Optimal minimal. At this altitude, I can run flat out for a half mile before my hands start shaking. Can I ask you a personal question? Now would be an appropriate time. What if I'm a cybernetic organism living over a metal endoskeleton?
This episode is brought to you by ExpressVPN. What is VPN? Virtual private network. It's an app that you run on your computer or your mobile device. It secures your internet connection, hides your public IP address, and lets you bypass regional restrictions on content. And I actually asked my followers on Twitter, 1.5 or 1.6 million of you, for VPN recommendations, your favorites. Many wrote back that ExpressVPN was their favorite, including a number of people who have been on this podcast. So, I gave it a shot. I've been using it for a few weeks now and it is ridiculously fast. To the extent that I thought I didn't have it on. To give you an idea, ExpressVPN is consistently rated the fastest VPN service on the market. It's incredibly easy to use and it's one, two, three. Just download the app, tap one button, and you're connected to a secure VPN server. And I recommend checking out the website just to see the signup flow. They make it really smooth, very easy to sign up. And if you're an entrepreneur or do any web-based front-end development or design rather, it's worth checking out for that alone. So, ExpressVPN, what are we talking about here? ExpressVPN is great for when you need to get work done while you're on some sketchy Wi-Fi network, for instance. And I've had a number of hacker friends of mine show me how easy it is to snoop on public Wi-Fi just by downloading simple apps. You do not need a computer science background to do that, which scares the hell out of me. So, if you don't want to be a victim of that, you can use ExpressVPN. Or if you're traveling and need to access something that's only available in another country, well, lickety split. ExpressVPN has you covered. ExpressVPN is useful not only for entrepreneurs and remote workers and travelers like yours truly, but really for anyone who wants protection from being snooped on or having their personal data stolen. So, I use it constantly when I'm in airports, coffee shops, and so on. Any public Wi-Fi really. You just use the internet like you normally would, but with ExpressVPN encrypting all of your network traffic to safeguard your data. So, check it out. Visit my special link at expressvpn.com/tim. And you'll get an extra 3 months of ExpressVPN protection for free. That's expressvpn.com/tim to claim your special deal. Visit expressvpn.com/tim. This episode is brought to you by ShipStation. If you've ever sold anything online or if you sell anything online, then you know what a pain in the ass the shipping process is. It's time-consuming. It's expensive. You're always copying and pasting orders from different sites trying to figure out the best carrier, so on and so forth. It's such a hassle. And in a previous life, I shipped tens of thousands of units overseas, domestically, overnight, ground, every possible carrier. It drove me bonkers. ShipStation was created to make your life easier. I wish I had had it when I was in the biz, so to speak. It has the most five-star reviews of any shipping software. 4.9 out of five for Magento users, 4.8 out of five for Shopify users, 4.5 out of five for Big Commerce users. It goes on and on. Whether you're selling on eBay, Amazon, Shopify, or more than 100 other popular selling channels, ShipStation lets you access all of your orders from one simple dashboard. ShipStation works with all of the major shipping carriers locally and globally, including FedEx, UPS, and the major local couriers like USPS. ShipStation will recommend the best carrier for your needs so that you know that you're always getting the best deal. They even offer discounts on shipping costs that are available to you as a one-person shop that would normally be thought of as reserved for large Fortune 500 companies. So there are a lot of benefits. No other shipping platform makes shipping faster, easier, and more affordable. And right now, Tim Ferriss Show listeners get to try ShipStation free for 60 days when you use promo code Tim. It's risk-free. You can start your free trial without even entering your credit card info. Just visit shipstation.com. Click on the microphone at the top of the homepage and type in tim tim. That's shipstation.com. Enter promo code Tim. Check it out. shipstation.com promo code Tim.
Hello boys and girls, ladies and germs. This is Tim Ferriss and welcome to another episode of the Tim Ferriss Show where it is my job every episode to deconstruct world-class performers of all different types to tease out the principles, habits, thinking, influences and so on that help them to do what they do. And my guest today does not grant many interviews and he came to me through avenues that I would not have expected. His name is Charles Koch. And I had several of my close friends, very very accomplished in business, all very socially liberal, who had become friends with Charles and suggested that I have him on the podcast. And we'll talk more about that, I'm sure. But let's get into the bio. And this episode, no doubt, will excite the internet because there is a case of insanity going around. And I would encourage you to listen and to focus on what I hope to transmit, which is the importance of attacking the problems, not the people. We'll come back to that. Let's get to the bio. Charles Koch received a bachelor's degree in general engineering and two master's degrees in nuclear and chemical engineering from the Massachusetts Institute of Technology, MIT. He is chairman of the board and CEO of Koch Industries, Inc., a position he has held since 1967. He was renowned for growing Koch Industries from a company worth 21 million in the early 1960s to one with revenues estimated as high as 110 billion. That's annually by Forbes. It's one of the largest privately held companies in the world. And by revenue, it's larger than both Boeing and Disney. Let that sink in. He has transformed the business into a diverse group of companies that employ nearly 130,000 people, making everything from Dixie cups to components in your cell phone. For 50 years, Charles has supported academic and public policy research with a special focus on developing voluntary market-based solutions to social problems. This interest led him to found or help build a number of organizations, including the Institute for Humane Studies, the Koch Institute, the Mercatus Center at George Mason University, and the Bill of Rights Institute. Charles credits the success of Koch Industries to applying proven principles of social and scientific progress, which led to the development and implementation of his market-based management MBM business philosophy. He describes MBM and its applications in two of his books, The Science of Success and Good Profit. Charles is now using those principles in philanthropy as the founder of Stand Together to tackle our country's biggest challenges. Stand Together is partnering with thousands of social entrepreneurs to help them improve their effectiveness and scale at tackling poverty, improving K-12 education, bringing justice to our criminal justice system, and more. I have more to say, so don't fast forward. But you can find out more about both Koch Industries and Stand Together at kochind.com and standtogether.org which I highly encourage you check out if you are a social entrepreneur or know social entrepreneurs in need of support and capital on Twitter and Stand Together. It takes us a little while to get warmed up as it often does in these podcast interviews. So, give it, you know, 5-10 minutes to get into flow. But we talk about a lot. We talk about books that have had the greatest influence on his thinking and actions. Thinkers. We talk about for instance the differences in acquisition strategy between Koch Industries and Berkshire Hathaway. We really go all over the place. And I also ask him some of the questions that were submitted by people following me on social media. And there are some real haymakers that I do read towards the latter portions of this conversation. So I do not simply serve up softballs. That's not the intention and that's certainly not the way that I run this podcast in general. So this episode, why would I do this? Why would I deliberately polarize my audience because of identity politics and people applying labels to themselves that cause so many problems? And I'm not referring to Charles. I'm referring to a lot of people among my listeners, no doubt. It's because I believe much like Paul Graham does, one of the co-founders of Y Combinator, that the more labels you apply to yourself, the stupider you become and the more prone you are to groupthink and it's very very dangerous. And in this episode, my role I view is not to get you to like or dislike Charles, but to pay attention to his thinking, which I do think is remarkable. And I will just mention a few things to calm down many of my friends out there who are predominantly liberal. I did live in the Bay Area for 20 years after all to try to encourage them further to listen to this whole thing. Number one, I would say that Charles has been very active in collaborating with previous adversaries on criminal justice reform. Including CNN commentator Van Jones. They shared or found they shared common principles when it came to reforming this country's criminal justice system. And that is the topic that actually was brought up by a lot of my friends who encouraged me to do this podcast. And in partnership with Van, Charles helped to build a nonpartisan policy coalition that passed historic criminal justice reform last year on foreign policy. Despite disagreements with George Soros on many other policy issues, as you can imagine, Charles discovered that he had common ground with him when it came to foreign policy. So they partnered with Georgia's Open Society Foundations to launch the Quincy Institute for Responsible Statecraft, which is a new think tank to promote ideas that move the US foreign policy away from war and towards vigorous diplomacy in the pursuit of international peace. And it goes on and on in the sense that despite, and I'm quoting the Guardian here, despite being a conservative powerhouse that has at times outspent the Republican National Committee, the Koch Network is increasingly showing willingness to work with Democrats and investing in nonprofit groups to promote quote free and open societies end quote. And then jumping forward in that piece, long seen as GOP kingmakers, David and Charles Koch have made waves by lambasting Trump and his administration. And they refused to back Trump in 2016, vowed to hold him accountable to conservative priorities like free trade, free markets, and small government, and have been outspoken against the White House on immigration and infrastructure spending. What I found is that the people who love Charles Koch miss a lot. The ones who have the most intense views about Charles and Koch Industries. Likewise, the people who hate Charles or Koch Industries miss a lot. And my hope is that I'm able to add some nuance and texture to this person who is often evaluated based on headlines and also again to encourage everybody listening much like I feel Charles does very effectively to attack the problems not the people. I think that's the only path forward really is to instead of asking how to most effectively fight against someone to first ask yourself what you might have in common in terms of priorities so that you can align in some fashion. Without that we're all doomed I think in short or long order either way. That's a long intro, but I'm happy to provide this and I'm sure that the feedback will be strong in all sorts of directions. Without further ado, please enjoy my wide-ranging conversation with Charles Koch. Charles, welcome to the show.
Thanks, Tim. Thanks for having me.
Oh, I appreciate you taking the time. And I've had a number of my friends over the last I'd say year, year and a half who have wanted me to interview you and who are fans of a lot of what you've done. The main subject that has come up a lot is criminal justice reform, which I'm sure we will get to and there's a lot to cover. I thought we would start with dandelions. Can you tell me about your history with digging dandelions?
Well, I was I really consider myself blessed because I had the best of all possible worlds. Looking back, it didn't seem that way at the time. But we were wealthy and my father, he called himself a half-baked chemist and he loved doing experiments. So we lived on an experimental farm. It wasn't a commercial farm, but it was a farm where my father could experiment with various things. So, we had cows, horses, dogs, chickens, and raised crops. And my father announced at an early age, he said, 'I don't want any of my sons to grow up to be country club bums.' And I was a middle child with a brother who was two years older and two younger brothers who are twins who are four and a half years younger than I was. And so my father started this on my older brother and he was more of an artistic bent. So, this manual labor that involved helping out on this experimental farm didn't work as well for him. And so, I bore the brunt of it. And you may ask why. Why did I bear? Well, that was one reason. And as he put it, I asked him years later, I said, 'Pop, why were you so much tougher on me than my younger brothers?' And he said, 'Son, you plum wore me out.' And so, I earned the right to be in more trouble, get knocked around more, and do more work. So, he started me out in all my spare time working. And the first was digging dandelions. The reason I say digging, you can't just cut them off or pull them. You've got to get all the roots out or they just come back. So, that was my job. And then I graduated into shoveling out stalls, feeding the animals, milking cows, digging post holes, fixing fence and all that stuff. And then as I got older, I got jobs in other places. So it was quite an opportunity to learn the value of work and learn that I better develop some skills that other people will value or I could end up doing this the rest of my life which I didn't look forward to. He used to say that he said I was a good kid in many ways as long as the work didn't come too close. And so I had what the economists call high time preference. That is I was into instant gratification. How could I minimize the work? How could I do something that's fun? So that was my whole orientation. And then I was blessed that I thought the only thing I was good at was getting in trouble. And I was pretty expert at that. And I found in the third grade that I had a gift in math. And I later learned when I studied psychology, I read Howard Gardner and his multiple intelligence theories. And boy did that fit me because the only thing I was good at was what he called logical mathematical intelligence. And so I had a gift for math and abstract concepts. So basically my whole life has been to find opportunities that use that I could create value with that and then to partner with people who were good at all the other things that needed to be done that I wasn't good at. And to dream possible is because I've done that. Whenever I've tried to do things by myself or without that kind of support, I've basically failed.
I want to ask a bit more about your dad, specifically about a letter I believe you still have, I would imagine. A framed letter that you found in your father's safe deposit box after his death. Can you talk about the letter that is on your wall and why it's important to you?
Yeah, he wrote that in I think January of 1936 and I was let's say I was born in November. So I was let's say 3 months old. And so he wrote it to my older brother and me. And in there he talked about adversity provides the greatest lessons and is certainly the greatest character builder. And then his hope for us and whatever he had given us that we used it. We didn't misuse it or waste it but used it so we could experience the glorious feeling of accomplishment. And so that's everything he did, whether I liked it at the time, was toward that end. And so he and I think this is so important for anyone who's a parent, and certainly we've tried to do that, is you don't lecture your kids on anything that you don't live up to. And he exemplified integrity, humility, treating others with respect, and as he used to preach to me, son, learn everything you can, you never know when it will come in handy. And so those were all great lessons and there was no hypocrisy in there. I mean, that's the way he lived.
When you ended up after your education. So after MIT, you were talked back to Wichita and my understanding is that he had an equipment company that wasn't doing well and effectively said you can run it any way you want. The one thing you would need approval for is selling it. Was that the time that your dad fascinates me because I think you might have been, correct me again if I'm wrong, but around 26. I have a piece of advice that he gave you and it's I hope your first deal is a loser otherwise you'll think you're a lot smarter than you are. So it really seems that your dad was focused on preserving your sort of initiative and drive so that the wealth wouldn't become a curse. Are there other things that he did when you first joined the business to facilitate that? Could be before or after, but I'm wondering what that initial experience was like.
Yeah, we had my father the way he got me to come back, he had been after me. I was working for a consulting firm in Boston and learning a lot and I got to work in all different phases. This wasn't just a management consulting. I started in product development and then I did process development and then I worked in an innovation group and I kept maneuvering. So, I got to try different things. I was looking for something that I could use what few gifts I had and in a way that would be productive and that I'd be passionate about. And by the way, I had the reason I was able to get into MIT is I started my time preference changed rather than being instant gratification. I started, I got a much lower time preference and that is I became focused on the long term on studying and developing these aptitudes and looking for a calling that I could use to create value for others and that would make me successful and that I would be fulfilled by. So I would be passionate about it and work. So I through all this worked in multiple departments at Arthur D. Little and I just...
Charles, may I interrupt you for just one second? I apologize. Could we talk about I just want to pause on the switch that you made. So how did you because a lot of people never make the switch from instant gratification to this longer term focus. What catalyzed that for you?
Well, I think it's I said is my father always had me doing dirty jobs and I was minimizing my work effort I put into it and at some point I figured out this is a dead end. What am I doing? And maybe his lessons and his example seeped in. And so I started reading probably as a junior in high school started reading started with novels and then at MIT I got three degrees in engineering there but I was a lousy engineer but I was good at the concepts behind engineering but not on how to apply anything. So I maximized taking the courses in theory. And so I took mathematics for nuclear engineers, all these abstractions because that's what I was good at. And so not that I've used a lot of that, but it really helped develop my aptitudes. And so then as I got to work some in business and business consulting, I found wow this came naturally because what I was good at in business were things like vision, philosophy, strategy, logically analyzing problems and looking at the other side, what could go wrong rather than just go with whatever ideas we had. But to really experiment, test them, apply the scientific method to them, part of which I learned at MIT, part of which I learned afterwards.
And I'd love to and we can certainly bounce around. I mean, that's sort of the nature of a lot of these conversations, but if we could talk about books because it certainly seems like books have had a large influence in your life. And in your book, Good Profit, you wrote, I am a bona fide book person. And my home contains more books than I'll ever have time to count and the walls of my Wichita office are lined with them too. What are some of the books that have had the largest impact on your thinking? And two, I'd love for you to in addition to anything else you might mention, I'd love for you to describe what impact two books had that came up repeatedly in my reading. F.A. Harper's Why Wages Rise and I'm probably going to pronounce this name so you can correct me but Ludwig von Mises.
There we go, yeah, the human action. Well, I can talk about those but the two authors that have had the biggest influence on me are Abraham Maslow and Friedrich Hayek. And a lot of what we do is based on Maslow's ideas of positive psychology. He was one of the early positive psychologists rather than most of them in history. Freud and others had worked on the psychiatry of illness and he took the other side. He said what can enable somebody to have a fulfilling rewarding life and what he said is what you can be you must be. If you are determined to live your life without developing your potential you may be successful in other ways but you will be deeply unhappy for the rest of your life. He said a bird has wings, a bird has to fly. What you can be you must be. And so that's and then he called that state of where you are fulfilling your nature self-actualization, that what you can be you're becoming. Not that any of us are ever perfect in that because it's a continual learning experience which requires ongoing effort. So that's what we try to apply here at Koch Industries and that's what we're applying in our philanthropic efforts to enable everybody to have the opportunity to realize their potential. And then what I said of all the insights that he's provided, one that I quote in my book Good Profit that what he called perhaps the greatest discovery in the history of mankind is that people can live and work together in peace and to their mutual advantage under generalized rules of just conduct. That is with generalized rules that enable people to succeed by assisting others rather than detailed rules that cause conflicts and people trying to undermine each other makes all the difference. And that was from his study of history, philosophy, economics and so on. So you put those two together and it forms the core of my philosophy and what's enabled me to accomplish more than I ever was really capable of doing.
You and I in previous chats have had Karl Popper pop up in conversation a number of times. Do you find yourself applying scientific principles or engineering principles that you used in your education to business or how does Karl Popper fit into your thinking about business or life?
No, no, that's a great question. At MIT I became fascinated with science and the scientific method and then after I moved back to Wichita I started studying one of the early things I studied was the philosophy of science and the scientific method and particularly one particular essay of Karl Popper's called 'Science is Falsification' in which he says that the true scientific method is develop a testable proposition, not a proposition that is untestable, but one that's testable. And then your obligation is not to go find evidence that will support it, but go out and seek criticisms of it, find what's wrong with it. And that's what we do on everything. Like we have a project or an acquisition. Okay. The first thing to do is find what could go wrong. And any idea I have, let's say I have an idea for a new strategy or a new business. And so the first thing I do is think through okay what are the key drivers of success here? What needs to happen? And let's say there are five different main drivers. Then I go find the people who can best show what's wrong or what could go wrong in each of those drivers. And we get together and I go through my idea and each one is expected to come up with ways that could go wrong. And every time we go through that, we come up with a better answer than I developed. And so that's critical. The other philosopher of science that I've particularly drawn on is Michael Polanyi who wrote, well a couple of things, his essay on 'The Republic of Science' where the reason a scientific community has been so productive and innovative is that no one's in charge. It's by consensus, debate, and knowledge sharing. And the innovations come about by taking different ideas and combining them in new and novel ways. And so that's another thing that we approach and use in management. Every one of our businesses we look at as a laboratory for innovation and finding new and better ways to do things and new and better opportunities.
Charles, could you speak to perhaps an example of how you have applied the Republic of Science or the concepts therein? And for people who want to look him up, first name Michael, I believe Polanyi, we'll put this in the show notes as well for folks, but in terms of information exchange recombining in novel ways, could you give a concrete example of how that has been applied?
Right. Well, the first thing we do is we emphasize knowledge sharing. Many companies particularly large companies operate in silos and you have an incentive where gosh you know you have an idea or you learn something and you don't want to share it because you may not get credit for it. We consider that the kiss of death. So we expect everybody to share and we build mechanisms and incentives in the company to encourage this internal knowledge sharing. And then we expect every discipline and every business to build knowledge networks around the world. And it may not be largely isn't something that's in your field or just with the competitors, but something that's going on elsewhere. And so we do that. I mean, for example, on how to keep compressors from breaking down and shutting down your whole operation. So we one group or we built a group to do data analytics to take measurements and determine where it was near breaking down so we could repair it before it shut the whole plant down and then everybody shared this knowledge and learned from each other. And this is our whole philosophy of mutual benefit. That is the way to get knowledge sharing is show when you help somebody else if it's the right person or group then they will reciprocate. And so we have this culture now of knowledge sharing what we call a republic, create the republic of science. And that's true for everything, not just compressors but everything. And then we have innovation conferences that draw from different disciplines and different of our businesses. They get together and throw out ideas they have and then they get to know each other. So they don't just share when we set up a structure to do it but they have what we call a spontaneous order where people just naturally know gosh I'm working on this problem who might help me in the company and then who can help me elsewhere in the world who's working on something similar. I mean it's like what Newton said, if I see further it's because I'm standing on the shoulders of giants, but they don't need to be giants, anybody who's working on a similar problem may have an idea that can help you and collectively we're all smarter than any of us are individually.
To that point, I'd say that it seems like you need to create systems and incentives to reward the right type of sharing and I keep mentioning Good Profit, you've written other books but you know Good Profit I've found very interesting for a number of different reasons. I mean, you have it's certainly completely politically agnostic. I mean, you have John Mackey, co-founder of Whole Foods, who's praised it. You've got General Richard B. Myers, former chairman of the Joint Chiefs of Staff, and others who've talked about it. And it strikes me that sort of clarity of thought and systems are a recurring theme. So, I'd like to talk about a few things that makes what you guys do different perhaps from others. And one that stuck out to me, and we don't have to spend a lot of time on this, but this is on Koch after Fred, in chapter 2, it was on the difference between acquisition strategies of Koch and Berkshire Hathaway. And I believe I'm getting this right, but it says Berkshire Hathaway buys companies when their competitive position is attractive and if their management is good, he assures them that he won't intervene except to decide how to invest the cash flow. Then he largely leaves them alone to operate as they had before the acquisition. Koch's strategy has been to make acquisitions when we can create additional value by applying our capabilities. I was wondering if there are any other differences or contrasts between Berkshire Hathaway or other companies that people might compare Koch to that come to mind. Are there any other differences that really stand out to you that we haven't talked about?
What I look at our management approach is based on understanding the principles of scientific and social progress and we've codified and systematized those in the market-based management in five dimensions and then which I didn't describe in Good Profit because I hadn't clearly thought through how we apply that enabled us to do all the things we did. That is in 1961 when I joined the company, we had two businesses. The largest one was a crude oil gathering system in southern Oklahoma and the other was a smaller company that I my father let me run initially that made internals for distillation columns. That was struggling at the time and since then we've increased the value of the company 7,000-fold and entered all these different businesses. We now have 12 business groups such as Georgia Pacific, DuPont's nylon business, and so forth. And well, I won't go through them all but okay, the way we've done that is by creating what I now call virtuous cycles of mutual benefit and that may be highfalutin expression but it accurately describes what we did. So the starting point is to understand what capabilities you have that others will value that you can use to create value for others and then to find the opportunities for those capabilities that will create the most value for others and particularly others who will reward you for that value. So our idea that the ideal for business is to maximize the value you create for others and your profit would come solely as compensation for that value you're creating for others and then to continually improve and add to those capabilities and then look for based on that what other opportunities there are for which you can create superior value. So there are two components. One is to become preferred partner for all your key constituencies that starts with customers but it includes employees, suppliers, communities and society as a whole. And then the second piece is to continually transform yourself. Like our philosophy is if we are in a business or you as an individual working in an area if you're the best in the world, it's not good enough. And particularly today with the rapid improvements in technologies within a year or two, you're going to be obsolete if you just rest on your laurels. So, you've got to be constantly thinking on how do I improve? How do I do things differently? What are the new opportunities? I mean, if we had just stayed with the crude oil gathering and making those tower internals, I mean, we'd be out of business now. But it's by applying these principles of human flourishing and to create these beneficial cycles. Focusing on how do I create value for all my constituencies particularly those who will reward us for the value we create for them is what has enabled us to do what we've done.
And is that in essence the definition of good profit?
The book is titled? I mean profit that is creating value for customer, society, partners, driven by sort of voluntary, a voluntary mutual beneficial relationship. It seems to map. I'd love for you if you can maybe to confirm or clarify that and then could you give some examples of what bad profit is? What are examples of bad profit and why?
Our job is to produce products and services that our customers will value more than their best alternatives. And in doing so, to constantly reduce and become more efficient in the resources we consume in doing that. Okay, how does that benefit society? It frees these resources then to satisfy other needs. So that's what good profit is. Bad profit is all the ways they profit that is antithetical to that approach, that is trying to cheat your customers, misrepresenting what you're doing, and rigging the system. Getting corporate welfare, protectionism of all different kinds, including protection from foreign competition but also domestic competition. And a great example of this is occupational licensure, in which there are like a third of all occupations today require some kind of government approval, whether that's state or local, but there are hundreds of these which are mainly keep people who start with nothing from being able to do anything because some of them require a couple years of going to school and paying a substantial fee that they can't afford. So it just keeps poor people poor rather than enabling them to realize their potential by developing their skills that other people will value. And these things like hair braiding, hairdressing, manicurists, yoga instructors, funeral directors, interior decorators, you name it. Not things that will blow people up or anything that you think, gosh, the government needs to approve that. So it's all just cronyism, protectionism, and corporate welfare.
So, you've, you know, one thing that I've found engaging about Good Profit in a lot of your writing is that you're very specific and also very transparent in a lot of respects. There are a number of other things that fall in the book, and please feel free to correct me if I'm getting this wrong. Under the category of bad profit, you got mandates, subsidies, tax incentives, import tariffs, restrictions on exports, anti-competitive regulations, bailouts. And I'm looking at a workbook. This is a way to engage with the material, a Good Profit workbook for people who want to really understand the material. And one of the questions that they pose is, do Koch companies participate in bad profit? If so, why? How would you answer that?
Well, you can't avoid it. I mean, if we for example take steel tariffs. We oppose those even though we have 40% interest in the newest steel mill in the country in Arkansas. Matter of fact, Forbes just wrote an article about it in the last issue, Big River Steel. And so it makes us money. But we oppose it. I mean, we play by the rules. We're going to play by the rules. We're going to obey other laws, but we're going to oppose all the ones that undermine the ideal role for business in society. And why? What? Are you just running a charity? No, but we take the long-term view. So to rig the system to make a quick buck and make people's lives worse, then what are you doing? Why does society need business that's making people's lives worse? If business and individuals are getting wealthy, the only way society is going to permit that long term is if they're contributing to helping people improve their lives, not making it worse. So this is a problem with business today. We have business people, wealthy people have a bad reputation because there's so much of this cronyism and protectionism going on. Like we opposed the border adjustment tax, a 20% tax on all imports, even though we determined in the most likely case it would make us over a billion dollars a year by increasing the cost of living to Walmart and Costco buyers. And we helped get that defeated because as I told the leaders in the Republican Party, I said, 'How does this make sense? Are you going to promote this? We're for this because it's going to make Koch Industries a lot of money and probably big exporters like Boeing and General Electric will probably never pay tax again. And it will increase the cost of living for the great majority of people in this country, particularly those who are least well-off.' And of course, they had their reasons, but it didn't make sense. And so we and others got it defeated. But the sad thing is you could tell what the great majority of companies were for or against that depending on whether they thought it would make them or cost them money short term. So that's it. All this short-termism that's going on, I think, is hurting people and undermining business's role in society.
What types of market distortions do you wish didn't exist or are you trying to prevent?
All of them. Could you give, are there any particular examples that stand out for you as sort of the heavier domino of sorts or something that has particularly negative cascading effects?
Well, I mean the biggest are all these forms of corporate welfare which I mentioned, occupational licensure, the restrictions on innovation and competition, and opportunities for those who start with nothing as I said on occupational licensure. So this goes with those, and then all the protectionist provisions, these trade restrictions, our crazy immigration system. All of these are things we're working hard on to change.
It strikes me, and I'm sort of a simpleton and pretty uninformed when it comes to these things, but that being a privately held company allows you flexibility that some people in leadership positions in publicly held companies, publicly traded companies would feel they don't have, which is a benefit that you have. For instance, if you have, because I would imagine there are differing opinions at points. So if you have an opportunity or a legislative or regulatory change that could be short-term beneficial, profitable that is, and that conflicts with you, Charles, your direction that you would like to see things head on a broader scale for human flourishing. How do you have that conversation among top brass in the sense that revenue, profit, these are things that are easily quantifiable whereas something like human flourishing may be harder to quantify. How do you guys have a discussion when there's disagreement?
We had those kinds of disagreements decades ago, but I can't think of any of those. Now we may have a debate on whether this will help or hurt long term, but it always will, will this enable us to fulfill our obligation as a business, that is to profit by helping others improve their lives. I mean what we do is we teach these principles. We have dozens of people who work full-time on teaching these and consulting on these principles, the principles of human flourishing and how to apply them that'll make us successful long term. And that's how we try to reward our people. Well, first of all, we hire first on values, on our guiding principles. We have now eight guiding principles. And so we hire on those, we reward on those, we promote on those. And if somebody isn't living by them, we encourage them to go somewhere else because it's not a fit for them here. And so we have harmony. That doesn't mean we don't have challenges and disagreements, but it's on how to realize this vision and these goals rather than whether we want to sacrifice our principles for immediate gain. So I would say what guides us first are these basic principles of human progress, human flourishing. Second is building capabilities that will enable us to create value for others, and then to continually transform ourselves to do a better and better job of that, and to focus on using our capabilities to contribute. So that's what's made us successful. So I mean, you look at our track record. Not that we've been perfect and we haven't had problems and haven't violated these principles because we're all flawed. We all make mistakes and get off track, which we've done many times and do it continually, particularly when we have 130,000 employees.
That's incredible. I mean, it blows me away constantly the power of these ideas. People say, 'Oh, well, you're so smart.' I am not. Believe me, everywhere I've ever worked or whatever, there are a lot of people who are smarter than I am. It's just I was dedicated to understanding and living by these principles and that's what's made the difference in my life, that transformed my life. Well, let's talk about your principles and your intellectual formation. I set a book note to come back to this and maybe these are the wrong trees to be barking up, but could you speak to, I have a couple of thinkers I've written down, authors and thinkers. We've already talked about a few of them. Michael Polanyi, we've spoken about your father certainly. I have F.A. Harper, author of Why Wages Rise, Ludwig von Mises, author of Human Action, among other things, of course, and W. Edwards Deming. I'm wondering what are the main principles or lessons that you've taken away from any of those people. We don't have to necessarily cover all of them, but if any come to mind that we haven't given any airtime to, if there are any principles or learnings that you think are core to what you took away from any of the names that I mentioned.
Right. Well, we've talked about Popper and Polanyi, and there was another besides Republic of Science that I got from Polanyi. It's personal knowledge. He's written a book named Personal Knowledge which says there's a huge difference between conceptual knowledge and personal knowledge. He uses the example of a concert violinist. First, somebody wants to be a concert violinist. First, how do I hold the violin? How do I move my hands? How do I make notes? And so they focus on the parts. And after these parts become natural, like the violin then becomes an extension of your hands. You don't have to think about how to use your hands. That's what he calls personal knowledge as opposed to conceptual knowledge. And then after you do that enough where the parts become second nature, then you can focus on the whole. The whole is making beautiful music.
And so that changed our whole approach to teaching our management philosophy. I think a flaw in our education system. It's not really education, it's schooling. And what we found in our programs that works and helps people realize their potential is to consider real education to be three-dimensional rather than one-dimensional. Those three dimensions are: discover your gifts, your aptitudes, and what will turn you on. And then the second one is do whatever you can to fully develop those. So first you learn to be, then you learn to learn, and then you learn to apply it. How do I apply these that will make a contribution in society that will help me better myself and in the process better others, help others better their lives. And that's three-dimensional education. And we find that in the programs we've started and support. That's what we're looking for because that's what moves us toward a society of mutual benefit where people have the opportunity to realize their potential.
Okay, so that's personal knowledge. Another one is the division of labor by comparative advantage, which also fits Howard Gardner's thesis on multiple intelligences. That is basically that people aren't smart or dumb overall, except in the real extremes, but most of us are gifted in some ways and not too swift in others. I'm exhibit A in that. So that division of labor by comparative advantage was first developed by Ricardo on nations: nations ought to focus on what they're good at and then trade with others, and that optimizes everything, learning, best use of resources, and so on.
Another concept is creative destruction, Schumpeter's concept. That is, you don't want to be protectionist in your own shop. That is, you're doing something a certain way like Kodak in making film rather than doing it digitally. They had the technology but they tried to protect their existing product line and so ended up going broke. So you want to drive creative destruction internally, that is constantly replace what you're doing with a better way, a better product, a better technology.
Another one is self-actualization, which I described. And then another one from Maslow and other positive psychologists is what he called synergy: a system and a state of mind where what is selfish and unselfish merge. That's what he meant by becoming contribution motivated. Focusing on helping others in a way that's also rewarding to you, then the whole dichotomy between selfish and unselfish disappears. Now, that's in an idealized case. That'll never be perfectly true. But if we could have a society and an organization where that's generally true, then you're going to be much better off. And that's what we try to apply here. That is to have what's in the long-term interest of the company in the interest of the individual employees. And as I say, I learned that from Maslow.
And then free speech and open inquiry is another one. The role of property rights and decision rights, which is a key one of the five dimensions of market-based management. Then basic values such as integrity, humility, respect, and desire to contribute.
Then another from this is from von Mises' human action model. People only act if the action will satisfy three requirements. The first is you become dissatisfied with your current state. You have a vision of a better state and you have a path to get there. So this is very important for how companies or societies organize themselves. If people believe they're dissatisfied with the current state, they see what's wrong with it, but they have no vision of a better state, and because you don't have free speech, you don't have communication, they haven't seen a better alternative, or you're so bureaucratic and protectionist you don't allow anybody to improve, or like in a company the approval process is so painful and difficult that you just give up.
Somebody we worked with in one of the major oil companies years ago was always complaining about the bureaucracy there and he couldn't do anything wrong. And I finally said, 'Well, so what do you do about it?' And he says, 'Well, after a while you just paint your ass white and run with the antelope.' [laughter] And so that's what happened. So these principles may seem obvious, but if they're so obvious, why are so many countries, organizations, and people ignoring them anyway?
Why? Why do you think they are ignoring them? Because they're non-obvious or because there are other factors at play. And then I want to segue into after you have a chance to just comment on that to Stand Together and we'll provide some background to that and then get into it. But why do you think that these principles are neglected? Is it because they're non-obvious, because they're difficult for other reasons?
I think it doesn't fit their priorities and I think a good part of it is they're short-term oriented rather than long-term oriented. I think that's critical. And as I say, that's been the demise of so many companies. That's why you see companies, the top companies in the country 50 or 100 years ago are all gone, or not all but the great majority are gone or else very markedly declined in their position.
Yeah. Yeah. It's incredible how many blind spots, maybe not incredible, it's totally sensible how many blind spots are created by ignoring some of these factors. A friend of mine, one of the co-founders of a site and a service called Reddit, who's been on the podcast, described a meeting with an executive at Yahoo at one point who dismissingly looked at their numbers and said, 'You're a rounding error.' And of course, that didn't work out so well for Yahoo. So the creative destruction is really important.
Let me mention one other principle that's been critical in my life. I touched on it. That is that I have a narrow range of abilities, developing those and focusing on that, and then partnering with people who could complement that. And what I've learned is to have a good partnership that would do that requires three things: shared vision, shared values, and having complementary capabilities. And where I've had partners who fit those three, or we fit those three together, then I've been very successful. Where I haven't, I've generally failed. And my best partnership has been with my wife, who we've been together 51 years. And we share vision and values, and I'm good at the few things she is, and she's good at about everything I'm not good at. So we make each other better. And so that's been one of my great blessings and advantages in my life.
Yeah. I wanted to ask you perhaps later we'll come back to this, but what factors have made it work, the relationship with your wife? Because we've spoken about that before and I do want to come back to that if we have the time to do so. But I also want to make sure that we have a chance to cover and give due time to Stand Together as a way of getting there. Because I think there are a lot of passionate supporters and a lot of passionate detractors, and at least in my own very small microcosm of this, my experience is that the most intense supporters and detractors tend to miss things. So I want you to correct me if I get anything wrong that I'm going to say as a means of context. But just leading up to Stand Together, I want to paraphrase a former Congressman Joe Scarborough. This is from that source. Basically, the gist of it is: although your critics are usually unaware, the Koch brothers have supported more than just what are generally considered conservative causes. They opposed George W. Bush on many issues, are pro-choice, support same-sex marriage, and worked closely with the Obama White House for the Obama administration's criminal justice reform initiatives that aligned with their own. I have two things that I wanted to mention on criminal justice reform and foreign policy, and then feel free, and I would love you to correct anything that I get wrong obviously. But what's impressed me about a number of the things that you've done, and probably many things that you've done, is that you've allied with former combatants, is maybe too strong a word, but people with whom you've had tension or people with whom you still have many disagreements over different things. The first, criminal justice reform, despite what I believe was a pretty adversarial relationship with activists and CNN commentator Van Jones, you ended up collaborating to work together on criminal justice reform. Similarly, on foreign policy, despite disagreements with George Soros on many policy issues, you found that you had common ground when it came to foreign policy. So you were able to partner with George's Open Society Foundation. The question I want to ask you before we get to Stand Together, which we're going to in just a few minutes, is: how is your approach to policy? Did I get anything wrong? I'm cheating, it's a two-part question. And then B, how has your approach to policy coalitions changed over time?
No, that's a great question. Well, I've been at this social change and philanthropic approach for 55 years now. And it was basically I had learned these principles that had transformed my life and enabled me to really realize my potential and accomplish more than I ever dreamed possible. And so I had the desire to help as many others have the same kind of benefits in their own way, to fit their own situation and gifts. And so I started, as I say, I started in on this in 1963. And for the first, let's say, 40 years of that, I wasn't involved in politics at all. I wanted to stay away from that and work with helping people realize their potential and supporting mainly students. And then as the students talked to their professors about what they were learning working with our organization, the professors would come and they'd want us to help them set up a program to do that. So it just spread.
And then to get things done, we decided we needed to build organizations that would, first of all, take these ideas and develop what are the policy implications of these. And so I founded the Koch Institute and a number of other institutes to do that. And then we decided we needed to help mobilize people. If more and more people were interested in these ideas, how do we get policy changes? Well, we need to mobilize people who were interested in them and help them have a voice. And so we started doing that. And then we decided we needed to get politicians, more politicians who would be interested in ideas that would really help the country long term rather than just help them get reelected. And so we started doing that. And the Republicans, although far from ideal, seemed more sympathetic to these. So we started supporting Republicans.
And then we learned that didn't get us anywhere. So we have changed. Now we will go back and support anybody who will advance these policies that will help bring about the society of mutual benefit where people have the opportunity to realize their potential.
And so if you put it in terms of my philosophy on partnerships, you share vision and values and have complementary capabilities. What I was doing was applying too broad a requirement for shared vision. That is, okay, we'll only support those and work with those who we share broadly a vision of what kind of society we want. And so that was really limiting the number of people we could work with. And so in the last few years, we've changed that. All we need is shared vision on a specific issue. And we may disagree on everything else, but if you can really help us advance this policy that will help people improve their lives, we will work together. And so that's how Van Jones has gone from being somebody who was trying to shut us down to working with us and bragging on us, and enabled us to work with Soros and everybody on specific issues even though we have major disagreements with him.
And that fits what we're finding: doing that reduces the hostility and the conflicts. If rather than you meet somebody, rather than try to find something you disagree with and fight them and attack them, search for something you can work together on that will contribute, that will help people improve their lives. And doing that now we have allies I never would have believed we could. And now as this is changing our brand and how people look at us, many more people are open to working with us.
It seems like a lot of what you've done, not just in the last years but certainly even before that, has led up to this initiative Stand Together. Could you tell us a little bit about that focus and why it's a focus, what it is?
