29 November 2021
The secret history of Koch Industries and corporate power in America
Simon & Schuster UK, 705 pages,
Reviewer: Robert Baker
Here Robert Baker reviews this book alongside “If Then: How One Data Company Invented The Future”, by Jill Lepore.
These books are a pair of engaging and insightful business and economic histories of the roles of data management and prediction and entrepreneurship in recent times. They follow the life and times of (a very omnipresent) Koch Industries and the (long-defunct) Simulmatics Corporation). These books give some epic narratives – especially from Leonard – that capture the characteristics and concerns of the markets of their and our times. They probe the dynamics amongst an eclectic cast list of movers, shakers and shaken. Maybe you need of an antidote to database overload, SPSS exhaustion and coding fatigue. Here they are and packed with insightful aspects on markets in the real world, their dynamics, role of regulations and the men and women who cooperated, contested and influenced our lives.
So what was the Simulmatics Corporation (1959 – 1969)? It was a big data venture before today’s even bigger data, a precursor to our 21st Century digital data-hungry decades. This American company aimed to pioneer the use of computer-based data analysis to identify, simulate and predict human behaviours. They applied it to voting preferences, election outcomes, consumer products advertising targeting, race riot prediction and even psychological warfare. Their clients were the USA defence and other government agencies (even in Venezuela and Vietnam), media and marketing corporations and consumer-facing businesses. The dysfunctions in the business model and close links to the establishment figures of the day are well researched and related. Lepore underlines the disjointed confidence in their research and the predictions made given the state of behavioural sciences, data management and IT systems of the 1960’s. Conflicts amongst the business partners and perennial risks in the dodgy research methods and data manipulation are cleverly documented.
As she notes on page 304, Simumatics was ‘too small a player, too weak a company and too clumsy a corporation’. It folded in 1969 and filed for bankruptcy in 1970. And today? Lepore sees prophecy as an ancient and longstanding societal need. But she stresses that if improved computer systems, digital data capture and management and IT connectivity technologies have helped give us a better understanding of the physical and natural world, the applications to human and societal behaviour lags and is much more circumspect. She is rightly wary of the bolder expectations and claims on the application of ‘big data’ to our society’s understanding of human activities - past and present - and confidence in reliably and timely predictions of future outcomes. There are scientific limitations, moral dilemmas, market failures and unanticipated shocks in applying these approaches and methods to the human condition and context. However, despite these caveats there have been advances too in the tool-kit of approaches and methods in the social sciences. These have also improved our understanding of economic and social conditions (from rational man to Kahneman) and seen a boldness to predict trends and nudge behaviour – with mixed results. The next frontier is a recent data-hungry vogue for algorithmic predictions and AI machine learning applied to financial trading macroeconomic modelling and analysing an array of markets. Where next?
Some may see the research behind this book as a useful primer to rediscovering the positive and normative threads in the subject matter of economics and social sciences: are they really ‘scientific’ disciplines? It certainly gives a unique focus to a long-forgotten company – and one of its key founders, Ithiel de Sola Pool (MIT) - that offered reliable predictions but based on a clumsy and dodgy understanding of the present did not deliver. This isn’t a book for tech-enthusiasts seeking more detail on IBM mainframe computers, punch cards and Fortran, but they are in the mix.
Kochland is a lively analysis and detailed narrative on the growth and growth of a very big private American corporation: $120bn annual turnover. It could equally be subtitled “modern day robber barons” or “risk-taking entrepreneurs unbounded”. As Christopher Leonard is a longstanding critic of Charles Koch’s conglomerate the emphasis is firmly on the former view. However, the subject matter, very thorough research behind the book and the availability of other significant sources on the Koch phenomenon allow one to form one’s own conclusions. The market behaviour of the businesses and the costs and benefits of their activities should be of value to economists with research and policy interests in the operation of imperfect markets, business regulation, market concentration, energy markets, financial trading, business taxation and the role of market power in political influence. This is a book with a broad-based perspective rooted in this ubiquitous business’ economic and political footprint, yet it is one that should provide aspects of value to all researchers with an eye on the role of modern corporations in our societies and cultures..
Leonard makes much of Charles Koch’s libertarian roots in his core business mission. He cites influences like Hayek and Von Mises (Austrian School). Other sources cite the earliest influence as being Robert le Fevre and the Freedom School. Freedom and the free market thus are key drivers of the Koch business creed. There are also strong influences of the Porterian (1980s) business and market analysis tools and techniques in the fabric of Koch’s businesses Market Based Management and Value Creation Strategies belief systems. This is a mantra that all employees are expected to follow. Leonard emphasises that over the past 50 years Koch’s management have consistently sought and exploited the potential for large and recurring trading surpluses from market dysfunctions, dominance and asymmetries in market intelligence – especially in energy, basic chemicals and financial trading markets. The current, autumn 2021 ‘spike’ in natural gas prices may be another example given Koch’s role in natural gas supply and also in refined gas basic chemicals, fertilizers and gas by-products.
The sections on Koch’s presence and ‘reach’ into lobbying, special interest groups and political arenas cast a sharp and analytical eye of the exercise of corporate power in the USA. The connection to the Americans for Prosperity activities and policy processes and relationships on the proposed Border Adjustment Tax and Cap and Trade government initiatives puts Koch’s networks in a very firm leading role to ‘block and tackle’ or stifle these policies. Clearly there was a wider business lobby at work, but Leonard leaves no stone unturned to document the weight of Koch’s role in blocking, delaying and obstructing any implementation of these policies. Overall, it is evident that the many risk-taking activities pursued by the Koch management have been more rewarding than reckless – at least for Koch’s as main (80%) shareholders, the home town of Wichita and along the way for some of their most entrepreneurial managers and financial market traders. The record of the effects on the environment, the majority of their labour markets and their exercise of political power are much more circumspect as Leonard has thoroughly researched and written in this book. And the next generation of the family (Chase) looks poised to give continuity to the business and its creed. As a final rejoinder, note that the Koch website says that ‘advocacy for a free and open society…truly sets us apart’.