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  Charles Koch addressed a question that had worried him since the 1970s: “Where is free capitalism at risk?”

  After the crash, it seemed as if capitalism was at risk across the United States. The dominant public narrative blamed the crash on a failure of the free market and private enterprise: greedy bankers had been given free rein and taken down the economy. When it looked for a solution to the problem, the American public turned to the federal government, not the free enterprise system.

  First came a giant federal bailout plan, designed and orchestrated by the Bush administration. The price tag for this bailout was placed at $700 billion. The US Treasury used taxpayers’ money to buy bad loans and rotten assets from the very banks that created them. Treasury Secretary Henry Paulson, a former Goldman Sachs executive, promoted the plan on national television, saying it was vital to stopping another Great Depression. A Republican, in other words, was made a passionate argument for government intervention on the scale of the New Deal. Surprisingly, the strongest resistance to this plan came from Paulson’s own party. Republicans in Congress voted against the bailout in September of 2008. The stock market crashed more than 700 points when they did so. The plan was eventually passed. It was seen as a last stand for the theory of laissez-faire.

  Even worse, from Charles Koch’s point of view, was the election of Barack Obama to the presidency in November. Now, Democrats controlled all three branches of government. The mood of America was decidedly running against Charles Koch’s beliefs. The mood was deeply “illiberal,” as he would call it. There was clamoring for more government intervention, more regulation, and more money for entitlement programs.

  What was unspoken, but what Charles Koch understood, was that all of this would also mean more taxes. In January of 2008, even before the Democratic takeover, Charles Koch warned that too many Americans were putting too much faith in government programs to solve their problems. The result was inevitable: “To support that spending, taxes will escalate,” Charles Koch had written in the company newsletter. Who was always the primary target of higher taxes in American history? The richest Americans and the largest corporations. Charles Koch happened to be sitting atop one of the largest fortunes in the world, and one of the largest private corporations in the country. The Democratic Party had been explicit in its promise to tackle concentrated wealth.

  This moment was dangerous, in Charles Koch’s view. Free enterprise had not seen such a direct threat since Franklin Delano Roosevelt’s election. Roosevelt’s New Deal had hemmed in corporate America for the following thirty years. Barack Obama’s presidency promised to do the same. The comparisons were neither subtle nor hidden. On November 24, 2008, the cover of Time magazine featured a photo illustration with Barack Obama’s face superimposed onto FDR’s body, sitting in a car, smiling, complete with a long-stemmed cigarette holder. The headline read: “The New New Deal.”

  The new New Deal already seemed to be in the works. Just over a month after he became president, Barack Obama passed a government stimulus package aimed at boosting economic growth. The package was valued at $787 billion and included new spending programs on infrastructure and renewable-energy programs. There was intense political energy behind these interventions. The public narrative held that a political savior had come along to tame the worst instincts of a private market run amok.

  But the story that Charles Koch told his employees that night at the dinner party was very different. As he spoke to groups of employees, Charles Koch spun a story about government malfeasance, public ignorance, and increasing harm to free enterprise and prosperity. Charles Koch did not believe that markets needed to be tamed. The very fact that so many people subscribed to this belief seemed to prove that most American voters were profoundly misinformed. Even the nation’s CEOs and business leaders were delusional on this point. They refused to accept the most important, most overriding fact: the American economy was not a free enterprise system in the first place. It was not a free enterprise system when FDR was elected, and it certainly was not one now. Government control and intervention were so deeply embedded in the American way of life that people didn’t even see it anymore. People failed to understand that it wasn’t the free market that caused the collapse of 2008, it was overweening government control and interference that caused the crash of 2008, and the crash of 1929, for that matter.

  This is what Charles Koch had said back in 1974 when he addressed his think tank, the Institute for Humane Studies. Back then, he told the crowd before him that “we ourselves have abetted the destruction of the free enterprise system.”

  He continued: “[W]e have allowed the free market to be blamed for fostering economic crises, when, in fact, a free market did not even exist at the time the crises occurred. A comment on the Great Depression will illustrate this point. Those who believe that the pre-1929 economy, polluted by government manipulations of the money supply, was a free market are defenseless against the charge that the Depression occurred because of unregulated market activity.”

  After these crashes, in the most bitter of ironies, the American people blamed capitalism for the problem, and heaped yet more government intervention onto the problem in the hope of solving it. This is what Charles Koch believed happened under FDR, who misdirected the people from the real cause of the crisis and made the problem worse by pushing the New Deal. Charles Koch noted, in a 2009 company newsletter, that the economy was sluggish and dipped into recession during the 1930s after the New Deal was passed. What Charles Koch failed to mention in the newsletter was that the country enjoyed three decades of economic growth where prosperity was widely shared during the ensuing era of the New Deal consensus, which didn’t truly end until the mid- to late 1970s.

  In 2009, Charles Koch believed that America was making the same mistakes again. The crash of 2008 was caused by “misguided government policies” rather than the shortcomings of free enterprise, he believed. These policies included the Federal Reserve Bank’s continued intervention in the money supply. The Fed kept interest rates extraordinarily low for an extraordinarily long time during the 2000s, in hopes of boosting economic growth. Charles Koch blamed that intervention for leading to the housing bubble, a point of view that was almost inarguably supported by all available data.

  The true threat to prosperity, Charles Koch said, was not untrammeled capitalism. It was the risk of a centralized, command-and-control system imposed by Barack Obama and the Democrats of Congress. It was the risk that people would be fooled by the public narrative that only big government could deliver an equitable society and economic growth. At Koch Industries, they would be doing all they could do to fight this looming threat. The efforts would begin with each employee, as they did their job each day. Koch Industries itself had become a microcosm of free enterprise, a system that sought daily to obey the true laws of prosperity. The citizens of this microcosm were expected to hold true to its values and to spread those values to others to the degree that they could.

  This kind of message found a receptive audience in Steve Mawer’s living room. Employees like Cris Franklin instinctively understood Charles Koch’s message. As the event broke up and everyone went home, Charles Koch’s words echoed in Franklin’s head. He saw the germ of truth in them. “You can measure the morality of a society by the number of laws they have. Well, we have a lot of laws. That’s unfortunate,” Franklin said.

  * * *

  Charles Koch left Houston that night and made his way back to Wichita. Once there, he resumed the routine that had occupied him since the 1970s. He woke up very early in his family estate, on the wooded property where he was raised, got ready for work, and was often in his car and on the way to the office before seven-thirty. He pulled into the employee lot as it was just starting to fill up. He sometimes preferred to take the stairwell to the third floor, rather than the elevator, walking up the extra-wide staircase that was bordered with well-marked hand railings. At the dawn of 2010, the Koch Industries Tower was a monument to Charles Ko
ch’s success. He had set out to show the world that he had discovered the laws of creating prosperity, and his company seemed to be living proof that he’d done so.

  As Charles Koch reached the third floor and walked down the hallway, he passed the boardroom and executive suites that were the command center for a corporate empire. Tens of thousands of employees. Billions of dollars in revenue and profit. Offices and trading desks that spanned the globe. The company’s operations touched the daily lives of virtually everyone who used gasoline, wore spandex, lived in a home with gypsum-paneled walls, swaddled their children in diapers, and counted on the heat to come on when they adjusted their thermostat. Koch Industries had a hand in all of it. The company had just survived the greatest economic shock since the Great Depression; it had adapted, trimmed back, and even found ways to profit during the chaos. And now, as it emerged, it was in a stronger position than ever before.

  Charles Koch entered his spacious office, walked past the sitting area with its tasteful couch and reading table, past the walls lined with bookcases. He sat down at his desk, where just to his left he could look out the windows at the expanse of green prairie grass. In quiet moments, he could turn and gaze out at this horizon when he needed a quiet moment to think. But this bucolic view is not what Charles Koch faced, most of the time.

  On the wall opposite Charles Koch’s desk, he had hung a painting that was quite unpleasant. His daughter, Elizabeth, had painted it. It was a picture of dark hues, heavy on the red, showing the face of what appeared to be a Chinese peasant. The man’s face was bruised and beaten. His expression was one of suffering. The painting seemed to be a reminder, and a warning. It was a totem of life under repressive regimes; the face of Communism, Socialism, and state control. It seems telling that Charles Koch gave it a place of such prominent display, hanging it where it was never far from his view. Charles Koch seemed to believe that the United States was slipping toward tyranny. When he looked out on the horizon, he saw a threat. The power of the state was rising, and Koch Industries was directly in its crosshairs.

  But Charles Koch, in all his years, had never backed down from a fight. And the world was about to learn this fact for itself.

  * * *

  I. One reason for this is that people selling oil in the futures markets are willing to take a somewhat lower price, just to lock in the sale. And people buying oil today are willing to pay a higher price because oil tends to be scarce. When oil prices in the future are lower, the market is in “backwardation,” as the traders call it.

  PART 3

  * * *

  GOLIATH

  CHAPTER 18

  * * *

  Solidarity

  (2010–2011)

  In the early morning hours, small traffic jams appeared around Koch Industries headquarters campus, as thousands of employees made their way to the company parking lot. The lines of cars edged slowly into the parking lot, nose to tail, as early as seven thirty. Everyone knew that Charles Koch was probably already at the office, his modest station wagon parked just a few spots down the sidewalk from an entrance into the Tower.

  Most employees parked in a large lot just north of the headquarters complex. After getting out of their cars, they flashed their company-issued ID badges to a security guard and then walked down a staircase to the subterranean tunnel that led into the headquarters building. The tunnel walls were decorated with photomontages of Koch Industries’ history, black-and-white pictures of the first trading desks, the Pine Bend refinery, and a smiling Fred Koch. The history of the place, and its story, was reinforced to every employee by the time they arrived at the elevator bank to take them to their offices.

  It was impossible, now, for Charles Koch to meet all of his employees. It was even impossible for him to teach his management techniques through the Koch University model of the 1980s, when he taught his managers in large seminar settings and had them, in turn, teach their own employees. The company was too large and too sprawling. Just between 2004 and 2007, the company had grown roughly six times larger, adding seventy-three thousand men and women to the payroll. Charles Koch believed, however, that every new employee needed to subscribe to Koch Industries’ philosophy, to learn its vocabulary and embrace its mission. This was most important for the employees who worked in the Tower, and who walked through the pedestrian tunnel each morning. These employees were the elite corps of the workforce, the overseers of Koch’s holdings around the world. They were like the managing partners at a large holding company, overseeing Koch Industries’ far-flung investments. While the job was more difficult than before, Charles Koch found new ways to integrate each employee into the fabric of his company, to teach them the philosophy that he called Market-Based Management.

  The training began with a stringent hiring process that selected only a certain kind of employee. Koch Industries developed a four-part interview process that revolved around Charles Koch’s Ten Guiding Principles. Job candidates, many of them fresh out of college, were led through lengthy lists of questions that sought to determine if they would adhere to Koch’s principles. Only the select few were chosen.

  “You need diversity in certain ways,” explained Randy Pohlman, who directed Koch’s human resources division until the mid-1990s. “But if you’re Koch Industries, you don’t want people who don’t believe in free markets. They’re not going to be successful there. That’s not the kind of diversity you want. . . . If you’re going to start hiring every other person as a Socialist to have nice diversity—it’s not going to work,” Pohlman said.

  Once the free-market adherents were hired, Koch began training them immediately. The new hires were collected in groups and led down a long hallway in the basement of the Tower, to a large conference room where round tables were set up to accommodate them. Their training session began with a video address from Charles Koch, projected on a large screen. He laid out the central tenants of MBM, and emphasized the importance of learning the code. And after the video was finished, employees learned the specific codes and rules of this new way of thinking. They broke into small groups and ran through simulations where they put the principles into practice. The training sessions lasted roughly two days. Once employees were on the job, the culture and the vocabulary were reinforced daily in every meeting and conversation, to create a kind of deep muscle memory of the culture.

  The unity among Koch Industries’ employees was hard to overstate, or even articulate, to outsiders. This was a cadre of people who worked for a secretive company that made the world work. They operated the mind-numbingly complex machinery that lay just beneath the surface of modern society: the pipelines, refineries, fertilizer plants, clothing factories, and trading desks. The stupendous profits that they realized from doing so only seemed to reinforce their sense of superiority over the outside world. When it came time to fight the outside world, it wasn’t done with malice or disregard. It was done with a sense of pity. People outside the Koch campus seemed misguided, uneducated, somewhat oblivious to what it took to keep the lights on. Koch Industries would patiently work to correct these problems and make the world a better place.

  One of the true believers inside Koch Industries was a young academic named Abel Winn. He had finished his graduate studies at George Mason University, home to the Mercatus Center that Charles Koch founded, and was fluent in the work of Hayek and von Mises. Winn didn’t know it at the time, but when he was invited for a job interview in Wichita, he was given a remarkable privilege. He got to interview with Charles Koch himself.

  The two of them met in Koch’s employee cafeteria, a large and pleasant facility that was voted by one local paper as the best restaurant in Wichita. Because it was a job interview, Charles Koch took Winn to a private dining room. Almost from the moment they sat down, Charles Koch put Winn at ease. Koch was self-effacing and more eager to hear about Winn’s experiences than to talk about his own. Koch began quizzing Winn right away. He wanted to learn more about Winn’s specific field of experimental economics. W
inn had studied the discipline at George Mason, under the Nobel-winning economist Vernon Smith. Experimental economics was a system to test economic theories in a laboratory setting. This idea seemed to appeal to Charles Koch—experimental economics might provide a way to prove or disprove the underlying principles of Market-Based Management.

  Charles Koch asked Winn about the limitations of the experiments. Could an experimental economist run studies that revealed the best way to teach people? Could a study show whether public schools were effective?

  Winn said it wasn’t as simple as that; experiments couldn’t effectively measure such large issues. But the experiments could break down smaller components of a school system and test their effectiveness. “You couldn’t do an entire educational system, but maybe features of the system,” Winn recalled saying.

  Charles Koch seemed impressed. He hired Winn to become director of a new joint venture between Koch Industries and Wichita State University, an academic center that would test the veracity of MBM’s claims and pioneer new discoveries about markets and human behavior. The new partnership would be called the MBM Center at WSU. The Wichita State administration renovated several classrooms in the basement of a historic building called Clinton Hall to make room for the center back in September of 2006.

  After he was hired, Winn helped design a large laboratory in the center where he could carry out his experiments. He installed a warren of computer stations, each one walled off from the other by partitions. The computers were networked together and linked to a device that Winn controlled, called the master box. His test subjects were students, many of them from the business school’s accounting and finance departments. They would be the economic guinea pigs. When an experiment got under way, the students sat at the computer stations, unable to see what their neighbors were up to because of the tall partitions. The students played complex computer games that were designed to simulate real-world economic problems, like buying a home or bargaining over a contract. The simulations were run from the master box, which tabulated the students’ responses and created databases for Winn to analyze in search of patterns.