Charles Koch on Cronyism (Part 1)

– Charles G. Koch, “The Importance of Economic Freedom.” August 17, 2012.

Classical-liberal entrepreneur Charles Koch, CEO of Koch Industries, Inc., valued at $100 billion, is one of the most intellectual business leaders in the United States, if not the world. He also takes the prize as the most trenchant critic of cronyism (rent-seeking) where business representatives lobby for special government favor.

Charles Koch’s views are based on his extensive study of the theory and practice of social cooperation for mutual gain–and prosperous societies. His verdict for private property, free markets, and the rule of law–and against government intervention–is long held. An incident back in the 1970s regarding federal energy policy and Koch Industries is illustrative.

William Simon, the top energy regulator in the Nixon’s Federal Energy Administration, received oil company head after head in his office demanding this or that to alleviate their oil shortage. many wanted to receive more entitlements credit for their refineries. But Koch Industries had come by to just ask the federal government to leave them alone—to allow price signals to allocate crude oil and petroleum products. It was a meeting that Simon and his office would not forget. [1]

For Charles Koch the libertarian-inclined entrepreneur, it has been lonely fight. Just about every fellow CEO talked about capitalism and freedom but did not practice it when their bottom line need a little extraneous help. Calculator-determined policy positions could often not be consonant to government-neutral policy. Instead of capitalism in principle, Charles once wrote in the early 1980s, business leaders were practicing capitalism a la carte. [2]

Today, business/government cronyism is rampant.  Yet reducing and eliminating politicized capitalism is a reform cause for both ends of the political spectrum. Its time has come.

This post reviews Charles Koch’s quotations on cronyism from years past; Part II tomorrow will reproduce quotations from his new book, Good Profits.

“I think one of the biggest problems we have in the country is this rampant cronyism where all these large companies are into smash and grab, short-term profits.”

“… ‘We don’t want [the government to allow firms] to export natural gas because of my raw materials’ [like Dow Chemical]… Well, you say you believe in free markets, but by your actions you obviously don’t. You believe in cronyism.”

“I think it’s in our long-term interest, in every American’s long-term interest, to fight against this cronyism. As you all have heard me say, the role of business is to create products that make peoples’ lives better while using less resources to do it and making more resources available to satisfy other needs.”

“When a company is not being guided by the products they make and what the customers need, but by how they can manipulate the system — get regulations on their competitors, or mandates on using their products, or eliminating foreign competition — it just lowers the overall standard of living and hurts the disadvantaged the most.”

– Kellen Jenkins, “Charles Koch: Business Giant, Bogeyman, Benefactor and Elusive (Until Now).” Wichita Business Journal, February 28, 2014.

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“Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

“The role of business is to provide products and services that make people’s lives better—while using fewer resources—and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.”

Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.”

“We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

“We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn’t ordinarily buy.”

“Because they have the advantage of an uneven playing field, crony businesses can drive their legitimate competitors out of business. But in the longer run, they are unsustainable and unable to compete internationally (unless, of course, the government handouts are big enough). At least the Solyndra boondoggle ended when it went out of business.”

“By subsidizing and mandating politically favored products in the energy sector (solar, wind and biofuels, some of which benefit Koch Industries), the government is pushing up energy prices for all of us—five times as much in the case of wind-generated electricity. And by putting resources to less-efficient use, cronyism actually kills jobs rather than creating them. Put simply, cronyism is remaking American business to be more like government. It is taking our most productive sectors and making them some of our least.”

“The effects on government are equally distorting—and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

“Subsidies and mandates are just two of the privileges that government can bestow on politically connected friends. Others include grants, loans, tax credits, favorable regulations, bailouts, loan guarantees, targeted tax breaks and no-bid contracts. Government can also grant monopoly status, barriers to entry and protection from foreign competition.”

“Whatever form these privileges take, Americans are rightly suspicious of the cronyism that substitutes political influence for free markets. According to Rasmussen, two-thirds of the electorate are convinced that crony connections explain most government contracts—and that federal money will be wasted ‘if the government provides funding for a project that private investors refuse to back.’ Some 71% think ‘private sector companies and investors are better than government officials at determining the long-term benefits and potential of new technologies.’ Only 11% believe “government officials have a better eye for future value.”

“To end cronyism we must end government’s ability to dole out favors and rig the market. Far too many well-connected businesses are feeding at the federal trough. By addressing corporate welfare as well as other forms of welfare, we would add a whole new level of understanding to the notion of entitlement reform.”

– Charles G. Koch, “Corporate Cronyism Harms America.” Wall Street Journal, September 9, 2012.

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“Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay.”

“Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

“The purpose of business is to efficiently convert resources into products and services that make people’s lives better. Businesses that fail to do so should be allowed to go bankrupt rather than be bailed out.”

“For example, because of government mandates, our refining business is essentially obligated to be in the ethanol business. We believe that ethanol—and every other product in the marketplace—should be required to compete on its own merits, without mandates, subsidies or protective tariffs. Such policies only increase the prices of those products, taxes and the cost of many other goods and services.”

– Charles Koch, “Why Koch Industries Is Speaking Out.” Wall Street Journal, March 1, 2011.

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[1] This anecdote was told to me by William A. Johnson, Simon’s number two at the Federal Energy Administration.

[2] Charles Koch, “Will Businessmen Be The Death of Free Enterprise?,” Chief Executive, Autumn 1980, p. 10.