do we start? And how do we start? Let’s go—I go back home on Monday into my company, and I want to change.

CGK: OK. Well, the first thing is “What capabilities do I have that somebody’s gonna value and is gonna pay me for?”

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