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Book Review: Good Profit by Charles Koch

I finished reading Good Profit by Charles G. Koch. Last year I read Koch’s The Science of Success  (I believe those are his only two books). Both books are guides to Koch’s management philosophy, Market-Based Management. Market-based management attempts to use economic knowledge to apply the tools which allow free market economies to prosper (property rights, free exchange, profit and loss) within the contexts of a firm.

Koch is Chairman and CEO of Koch Industries. Along with his brother David, Charles is one of the wealthiest people alive. Koch is also a classical liberal who has dedicated a lot of time and money to classical liberal causes such as the Charles Koch Institute and the Institute for Humane Studies.

In the first section of the book, Koch writes of his early years from his childhood to his first days in business. He particularly focuses on the lessons of his father, who left behind the family business to his sons.

The bulk of the book details the five core components of market-based management: Vision, Virtue and Talents, Knowledge Processes, Decision Rights and Incentives. A firm should have a clear vision that expresses how it will use its capabilities to improve people’s lives. Employees should have the right virtue and talents to contribute to the firm (virtue is more important than talent). Firms should be structured such that the right information is available to the right people. Employees should have clearly defined rights over the decisions they can make based on their ability to contribute to the firm’s long-term profit. Policies and compensation should be set so that employees face incentives which encourage them to act in the interests of the long-term profits of the firm.

In the final section, Koch runs through four brief case studies of applied market-based management.

Whereas The Science of Success reads like a how-to manual for implementing market-based management, Good Profit definitely reads like Koch’s manifesto. The book did not address my reasons for skepticism of market-based management. To try and summarize those concerns very briefly, my gut tells me that market-based management is a misapplication of economic concepts to the wrong contexts. Firms exist because of transaction costs, a concept I don’t find addressed by the structure of market-based management.

Koch doesn’t address criticisms of market-based management in the book, but presents the tremendous success of Koch Industries as a testament to the power of his business philosophy. Besides Koch’s two books, I have encouraged market-based management in working with organizations supported by Koch such as the Charles Koch Institute. I find some concepts (decision rights) more compelling than others (incentives). I would be really interested to have the opportunity to experience market-based management working in a firm that fully embraces it, especially in a for-profit context.

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Book Review: The Last Safe Investment

The Last Safe Investment: Spending Now To Increase Your True Wealth Forever by Michael Ellsberg and Bryan Franklin is a combination self-help and retirement-planning book. The authors argue that the typical American retirement plan is broken. They offer an alternative that will better serve one’s retirement as well as one’s present and near future. At its core, the author’s alternative is about viewing yourself as your primary investment vehicle for your future.

Ellsberg and Franklin introduce three “true wealth disciplines”: systematic spending, increasing your value to other people, and improving your happiness exchange rate. These disciplines, when cultivated, lead to three “true wealth assets”: adviser equity, tribe, and savings. If you invest in yourself by building the three disciplines, the three assets will better provide you with a happy retirement than the 401ks and vacation homes of a traditional retirement plan.

True Wealth Disciplines
Spend systemically: Evaluate the value of spending within your whole life not just that item’s category. View expenses as life investments and spend accordingly.
Increase your value to other people: Your value to others = match between your behavior and other people’s desired outcomes. Investing in your value is your greatest leverage point to increase your future earnings.
Improve your happiness exchange rate: Figure out what makes you happy. Figure out how to increase happiness efficiently (more happiness for less dollars).

True Wealth Assets
Adviser equity: Provide value to new enterprises, typically in the from of advice but maybe other forms of labor. Get equity, cash it in some point in the future.
Tribe: Community of people who share same values and are connected to one another. Provide you with resources/earning potential and also will make you happier (connections and experiences)
Savings: Cold hard cash set aside. Yes, this excludes monetary investments such as stocks and bonds.

For a majority of the book, Ellsberg and Franklin outline “super skills” which are the best ways to increase your value to other people. Super skills are presented in four categories: interpersonal (leadership/influence, public speaking, visioning, teaching, selling, networking and building tribe, and holding paradox), creative (context importing, improvisation, writing, copywriting, reading, storytelling, and design), technical (mental models, financial models, systems thinking, web development, direct marketing), and physical (longevity, mental focus, clean healthy appearance, clean and organize environment, healthy relationship with substances, and healthy relationship with your sexuality).

I would grade the book as fair. Ellsberg and Franklin present a novel solution to a commonly perceived problem. I am not totally sold on their system, not enough to stop contributing to my IRA. Their true wealth disciplines are all fine pieces of advice. Nothing revolutionary there, but also enough off the beaten path to be worth writing. The true wealth assets part of the equation is where I’m very skeptical of their advice.

I’m not convinced that after a lifetime of following their true wealth disciplines you are better off with adviser equity, tribe, and savings than a 401k and a vacation home. The stock market is robust in the long run and if you start early (see my next point about willpower) you should be set up for life, especially if you practice the true wealth disciplines. Adviser equity sounds like a nice but unpredictable way to score big (like trying to pick individual stocks). Some people hate tribe! And savings is nice, but again, I’m not quite sure why the authors are so averse to setting up an IRA over cash and money market funds.

Another flaw in the book is the authors’ dismissal of willpower. In the introduction they say any workable plan (which they argue theirs is), “must not rely on willpower, or behaviors that people know they should do but few actually do”. Retirement is just a form of saving and saving is all about delaying gratitude (an exercise of willpower). The requirements of the book’s plan (spending systematically, increasing your value to other people, and improving your happiness exchange rate) all require willpower. In fact, I think the authors spend most of their book telling the reader what “they should do but few actually do!” This caught my attention after reading Willpower: Rediscovering the Greatest Human Strength by John Tierney and Roy Baumeister. I think Ellsberg and Franklin provide good advice that most of us should follow, but they are kidding themselves if they don’t think it relies on greater willpower to put in practice.

Ellsberg and Franklin’s true wealth disciplines are good advice worth following. I want to incorporate them into my life. But I’m not in a rush to center my future around adviser equity, tribe, and cash savings.

PS – Thank you to my friend Isaac Morehouse for the book recommendation!