“I was especially fascinated by the second law of thermodynamics, which holds that entropy virtually always increases in a closed system. Entropy is a measure of disorder or uselessness. In lay terms, this means that progress stalls or declines when something is walled off from the outside world.”
―
Charles G. Koch, Believe in People: Bottom-Up Solutions for a Top-Down World
Last week on Methods of Prosperity
In 1980, Mary Gates was a board member of United Way of King County. She influenced IBM CEO John Opel to consider her son’s company, Microsoft, for IBM’s “Project Chess”. Project Chess was an initiative to develop software for IBM's new personal computer. A company named Digital Research lost the contract for the job. IBM hired Microsoft to replace Digital Research. Microsoft didn’t have an existing operating system. Bill Gates outsourced the work. He purchased 86-DOS from Seattle Computer Products for $50,000 and adapted it for IBM. This strategic move set Microsoft on a path to dominate the PC software market. Bill Gates became the youngest American billionaire. He amassed a net worth between $123 and $125 billion by November 2023. The Bill and Melinda Gates Foundation manage his philanthropic efforts today.
The following is Methods of Prosperity newsletter number 21. It was originally deployed November 9, 2023. As of July 17, 2024, original subscribers have received up to issue number 57: Howard Schultz.
Part 21: Charles Koch
TL;DR
Charles and David Koch inherited Koch Industries from their father, Fred C. Koch. Fred C. Koch founded the company in 1942 as an oil refinery. The original name was Rock Island Oil & Refining Company. It became Koch Industries in 1968. Under their leadership, the company expanded into a major conglomerate. Annual revenues grew to over $125 billion. Koch Industries is in sectors like petroleum, chemicals, energy, and technology.
Charles Koch inherited Koch Industries, which is the point of generational wealth. He applies his libertarian principles, opposing corporate welfare and advocating for free markets. He developed Market-Based Management (MBM). This is a philosophy treating businesses like markets to encourage competition and decentralization. Koch is also a significant philanthropist. He dedicates funds to education, healthcare, and criminal justice reform. Koch supports free trade, free immigration, and privatization.
Charles Koch’s approach is interesting. He emphasizes individual liberty. He believes in creating value for others. His approach encourages self-actualization. That’s in contrast with Henry Ford’s welfare capitalist tactics.
Key Lessons:
Generational Wealth is leaving an inheritance to the next generations.
Inheriting a business is an opportunity to increase it.
Crony Capitalism is not for everyone.
Stand for something.
Charles Koch and his brother David inherited Koch Industries. Their father, Fred C. Koch is the son of Danish immigrants living in Texas. He was born in 1900. Fred Koch and his partners founded the Wood River Oil and Refining Company in 1942. Its location was near Duncan, Oklahoma. In 1946, the company acquired the Rock Island refinery and crude oil gathering system. Its location was Wichita, Kansas. They renamed it the Rock Island Oil & Refining Company in 1967. This served as Fred Koch’s main vehicle in the oil business. The company guarded its privacy and avoided doing business with the government. Fred Koch died in 1967. Rock Island and the various Koch subsidiaries revenue had reached about $400 million.
Charles and David renamed it Koch Industries in honor of their father in 1968. They grew it into one of the largest private companies in the United States. Estimated annual revenue is over $125 billion. It’s the second-largest private company in the United States, after Cargill. If you’ve ever purchased a roll of Brawny paper towels, you’ve purchased one of their products.
Remember, this is an enterprise which started out as an oil refinery. Koch Industries is a conglomerate. Their business includes manufacturing, refining, and distribution of petroleum. They’re in chemicals, energy, fiber, intermediates and polymers, minerals. There’s more. Koch Industries deals in fertilizer, pulp and paper, and chemical technology equipment.
But that’s not enough. Under the leadership of Charles Koch, the company expanded into a few more sectors. Koch Industries is in finance. They’re in raw materials trading. They own subsidiaries that produce various goods such as resins, polymers, and glass. Oil pipelines, tissue paper, robotics, and more. Koch Industries controls some lesser-known companies as well. They own Matador Cattle Company. They own the Koch Chemical Technology Group, Koch Disruptive Technologies, and Koch Minerals.
Through Koch Disruptive Technologies (KDT), Charles Koch invests in tech startups. A developer of power conversion technology for data centers (Depcom Power). A developer of artificial intelligence software for energy optimization (Sentient Energy). Koch owns a provider of enterprise cloud software (Infor). KDT venture capital has invested in a cell therapy contract manufacturing organization (Cellares). KDT invested in a cloud infrastructure startup (Volumez). They invested a developer of industrial communication technology (weavix™).
Wait a minute. This guy inherited his fortune. What can we learn from him? Well, the truth is that his father was in the oil business and left it to his sons. Imagine alternative history. It could have been that they lost their father’s business and squandered his money. But that’s not what happened...
Charles Koch was born on November 1, 1935. He is a controversial figure, as most billionaires are. A very politically active libertarian, he is very anti-corporate welfare. Charles Koch is unlike Henry Ford. Ford was one of the inventors of welfare capitalism. Koch has a different attitude.
When government gives corporations subsidies, tax breaks, and bailouts, that’s corporate welfare. Charles Koch is against that. He believes it’s a form of crony capitalism. Crony capitalism benefits special interests at the expense of taxpayers and consumers. He argues that corporate welfare distorts the market. Corporate welfare prevents fair competition. He’s been a vocal critic of corporate welfare for many years. He published extensive writings on the issue. He’s funded organizations that oppose corporate welfare. Free markets are essential to our progress. He makes the analogy that they are like the Declaration of Independence is to our freedom. He believes that the government should not give special privileges to businesses. To him, that is unfair to the market.
In conclusion, it’s the ideals and philosophy of Charles Koch that resonate with me. I can’t say that I agree or endorse 100% of his views. Since we’re on a journey to financial freedom, we can acknowledge what he stands for.
Libertarianism
As a libertarian, Koch believes in individual liberty and limited government. He believes that people should be free to make their own choices. The government shouldn’t interfere. He believes there should be a limit to the government’s role. That is, protecting individual rights and providing essential services.
Market-based management (MBM)
MBM is a management philosophy that Koch developed at Koch Industries. Businesses should run like markets. In a market-based economy, businesses are free to compete with each other. Customers are free to choose the products and services that they want. Koch believes in applying this same principle to businesses. He believes in treating employees like customers. Giving them freedom to make their own decisions. He believes in the decentralization of businesses. Making decisions at the lowest possible level.
Koch’s other beliefs
Koch is also known for his beliefs in free trade, free immigration, and privatization. He is a strong supporter of the free market, and he believes that it is the best way to achieve economic prosperity.
Koch’s philanthropy
Koch is a generous philanthropist. He has donated billions of dollars to a variety of causes. This includes education, healthcare, and criminal justice reform. He is also the founder of the Charles Koch Institute. It’s a non-profit organization that promotes free markets and limited government.
Interpretation
Charles Koch stands for empowering others to be contribution-motivated. Creating value for others is his main thing. He speaks of “creative destruction”. That is, to create by destroying useless things such as seeking profit for the sake of greed. He believes in encouraging those who may not have credentials or equal status. They can find their gift and their purpose so they can benefit others in-turn. This seems counterintuitive, but he encourages others to find arguments against his ideas.
Methods of Prosperity no.19 covered Henry Ford’s welfare capitalist tactics. He used social engineering to manipulate the personal lives of his workers. This demonstrates an ideological difference between Ford and Koch. Koch calls this a “virtuous cycles of mutual benefit”. It’s the antithesis to Ford’s way. Koch applies the process of self-actualization to an organization.
Here’s my interpretation of his ideas. Self-actualization is a term from Abraham Maslow. It refers to the fulfillment of one’s potential. As Koch notes, this is in conflict with entropy. In the same way, good is in conflict with evil. Entropy is the state of disorder. Koch defines it as “uselessness”. His principles of human flourishing inform his cause.
I like you,
– Sean Allen Fenn
