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We need more Principled Entrepreneurship

by Charles G. Koch, Chairman and CEO, Koch Industries, Inc. 1/30/2013

Principled EntrepreneurshipWhen someone asks me what last November’s election results mean for our country, my answer is simple: They are part of a trend that, if not reversed, will destroy the American dream.

The majority of those elected last fall, both Democrats and Republicans, seem determined to continue the spending, borrowing, taxing and money printing that got us in this mess.

Their compromise to prevent us from going off the imaginary “fiscal cliff” does nothing to address our trillion dollar annual deficits and liabilities exceeding $100 trillion. This is America’s real fiscal cliff.

The deficits and debts of the U.S. threaten our future as a nation. They are exacerbated by massive government spending, rampant corporate cronyism and the escalation in destructive regulations.  
Together, these things hurt business, reduce employment and lower the standard of living for the overwhelming majority of Americans.

No nation can maintain its living standards by continuing to consume more than it produces. Ultimately, its standard of living is determined by the ability to produce goods and services that make people’s lives better. To bring this about, the government must pursue policies that enable individual productivity to be maximized rather than extend the crippling policies we have experienced in recent years.

Cause and effect

When considering the effect of U.S. government policies on Koch Industries, consider that 85 percent of our employees live and work in the U.S., and the great majority of our assets are here.

Koch is eager to make large investments – billions of dollars’ worth, in fact – in further improvements for many of those facilities. By doing so, we can make better, lower-cost products, reduce emissions and energy consumption, and create new job opportunities.

But ever-more restrictive permitting requirements for building new plants or improving old ones make it challenging for us and other businesses to expand and improve our products and facilities. Such obstacles undermine U.S. competitiveness and jobs. Today’s permitting process for large plants can delay approvals for years and greatly increase the project cost, often making it uneconomic.

Onerous occupational licensing requirements and other unnecessary regulations impede business start-ups, making it difficult, and at times, impossible for entrepreneurs to launch new ventures. This not only hinders people from improving their lot in life, it reduces innovation and limits competition.

On top of all this, blatant cronyism – the favorable treatment of a few at the expense of many – undermines the power of a free economy in which businesses properly earn a profit only by benefitting others. For crony corporations, the chief focus is pleasing government, not satisfying customers.

Crony favors, such as subsidies and mandates, waste resources and increase costs for consumers while hurting productive competitors. Cronyism also helps unprofitable companies stay in business, even when those businesses are undermining the nation’s social welfare.

Citizens everywhere need to understand that productivity and innovation are lost when their government takes over an increasing share of the economy through spending, regulation and subsidies.

Consequently, fewer goods and services are available. Those that remain come at higher prices with lower quality. In the end, there are shortages of virtually everything, as we saw in the old Soviet Union and see today in the new Venezuela.

Innovation

Governments that truly want the best for their citizens – most especially the poor – should not undermine productivity and innovation.

Innovation is one of Koch’s six core capabilities and represents one of our greatest competitive advantages. We define innovation as the discipline of discovering, developing and commercializing new ways of making people’s lives better.

We live better lives because of the creative genius of people with innovative ideas who had the courage and initiative to bring those ideas to life. Less-invasive surgical techniques, smart phones and the Internet are innovations that have helped us all.

But the need for innovation is not limited to the world of technology. Innovation is just as important for business organization and for understanding customers and meeting their needs. It is the driver of what economist Joseph Schumpeter famously called “creative destruction.”

Although the term may sound slightly ominous, creative destruction is the very positive process of transformation by which innovation replaces older and inferior methods and products with new and better ones.

I like Abraham Maslow’s perspective on innovation:

Each new invention, each great discovery creates turmoil behind the lines. The people who have settled down comfortably are shaken and disturbed out of their comfort. They must learn new ways of doing things. They must see things in a different way… It is clear that any great discovery, any new invention, anything which requires a reorganization of the conquered territory will be fought against, and will not be accepted easily.

With this in mind, we should not be surprised to encounter significant resistance to innovation – especially from those businesses that rely on government favors for their existence instead of creating value for society and bettering people’s lives.

I suspect it is because we have spoken out so strongly in favor of economic freedom and innovation, and against cronyism and fiscal irresponsibility, that we have been the target of so many political and media attacks.

Special interests feel threatened at the prospect of rules and policies that are no longer rigged and don’t offer unearned advantages. They shudder at the thought of having to compete, without subsidies or other special treatment, for voluntary customers in an undistorted marketplace. Many attackers have falsely tried to lump us in with the cronies who seek government protection and special treatment. The truth is just the opposite. At Koch we consistently oppose such policies as a matter of principle, including those that might benefit us.

Although one of our companies, Flint Hills Resources, owns and operates five ethanol plants, we were happy to see the ethanol tax credit expire at the end of 2011 and would be even happier to see the ethanol mandate end, just as we would all energy subsidies and mandates.

Making people’s lives better

In spite of such a poor political and economic environment, many Koch companies have been achieving record results, as some of our critics are quick to point out. How has this been possible?

I believe we owe our success to our focus on Principled Entrepreneurship™ and to the significant increase in the understanding and practice of Market-Based Management®, or MBM®, throughout Koch companies. As a result, we have improved our compliance, safety and environmental performance, and brought about a marked increase in innovation across the board. We are also generating a significant increase in the number, size and diversity of business opportunities, both internal and external.

Just as important is the fact that we are building capabilities to do all of this even better in the future. This is how we are able to expand our employment and increase the number and quality of opportunities for existing employees.

What if more businesses focused on practicing Principled Entrepreneurship™ rather than seeking political favors? What if they tried to profit by benefitting others (a win-win philosophy) rather than by persuading the government to take from others (a win-lose mentality that is really a lose-lose proposition)? I am convinced those businesses would be much better off for the long term – and so would almost everyone else.

The real harm from today’s destructive public policy is not just to start-ups and entrepreneurs. Poorer Americans are those who suffer most from a government that attempts to control people’s lives instead of letting them be free to create and produce. It is the poor who bear the brunt of higher unemployment, lower-paying jobs and products with higher costs and lower quality, as they do when less innovation leads to fewer new products.

November’s election results underscore a dangerous trend in the United States. That trend is for the problems I’ve outlined to grow worse, not better. Current policies – especially those that favor a few at the expense of many – are putting the economic wellbeing of America at risk. These policies have global consequences.

As a company, we are committed to doing what is right in every aspect of our business. That is why we will continue doing everything we can to persuade politicians to put what is good for the country first, before it is too late.

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