Koch Idealism: Charles Koch recommends liquidating Koch Industries

Koch Industries, Inc. is a firm whose foundation found itself building oil refineries in Stalinist Russia - for the state, of course. In fact, Koch industries has a record of raping state industries across the globe, with some of its most Lucrative contracts in Yugoslavia (ship manufactories), Venezuela (natural gas) and  the US (oil fields on government owned land). Even when it comes to the US, in the face of what may be the strongest legal structure in the world, Koch Industries built its 1990s wealth expansion on oil fraud to the federal government. (See Yasha Levine's excellent article about their reliance on corporate welfare).


How surprising, then, that Charles Koch has written an article which all but demands the liquidation of Koch Industries - utilizing free-market mythology, he claims that we'll all be freer if firms enjoying corporate welfare go out of business. This is the same mythology that allows such cognitive dissonance as the claim that firms enjoying corporate welfare cannot compete globally. If anything, as Charles well knows, any kind of subsidy is correlated with an ability to compete more effectively - as Koch rightly argues later.

"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." - Charles Koch, "Corporate Cronyism Harms America" WSJ

Cheer up, Charlie: corporate handouts will keep your company afloat to rival the best of them out there. It's not like Brazil was just fighting US subsidies to domestic agriculture ahead of their free trade agreement, right? The singular caveat "unless handouts are big enough" rings on hollow ears - what, is he demanding greater subsidies, or is he quietly admitting that subsidies are a far more pervasive fixture of our economy, with Koch Industries being a minor player? If so, and in the context of Koch holdings that are entirely reliant on government handouts, this is an indication that the government is a central player in any prosperous economy.

Of course, this is the case. Nonetheless, Koch falsely claims that "economic freedom" is what the alternative is, whatever that means. If government regulation and subsidies are the difference, as Koch strongly infers throughout, then not only are nations like Somalia freer - but the preferable model of governance. Even compromises like the liberalized economies in India and China are examples where capital has flowed to economies which offer markets "freer" in this way than than the US's.

And these are regimes which routinely squash peasants for corporate interests - literally and figuratively. See, their system of capital hasn't quite kicked all of their landholding farmers off of their farms yet. And their civil-social structures have had their own challenges - routinely held back by forces that sometimes employed the same market-worship rhetoric congealed in Koch's remarks. The regulatory race to the bottom (one example is discussed in this Real News segment with Bill Black) creates the dismal state of regulation that allows firms to pollute the air in China with toxic clouds, and diverts the clean water even whilst the local population is only allowed the water poisoned by the Coca-Cola Co's local operations.

To be fair, these firms rely on government subsidies. If they weren't provided, these firms would refuse to produce their goods there. And this is the root of the problem: the disparity in regulation, labor and taxation conditions incentivize a business model which threatens to leave nations where workers enjoy a significant portion of their input, where externalities such as poisoned public goods like water and air go unregulated. This is what you get when you prefer centrally manged economic entities to those built and maintained by democratic or social institutions. This is the competition model of global capital markets.

Koch routinely ignores this bottom line. He claims that "[t]he 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." Please. The role is to provide for the expansion of return on investment - and if resources are wasted, so be it, so long as the cost is low enough. Moreover, the role of business is to make people's lives more dependent on your firm, service or product, regardless of whether "people would ordinarily buy" them (an aspersion he wrongly casts exclusively on government-backed firms).


This inability to link the process of incentives across market ideals show just what a failure this interpretation of capitalist markets really is. If we are to take him seriously, and give grace to his misrepresentation of profit-seeking as "resource saving," we should still conclude that investment in production is only valid in the context of firms owned by nations or firms too week to protect their capital assets from external acquisition; building one's own wealth, as proven by the history of Koch industries, is out of the question.

But I'll give him something, and I think its only fair. He points something out I've been describing for years:

"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." -- Charles Koch, "Corporate Cronyism Harms America" WSJ

Yeah, winning customers is but a portion (much like the incentive process) of the profit system, and a small one at that - financial products made solely to gain a profit far outstrip production capital in terms of market capture, and the private services industry far outstrips the public industries in terms of everything from advertisements, "courtesy calls" and profit-protecting fail-safes that consumers would gladly not purchase, encounter or receive.

But back to the scraps C. Koch deserves: he's right that government lobbying serves as a disincentive for consumer-geared production. I've been saying this for a while now. He even admits that "some" government policies help Koch Industries - and Koch, a slave to the market - is obligated to accept them. But by golly, he wouldn't do it if he had the reigns of government power (well, besides his lobbying efforts, but that's just a part of competition).

And you can be sure he'd be disabused of government subsidies if he were able to reorganize those government handouts. It's not like profit would be a factor, right? The private profit of the market doesn't influence their goals in managing state firms. And of course, we can trust these industries after all to regulate themselves - I'm sure that power purchasable in the free market is likely to be far more democratic than power split between executive, legislative and judicial branches of an organization reliant on an electorate for legitimacy and tax revenue.

The real issue of liberty is the disproportionate power held by possession of capital assets. This is succinctly seen in national examples, but is also evident in the spurious claim about consumer-driven industry. As I have shown, consumers are hardly the dominant force in the determination of investment dollars - and why should they be, when so much wealth and technology comes from the government, either directly or in the form of subsidies? Wherever this kind of social control over the markets is removed, you get externalities that are worse than any "uncompetitive market" in the US, India and China being great examples of this.

The article is rife with inconsistencies, rhetoric and idealistic notions. It repeats just about every argument used to justify the expansion of private power and the centralization of economic power in the Western canon. Worst of all, it does nothing to peel back the political mysticism accumulated in the Democrat/Republican joint narrative. The partisan character of his real-world examples are laughably microcosmic: only too typically, he attacks such Democratic Party idols as solar power and low-income housing. Charles Koch may indeed be pained by corporate welfare, though it built his empire. But nothing in his editorial indicates that the issue is anything more than a tool for his own petty, partisan political posturing.

Patent Trolling: Just Another Form of Capitalism

The dawn of the information age has ushered in a new form of value in intellectual property. Patents are based upon the innovative character of new kinds of tools, business models and processes with economic value. And like all economic functions, the patent occurs in, and helps to propagate, a specific social relationship of value.

Enter the "patent troll:" an irreverent term referring to those who deal in the purchase and defense of patent rights. Patent trolls purchase troves of patents, then litigate to turn a profit on their purchase. Sometimes, the patent merchants get a cut of the proceeds from litigation executed by their customers. All this is justified as defense of intellectual property and encouragement of innovation. But this is actually a simple form of capitalism.

Nothing is as Sure as U.S. Debt Payments

For all the hype about fiscal deficits, the numbers don't add up to any significant threat to the U.S. economy: The U.S. is highly unlikely to default on its debts, and debts are mostly held by private and public U.S. firms and individuals.

As Ludwig von Mises famously argued, if you print money (or create loans) you'll get inflation, and whoever gets the money first benefits from it most. But whom does inflation hurt? In a global economy, it is the relative debt/capital holdings that matter. These are called "net account balance" and "capital account balance." The U.S. far supersedes other nations in terms of net debt and net capital. What will expanded government purchases do to this dynamic? It depends on where those purchases go. If we look at the current data from the U.S. Treasury, we see that U.S. debt goes primarily to U.S. interests: 70.7 percent of U.S. debt is owed to U.S. firms or individuals.

If we decide to take Rep. Paul Ryan's advice, we will be reducing government purchases that expand net capital in the U.S. and net debt to entities in the U.S. If we follow these plans, the U.S.'s place in the global economy will contract: Capital will leave the nation.

In a nation with fiat currency, the government can simply create money. The trend in government borrowing is a testament to this fact; as Binyamin Appelbaum noted on "NewsHour": "Nothing is as sure in financial markets than that the United States government will repay its debts. And so the government gets the cheapest rates available."

(Originally at Richmond Times Dispatch: Letters to the Editor: Dean Sayers: Nothing is as Sure as U.S. Dept Payments)

Astroturfing Bankers in the Age of Jackson

In the early 1800s, the US banking system was dominated by a unique blend of proprietary bank notes held by wealthy merchants and a working class mostly limited to foreign currencies (when they were lucky enough to earn real money at all). New England merchants, ever reliant on European trade, had developed or maintained extensive connections to prominent European trading partners. The capital to valorize these products, coupled with the unique trading opportunities that a continent of untapped resources offered, were fertile ground for a rising class of bourgeois. A shipbuilding/fishing economy had given way to an international-mercantilist model, and the monetary supply could hardly keep up with growth.

As this rapid accumulation of capital progressed, a clear winner was bound to emerge - and the US Government wasn’t playing around: they were going to enthrone the financiers to their own ends. Remember, in those days money wasn’t quite as easy as it was now – loans were in the form of promissory notes or proprietary bank notes: unlike fractional reserve banking, there was little liquidity in loaned value. This was such a problem that it would cause a run on debt in 1937. For the better part of the century, the country was set to witness profound clashes between nearly monolithic financial interests - interests, it turns out, that would manipulate popular movements to push their own financial agenda, all in the name of the "free market."¹

The Wage Rate and Globalization

VoxEU on the Euro and competition for capital:

"This analysis leads to the conclusion that if the underlying problem of Europe’s periphery were lack of competitiveness, it should relate to the types of products they export (vis-à-vis Germany) and not to the fact that their labour is expensive (their wage rates are substantially lower), or that labour productivity has not increased (it has significantly). The problem is that they are stuck in the manufacturing goods also produced by many other countries, especially the low-wage countries. Reducing wages would not solve the problem. What would an across-the-board reduction in nominal wages of 20%–30% achieve? The most obvious effect would be a very significant compression of demand. But would this measure restore competitiveness? We argue that it would not allow many firms to compete with German firms, which export a different basket, and in all likelihood it will not be enough to be able to compete with China’s wages." -VoxEU

This is more confirmation of the point that competition for capital along varying economies transfers market shares to economies which demand less labor compensation. This same process depresses the average for this and other standards across the board.

HT: Yves Smith at Naked Capitalism

India, Liberalization and Real Wages

VoxEU has a report arguing that liberalization has increased the productivity of industries in India:

• First, from 1985 to 1990, average productivity rose by over 8%, while the reallocation component actually fell by more than 6%, indicating that more productive firms lost market share to less productive firms.

The Credit Crisis as a Valorization Problem

Naked Capitalism has a great guest post today which exposes the incentivization process at work in the credit system:

"One source of credit market friction arises from coordination failures among lenders (see for example Gorton and He 2008). In these models, banks are heterogeneous and their behaviour strategic. The individually rational actions of heterogeneous lenders can generate collectively sub-optimal credit provision in both the upswing (a credit boom) and the downswing (a credit crunch). This is a collective action, or co-ordination, problem among banks.

...

"In the face of stiffening competition, banks were increasingly required to keep pace with the returns on equity offered by their rivals – a case not so much of “keeping up with the Joneses” as “keeping up with the Goldmans”."

So we see that the underlying cause of the expansion of credit is the valorization of capital. Not only the simple valorization, but the competition for capital (which I hope to cover soon on its own right) serves as an important ossifying process for companies which cannot necessarily sustain this model: