Creating a Science of Liberty

Based on a speech given by Charles Koch at an Institute for Humane Studies Research Colloquium
January 11, 1997

You may wonder why I'm speaking on this topic. It wasn't my idea. I yielded to IHS Senior Vice President Marty Zupan since, in the Market Based Management® (MBM®) framework, the person with the best knowledge makes the decision. So, if you don't like my remarks, blame Marty — consider me another victim of forces in society beyond his control.

Seriously, the IHS staff thought you would be interested in my intellectual pilgrimage and current priorities for advancing the free society.

I’ll start by describing the intellectual path I followed and what I learned from our successes and failures over the past three decades. From this experience I believe our most serious problem is the lack of a science of liberty and a supporting republic of science.

Second, I will address what I think is involved in creating such a science and republic of science. In fact, I hope this "republic of science" model will be used this weekend to challenge and improve the ideas I am offering here.

Finally, I will discuss Market Process Analysis (MPA), a method of the science of liberty which we have found to be a powerful tool for improving both the understanding and the progress of liberty.

I’ll begin with the observation that I have been a student of liberty for 35 years. My motivation has been an internal compulsion to understand reality and to develop a unified philosophy of life — I suppose that’s the engineer in me. I have always been driven to make my views internally consistent and to understand what creates prosperity and social well-being.

Probably the first book on liberty I read was Leonard Read's Elements of Libertarian Leadership in 1963, which interested me enough to attend Bob LeFevre's Freedom School. That's where I began developing a passionate commitment to liberty as the form of social organization most in harmony with reality and man's nature, because it's where I was first exposed in-depth to thinkers such as Mises and Hayek. Mises and Hayek, together with Michael Polanyi in more recent years, have had the greatest influence on my thinking. In fact, what I learned from Polanyi (e.g. his model of the scientific community as a microcosm of the free society) enabled me to integrate and apply these ideas in a much more productive way. (By the way, I was first exposed to Polanyi by reading a footnote in Don Lavoie’s book, National Economic Planning.)

My compulsion to internally integrate all my beliefs ensured that I would radically change the way I viewed the world in all arenas — life, business, non-profits, government, and society. In short, market principles have changed my life and guide everything I do.

Following Hayek’s model of the free society as an experimental discovery process, I have engaged in a large variety of activities to advance the free society over the past 30 some years:

  • In 1964, for example, Baldy Harper recruited me to help develop the Institute for Humane Studies. When Baldy became ill, he asked me to guide the Institute after his death. I have spent the past 30 years trying to help IHS fulfill Baldy’s dream.
  • In the same period, I began supporting a large number of market-oriented intellectuals such as F. A. Hayek, Israel Kirzner, Walter Grinder, Rich Fink and Murray Rothbard. Murray even had an office in our NY offices and we typed his Conceived in Liberty and Ethics of Liberty manuscripts. In those early years, I focused entirely on helping scholars develop because I believed knowledge was the key to progress. Ideas and talent continue to be my priorities. I’ve supported so many hundreds of scholars with so many different approaches because, to me, this is an experimental process to find the best people and strategies.
  • Between 1976 and 1980, my brother David and I were active in the Libertarian Party because we saw it as an educational tool. A political campaign seemed like a good vehicle for educating large numbers of people. We later concluded the party was not that effective and refocused our efforts in other arenas.
  • In 1977, I recruited Ed Crane to convert the former Charles Koch Foundation to the Cato Institute in order to develop public policy tools from market concepts. Also in the late 70s, I helped found a number of other organizations such as Students for a Libertarian Society (SLS) and Council for a Competitive Economy (CCE). 
  • In 1982, the year after Claude Lambe died, we established the Claude R. Lambe (CRL) Fellowship Program. Claude was a close family friend who left his estate under my care. He had a strong interest in both the free society and young people, so the Fellowship Program seemed a natural.
  • I funded Libertarian Review to build a stronger, more knowledgeable movement, and Inquiry magazine to show modern liberals that the free society would best enable them to achieve their ends.
  • I worked with Richard Fink to build the Center for Market Processes (CMP) and Citizens for a Sound Economy (CSE), and salvage parts of CCE and the National Tax Limitation Foundation (NTLF). 
  • I provided the seed money for the Institute for Justice, and support for a wide range of other market-oriented organizations including National Center for Policy Analysis (NCPA), American Legislative Exchange Council (ALEC), National Foundation for Teaching Entrepreneurship (NFTE), Pacific Research Institute, Acton Institute for the Study of Religion and Liberty, Fraser Institute, Reason Magazine, Competitive Enterprise Institute (CEI), and Heartland Institute.
  • I have provided financial and educational support for free-market-oriented politicians.
  • I ensured that Koch Industries followed a philosophy of profiting by the economic, not the political, means.
  • Also, at Koch Industries, we developed Market Based Management (MBM) and are working systematically to apply it.
  • I continue investing in ideas and talent at various universities, such as the University of Kansas and George Mason University.

As you might suspect, carrying out so many activities over so many years has enabled me to gain some insight into our failures and what is effective and why.

We market advocates have failed to put to productive use the proven market-based tools at our disposal. We all say we believe in the productive power of a free society but fail to use this framework to guide our efforts. Since we are greatly outnumbered, the failure to use our superior technology ensures failure. So why haven’t market advocates used our framework?

One reason may be that we don’t truly understand it. For example, we understand chess not when we know the rules of the game, but when we instinctively know how to use the rules to create winning strategies. Here I’m using understanding as Howard Gardner does — applying it automatically and routinely in all aspects of life to get superior results. Or, following Michael Polanyi, we haven’t developed personal knowledge of the framework — we haven’t become skilled in the art of applying it, we haven’t made it an extension of ourselves. As a result, its parts remain disconnected abstractions unable to guide our actions.

Achieving this personal transformation, this intentional change of being, requires both working out concrete problems with the framework and living or dwelling in it. It requires the integration of theory and practice.

Note that I'm not saying that only applied work is important or — using Polanyi's distinction between science and technology — that only technology is important. He saw science as seeing more deeply into the nature of things and technology as turning known facts to a material advantage. I’m saying we need to see more deeply into liberty and the conditions for its existence.

Thus, although I am advocating developing a technology of liberty, I'm saying more fundamentally that, building on our forebears, we need a science of liberty. A science of liberty would expand the power of our concepts to reveal new implications leading to more powerful tools for problem-solving. It would unleash the kind of force that propelled Columbus to his discoveries. His accomplishments came because he dwelt in his theory and used it as a guide to practical action — a theory held by his contemporaries but only vaguely and as a matter for speculation.

Similarly, the ideas Newton elaborated were also widely known and accepted at the time. His contribution was in casting these vaguely held beliefs into a concrete and binding form. Developing this problem-solving capability, turning general knowledge into a useable form, is what I mean by creating a science of liberty.

Our lack of a science of liberty is crippling our progress. An example is the poor advice market advocates gave the Russians on how to create a market economy. To pick one particularly egregious case, some in the U.S. urged the freeing of prices while producers still had legal monopolies. Naturally, this led to disaster — soaring prices, but little increase in production and no consumer choice. The Russians would have been justified in telling these well-meaning advisers what George Washington told the doctors who killed him by bleeding and giving him arsenic for a cold: “Gentlemen, I beseech you — trouble yourself no more with me.”

A science of liberty must satisfy requirements set by the unique nature of liberty. One aspect of its nature is that it is a process, not an end state. Therefore, a science of liberty requires more than describing the ideal and criticizing the present state of affairs. It involves defining a process of liberty that is self-reinforcing, not self-destructive. In other words, it involves determining the conditions for making it in the nature of things for liberty to gain ground rather than to yield.

Another aspect of the nature of liberty is that, in contrast to other political systems, liberty must actually contribute to social well-being. The science of liberty must actually enable us to determine how we can best live and work together. Therefore, it must be developed through an experimental process to find what gets results.

Finally, since liberty has to do with how we live and work together, the practitioners of its science must live its concepts and values to understand liberty.

As Polanyi pointed out, this much deeper understanding is what led to such different results for the British revolution than for the French. During the 17th and 18th centuries British public life developed the art as well as the doctrine of liberty. By living the doctrine of liberty the English people developed a tacit, unspecifiable understanding. But when the doctrine spread to France in the 18th century, this understanding, which can be gained only by practice, was not transmitted with it. Without knowledge of its application in practice, the French Revolutionaries moved the country away from, rather than toward liberty.

The results of the activities of current advocates who don’t live the framework are no different in our country today. Those who live the concepts and values of liberty will make the greatest contributions to the development of its science. This is also true because, as Einstein realized: “The world we have made as a result of (our past) level of thinking creates problems we cannot solve at (that) same level of thinking. . .” To create a science of liberty we must, as William Blake put it, take off our "mind-forged manacles"; we must challenge our past ways of thinking.

In striving to apply the framework at Koch Industries, we've found this same enormous gap between abstract understanding and the understanding required to get results. Skillful application is a much more difficult form of understanding to acquire — in part, because if we are glib in a concept it is easy to delude ourselves that we really understand it. It is as if someone who learned the theories underlying golf by solely by reading about them believed he was ready to teach golf, or even go on the PGA tour.

As I indicated, progressing from critics and painters of utopias to master scientists requires working out concrete problems in the framework. For this transformation to occur, the focus must be on the problem, not on the concepts or the tools.

As Jim Buchanan pointed out last night, focusing on the tools is what has undermined the effectiveness of the economics profession. This ability to skillfully use concepts without thinking about them is developed only by living in them, by applying them until they become an extension of ourselves. Only then can we become masters in the art of selecting the best tools for the problem, of improving the power of our concepts to solve problems, and of using our framework to see new problems.

I don’t pretend to have all the answers on this, but I’d like to tell you about one method that has proven extremely effective at Koch Industries. We call this problem solving process, Market Process Analysis (MPA). It starts with developing a tool kit of market-based models. Our tool kit, at present, contains approximately 80 models, integrated into a hierarchical framework from fundamental and permanent to factual and transitory. Following Einstein, we “make as simple as possible, but no more simple” by grouping them in five elements: vision, virtue and talents, knowledge systems, decision rights, and incentives.

I use the term "models" to describe the mental constructs every person uses to connect with reality. Models of this kind are used to do three key things:

  1. Determine what facts are significant.
  2. Simplify, see patterns, and understand causality.
  3. Identify the problem and root causes.

After gaining conceptual understanding of our models, we use MPA first to identify the problem and root causes, then to develop a course of action, and, finally, to create measures of progress. These measures provide feedback enabling us to improve each step of the process. Every iteration enriches our understanding, both of our framework, our tool kit, and of the process.

To give you a better feel for the process, I’ll briefly use the five elements to attempt to identify the root causes of the problem: Given the power of our ideas, why aren’t we making more progress?

1. Vision

A major impediment to advancing the free society is the poor visions most market-oriented leaders have for their institutions. Among other problems, these visions are disconnected from the model of a free-market as an experimental discovery process leading to creative destruction.

A similar problem exists in business. To overcome it, Koch Industries created a Vision Process based on market models. The Vision Process is designed to create superior profitability and growth by building superior interrelated plays and capabilities that are hard to duplicate. By capabilities I mean the key elements in creating customer satisfaction. Coca Cola and Microsoft, for example, became tremendously successful by building such capabilities. In Coca Cola's case this involved creating high subjective value in consumers for its product, controlling the best distribution channels, universal low cost availability, and uniformly high product quality. A free society would be much closer today if market advocates had built similar capabilities.

At Koch Industries, we have found that substantial improvement in a business has invariably been preceded by a change in vision. This is because, as Einstein saw: “Whether you can observe a thing depends on the theory (vision) you use.” For example, changes in the vision for our asphalt business have caused us to see that business entirely differently and to revolutionize it. We have gone from a vision of selling low-cost asphalt to supplying performance asphalt, and now owning the performance for roads. Our current vision has caused us to develop new interrelated capabilities from road research, to road construction and maintenance, to municipal leasing, to privatization.

This same vision process can be used to guide our efforts to advance the free society. The problem we face is that most leaders of free-market institutions build their vision on models that are antithetical to free markets. These include purity tests and what worked in the past will work in the future. Many focus on isolated projects or initiatives rather than interrelated plays, have little integration with other institutions to build superior interrelated capabilities, and do minimal value chain analysis to connect what scholars are working on with what people value.

2. Virtue and Talents

At Koch Industries, we have greatly improved performance by building a Virtue and Talents Process with market based models. I believe market-oriented nonprofits institutions can improve effectiveness through a similar process. There is a major disconnect between the stated vision of most free-market institutions and the values, talents, and expectations of the people attempting to execute it. Free-market institutions whose behavior is not guided by market-based values and concepts tend to erode our progress toward liberty rather than contribute to it.

If the free market is a discovery process then discovery institutions are needed — ones whose structure and culture are conducive to discovery. To bring about discovery, people must be selected, first and foremost, on values and talents, rather than credentials or how well they test. Among the values critical to discovery is humility. Humility is required for learning and sharing knowledge. As Daniel J. Boorstin put it: "The greatest obstacle to discovery is not ignorance but the illusion of knowledge."

3. Knowledge Systems

As you know, in a free market, prices, profits and losses supply vital information on what creates value. At Koch Industries, we are trying to create a similar system for connecting people to value creation for the whole by using models such as marginal analysis and opportunity cost. Market-oriented nonprofit institutions can benefit greatly from applying these same models.

They can also benefit by connecting research to our market by developing open communication with customers on our intellectual products. These products need to be developed in the market spirit of openness and openendedness rather than being ossified by purity tests. To the extent we are controlled by the test of purity rather than the test of results we will continue to fail. We must overcome the tendency to establish an orthodoxy that stifles discovery. To connect, we must show how a market-based approach will solve our customer's most pressing problems, not our own.

To stimulate learning and discovery at Koch Industries, we apply Polanyi’s "republic of science" model, with the focus on real world application and the elimination of orthodoxy. The republic of science is a model of mutually adjusting individual initiatives under mutual authority with open knowledge sharing and the scrutiny of theories by those who apply them. It is the application of this model of an open-ended society of explorers at all levels of the intellectual structure of production that I believe would lead to a science of liberty.

4. Decision Rights

Many free-market institutions also fail to apply market principles in value analysis and in decision-making. Often, proposals from free-market professors are based on the labor theory of value. Fundraising efforts are focused on getting a greater share of a fixed pie rather than increasing the pie to advance liberty. Boards of directors too often ignore their fiduciary responsibilities. And, like institutions in all political movements, free-market groups have been weakened by authoritarian models, personality cults, and the failure to use the best knowledge. The difference is, we should know better.

A market-based system is rooted in quite different models and ensures that, rather than becoming obsolete and irrelevant, an institution continues to discover new ways to create value. In a market-based system, decisions are focused on increasing value and are made by those best qualified to do so. Thus, decision rights are dynamic and based on demonstrated comparative advantage. (To the extent a person's decisions do not create value, he loses those rights.)

5. Incentives

Free-market nonprofits tend to have perverse incentives. People are rewarded for maintaining the status quo, not creating value, and for making their part look good, not for advancing the whole. They use fragmented metrics or political standards of effectiveness based on PR or glamour, not results. Incentives should be based on real impact. Judging results based on the number of press clips or books makes sense only if these measures are related to real change.

The approach of many non-profits — one which relies on a union mentality of seniority, tenure and entitlements — is antithetical to market principles. True market-based incentives reward people according to their contribution to the whole, in this case contributions to liberty. With market-based incentives, people have a great deal at risk and unlimited upside. They are not permitted to profit by the political means, by playing politics or co-opting the board.

Using MPA, then, we can conclude that a cause of our poor progress is a lack of understanding of liberty due to the failure to integrate theory and practice. Market advocates are not living the concepts and values of liberty.

MPA can be extremely effective in solving this problem, but only if all five elements are applied in a mutually reinforcing way. This is because, as Polanyi saw, the whole is not just more than the sum of the parts. It becomes a different entity than the parts. Just as a living thing is a different entity than a collection of molecules, an organization that combines all these elements becomes something beyond the ordinary collection of people, activities and assets.

I believe that if scholars used MPA they would see more deeply into the nature of social problems and of liberty. They would be able to see the whole of the problem, rather than just one part, such as perverse incentives. This disconnect with the whole is another aspect of the present ineffectiveness of the economics profession as Professor Buchanan sees it.

Now, your reaction may be that this method works in the economy and may even work in business but it won't work in non-profits — they are different. I've heard that for every new arena in which MPA has been applied. "It won’t work in my area" is a natural defensive reaction which becomes a self-fulfilling prophecy. If we never try or we give up after the first failed attempt, we will never make any progress. To make discoveries leading to a science of liberty, we must have a passionate commitment to applying our framework. Our skepticism needs to be directed toward rationalizations for not applying the framework rather than toward the framework itself.

Not that any of this is easy. Becoming consistent, changing old habits and ways of thinking and developing new skills is difficult and painful.

But when people combine true understanding of the framework with a genuine commitment to making it work, the framework demonstrates tremendous power. And when it is used to connect people to the whole, to ensure that there is meaning in people’s work, the alienation from specialization and the division of labor that has concerned social commentators from — Adam Smith to Karl Marx — is eliminated. I have seen its power when applied to all types of work and activities, as well as to the business as a whole.

Take, for example, a unit operator in a process plant. Traditionally, each day that operator has been given detailed instructions — throughput, yields, temperature, pressure, etc. Going from that command and control framework to a market-based framework leads to amazing across-the-board improvements. In our refineries alone, it has contributed several hundred million dollars.

The key to capturing this power is in applying all the elements in a mutually reinforcing way. First, we must select operators with the appropriate talent and the humility required for learning, who treat people with respect, and who are committed to creating, not to the status quo. Then we must help them acquire the vision of their jobs as creating value rather than following instructions. Next, we must produce the information and measures to know what problems are important, and use the knowledge to know what creates value and what information to integrate and apply. Finally, we must provide decision rights, ownership (including room to experiment), and incentives that reward value creation. These elements taken together build spontaneous order in the organization so that everyone creates value for the whole through mutually adjusting individual initiatives.

So how does such a science of liberty relate to the tradition of classical liberal thought? I see it as standing inside, as building on, that great tradition, on the work of pioneers such as Adam Smith, Mises, Hayek, and Harper. But it means interpreting this tradition dynamically, not as a strait jacket, but as an open-ended foundation to build on. We will never succeed if we take our intellectual forebears as the last word. Rather, our attitude toward our tradition must be — we are just getting started and will always be.

Please don’t misinterpret my remarks today as telling you what you should work on. In the spirit of the republic of science, you need to follow whatever direction your interpretation takes you — you need to follow your passionate commitment. The only constraints should be the tradition, the values, the mutual adjustments, and the progress of liberty. In fact, I urge you, within these constraints, to have the courage to challenge orthodoxies, to be as creative as possible regardless of the pressures to conform. Creating a science of liberty demands no less.

Today I have tried to communicate the directions I intend to follow. I have a passionate belief in the power of the ideas of liberty. If we fail, it is our failure, not that of the ideas. My commitment is such that it is to them I am dedicating my life. In that, I echo Martin Luther: "Here I stand, I can do no other.”