The Best Book of 2019 – Kochland by Thomas Ultican

This may be the finest book thus far in the twenty-first century. Kochland; The Secret History of Koch Industries and Corporate Power in America is the second book by former agribusiness reporter for the Associated Press, Christopher Leonard. His first book, The Meat Racket; The Secret Takeover of America’s Food Business received rave reviews; however, Kochland is uniquely special. It is an economic history of America since 1967 that shows the deep changes in our economy that have given rise to a new kind of capitalism. Kochland is told through the lens of Koch Industries whose “annual revenue is larger than that of Facebook, Goldman Sachs, and US Steel combined.”

Leonard weaves an epic tale of brilliance, philosophical intransigence, greed and ruthlessness. Over almost 600 pages, this enjoyable read clearly elucidates many of the troubling outcomes from the last 50 years like the rolling blackouts in California and the destruction of the labor movement.

Fred Koch, the family patriarch, graduated in Chemical Engineering from Massachusetts Institute of Technology (MIT) in 1922. In 1927, he won a patent for an improved petroleum refining process. Do to legal issues surrounding his patent, Fred ended up working in Stalin’s Russia between 1929 and 1932. This experience informed his extreme anti-communist views. He later joined with Robert Welch and a group of businessmen to establish the virulently anti-communist John Birch Society. In 1960, he published the pamphlet “A Businessman Looks at Communism” in which he claimed that the National Education Association was a communist front organization and that public school books were filled with pro-communist propaganda.

In 1961 Fred convinced his son Charles to leave his new job at Arthur D. Little, Inc. and come back to Wichita to work for the family business. Charles went to work there after an impressive career at MIT earning a BS in general engineering 1957, an MS in nuclear engineering 1958 and an MS in Chemical Engineering 1960.

Kochland is also the story of Charles Koch. In 1966, after five years working for his father, he became the CEO of the company then known as Rock Island Oil & Refining Company. After his father Fred died in 1967, Charles took a disparate set of assets – a cattle ranch, a minority share in an oil refinery and a gas gathering business – and stitched them together into the company the family renamed Koch Industries as a tribute to their father. Today it is the second largest privately held corporation in the world. Largest.org lists Cargill, the corporation headquartered in Minnesota and founded in 1865, as the world’s largest privately held company with revenue of $114.7 billion. Koch Industries revenue for the same year came in at $110 billion.

Charles Koch during a 2014 Interview with the Wichita Business Review

After Charles took over the company, he also started reading everything he could about what made people tick and how societies functioned. Leonard says, “Koch read the work of Karl Marx and other socialist thinkers. He read books on history, on economics, on philosophy and on psychology.” When he was a boy, his father had impressed upon him the evils witnessed in Russia and a fear of government overreach.

It was the works of Austrian economists and philosophers like Ludwig Von Mises and Friedrich Hayek that attracted Koch. He has been described as a libertarian and a conservative but “classical liberal” is a more apt description. Leonard observed, “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 writing about Koch’s 1974 speech to a Dallas gathering, Leonard noted, “Koch chastised the business community for having been seduced by the thinking behind the New Deal.” Koch declared, “Anti-capitalist feelings in the United States are probably more virulent today than ever before.” He went on to say that business leaders needed to fight back and proposed a campaign based on four elements:

• Education: Public universities needed to be populated with people who would advocate for free enterprise and do research to support it.

• Media Outreach: Businesses should appropriately “reward” the media when they promote free markets and withdraw support when they attack them.

• Litigation: “Announce publicly and vigorously, both as individual companies and through associations, that they will not cooperate with the government beyond the legally compelled minimum in developing or complying with control programs.”

• Political influence: Koch recommended lobbying and “litigation to affect bureaucratic behavior.” He cautioned that the temptation to game the system through lobbying ultimately undercuts business; therefore it should be a “limited program.”

Leonard reports,

“Charles Koch would remain remarkably true to this basic game plan over the next forty years. The only part that would change significantly would be the ‘limited’ nature of lobbying and campaign contributions. Koch would eventually build one of the largest lobbying and political influence machines in US history. But the rest of the plan was executed almost exactly as he laid it out in 1974.”

The First Big Cash Cow

In 1969, Charles Koch completed a secret plan to go from being a minority share holder to sole owner of the Pine Bend Oil Refinery near Rosemount, Minnesota. He convinced J. Howard Marshall to sell his share in the refinery for stock in the newly formed Koch Industries. He then went to the now minority owner, Great Northern, and convinced them to sell its stake. Leonard says, “Charles Koch saw something in the refinery that others didn’t see.”

The Pine Bend Refinery – StartTribune Photo

Pine Bend was one of the few refineries in the United States that had access to a special form of Canadian Oil that was very cheap and it was set up to refine the dirty oil. Koch sold gasoline from Pine Blend into a retail market that was particularly expensive. Pretty much all executives at Koch industries call Pine Blend a “cash cow.” This acquisition continuously supplies the Koch machine with cash.

Leonard recounts in detail the decades-long family struggle over control of Koch Industries. During this period Charles refused to take the corporation public much to the chagrin of brothers Fred and Bill. Charles and David came out of the fight as co-owners of the company.

Koch was accused of stealing oil from Native Americans by errantly measuring the amount of crude drawn from storage tanks. They were also cited for breaking environmental protection laws at both their refineries (Pine Blend and Corpus Christy). Koch was gaining a reputation as a criminal corporation.

Koch Industries is infused with Charles Koch’s Market Base Management (MBM) theory. MBM is the common language spoken by all managers and most workers at Koch. It guides everything from trading to labor management to safety. Its glaring failure is the inability to solve safety problems at Georgia-Pacific. Deaths and major injuries are on the rise there. MBM when applied in labor relations is anti-union and creates a difficult high pressure environment for hourly wage earners.

Koch’s trading organizations along with the Koch financed American Legislative Exchange Council (ALEC) were heavily involved in the deregulation of California’s electrical grid and the underlying corruption that led to rolling blackouts across the state.

Koch was also a big players in the derivatives markets that played a central role in the 2008 financial meltdown.

Christopher Leonard chronicles all of these episodes and provides deep insight. He explains how the shift from managerial theory in the 1960’s to agency theory in the late 1970’s had changed corporate governance. His relationships created with scientists, managers, laborers and union officials and the telling of their stories sheds new light on the internal operations of Koch Industries.

He shows how neoliberalism captured both major American political parties and describes Koch’s development of the largest most effective political influence organization in America. Koch constructed his political assets patiently over the past fifty years. Sometimes known as the “Kochtopus,” it includes political organizations like Americans for Prosperity and think-tanks like CATO Institute. When the state based organizations are included, these political pressure entities number into the hundreds.

Koch’s entire corporate structure is always focused on gathering information which is one of the primary reasons under-girding its success. Koch always has an information advantage during negotiations. In the early 2000’s, Koch’s traders started learning about the effects fracking would have on energy markets. Operating under the radar, Koch built an oil superhighway (pipelines) out of the Eagle Ford region of south Texas to its Corpus Christy refinery and a Koch shipping terminal. When fracking caused millions of barrels of oil to start flowing from Eagle Ford, Koch had another “cash cow.”

However, the enormous profits from Corpus Christy and Pine Blend were being threatened by efforts in the Obama administration to fight global warming.

Koch Defeats Climate Change Legislation

Leonard states, “Koch Industries, Exxon-Mobil, and other firms spent millions of dollars to support the idea that there was an ‘alternative’ view about climate change between 1991 and 2009.” In 2009, it was Koch’s political network that undermined and eventually killed the Waxman-Markey “cap and trade” bill, the last major federal attempt to fight the growth in greenhouse gasses causing global warming.

Wei-Hock “Willie” Soon – Harvard-Smithsonian Center for Astrophysics (Greenpeace)

Willie Soon claimed that the variation in earth temperature had to do with changes in the sun’s output. He was lavishly supported by Kock. Soon never mentioned in his 11 papers; the more than $1.2 million dollars he received from the fossil fuel industry. The New York Times reported, “Charles R. Alcock, director of the Harvard-Smithsonian Center, acknowledged … that Dr. Soon had violated the disclosure standards of some journals.”

Head of the Goddard Institute for Space Studies, Gavin A. Schmidt said, “The science that Willie Soon does is almost pointless.”

It was congressman Mike Pence of Indiana who made the final argument on the house floor against Cap and Trade. But it was the Koch political machine that finally killed the bill in the senate. Koch’s intentionally obscured and complex organization led the fight. Their primary target was Republicans who stood against Koch on the issue of climate change. Leonard explains,

“These Republicans were the primary targets for a reason. Koch’s long-term plan was to reshape the Republican party, and these members would be made an example of. The strategy wasn’t necessarily new. But the means that Koch used to pursue were unprecedented.”

“In 2009 and 2010, Koch Industries’ political network created new Republican candidates, seemingly out of nowhere, who rose up and challenged sitting congressmen and senators. Koch’s chosen candidates attacked the incumbents from the right claiming that the Republican Party was insufficiently conservative and too accommodating of the Obama agenda. The overwhelming message was that comprise with Democrats must end.”

Charles Koch and Donald Trump see eye to eye on denying climate change and have forged a path of coexistence if not mutual admiration.

Kochland tells a long complex story that illuminates political and economic developments since 1967. When David Koch died in August, his much younger wife, Julia Flesher Koch, surpassed Alice Walton as the richest woman in the world. Charles Koch turns 85 in 2020. Will the new leadership that will certainly come to Koch Industries chart a less politically authoritarian direction which is not based on Malthusian concepts of social construction?