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Market economics in the workplace

By Lawrence W. Reed

There should be a ready-made market for a great new book – Charles G. Koch’s “The Science of Success: How Market-Based Management Built the World’s Largest Private Company.”

Academia, government, nonprofits and even the business world can use this management primer, published by John Wiley and Sons Ltd., which integrates economic and management principles against the backdrop of indisputable achievement.

Koch doesn’t just read books or give lectures about building and running a successful enterprise. He actually built – and is chief executive officer of – Koch Industries Inc., an oil business that boasts $90 billion in annual sales and 80,000 employees.

Since the late 1960s, Koch, his brother, David, and their business associates have fashioned the company into a privately held global conglomerate. It produces more “stuff” than I can list, including oil, beef, carpet, asphalt, disposable cups and paper towels.

Koch’s core premise is universal and elemental, and one that should prompt any reader to have a “V-8 moment,” like the characters in the old television commercial.

‘ … economic thinking can add significant value even in situations that don’t involve analyzing markets.’               

We know what makes an economy successful – private property, the rule of law, individualism, risk and incentive, innovation, entrepreneurship, profit and loss, competition and Joseph A. Schumpeter’s “creative destruction.” Why shouldn’t these very principles, which translate to a market economy, also be the foundation of an organization’s success?

The challenge Koch lays down in his book is to “develop the mechanisms” that allow any organization “to harness the power of the market economy within the company.”

But the book is more than a management guide. It’s a refresher on the critical pillars of market economics. He reminds readers of concepts such as sunk costs, marginal utility, subjective value, comparative advantage, imperfect knowledge and numerous others. Much of the book explains how Koch Industries translated the melding of management and market-economy principles into real-world decisions, strategies and directions.

He calls his resulting methodology “Market-Based Management,” or “MBM,” and promotes the idea that economic thinking can add significant value even in situations that don’t involve analyzing markets.

Koch’s book drives home the point that even in the for-profit business world – where markets exert a great deal of force – many firms really don’t understand the power that market principles can have.

For instance, how many times have you noticed excessive bureaucracy, short-term thinking, ossified decision making and reward structures that pay for tenure rather than entrepreneurship? How many times have you witnessed supervisors afraid to bestow real authority on those they supervise? And how many times have you observed a corporate culture beset from the top down with corner-cutting on both quality and integrity?

In most cases, what poor managers need is a reality check. If they don’t comprehend the miraculous workings of a market economy, don’t expect them to diligently implement its principles within their organization’s operation.

If they’re managing as if they were Soviet central planners, they’re probably reaping Soviet results.

The Soviet system suffered big failures even in its core “expertise”: maintaining rigid internal security. Remember when a young German named Mathias Rust flew his Cessna 172 in 1987 across hundreds of miles of Soviet terrain and then landed safely in Red Square? Bewildered onlookers, including police and security forces, watched as he enjoyed a nice little self-guided tour of the local sites.

They didn’t act because they were instructed to do only what they were ordered to do, and reacting to a Cessna landing in Red Square wasn’t in the book. They were not allowed to be on-the-job entrepreneurs.

Koch’s examination of nonprofits reveals they sometimes behave more like unresponsive, unaccountable and nonentrepreneurial government operations than do for-profit firms. He believes MBM can work for them, too, when leadership knows how to put in place the spirit – not just the letter – of MBM principles.

As I read Koch’s book, I realized that my nonprofit organization, the Mackinac Center for Public Policy, succeeded in great measure because of MBM-like ideas. We embrace change and seek continuous improvement. We think long-term, which often means that we forgo some attractive but ephemeral ventures that would distract us from our course. We employ the concept of opportunity cost so we get an accurate perspective on what it really costs to undertake a project.

We may be a nonprofit, but we don’t act as if it’s a virtue to be unprofitable. If I had had Charles Koch’s book at my side 20 years ago, however, I think we’d have become successful even faster.

For readers who have failed to make a connection between the market economy and the principles of organizational management, a revelation awaits on every page.

For readers who think they already know these things, the book could well provide a kick in the pants that makes them realize how far they have to go to practice what they preach.

– Lawrence W. Reed is president of the Mackinac Center for Public Policy, a research and education institute headquartered in Midland, Mich. Readers interested in learning more about “The Science of Success” can visit www.kochscienceofsuccess.com.

The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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