Trickle-Down Stalinism: The Weird Origins of the Koch Empire in the USSR
They say the political spectrum isn't a line, it's a circle: in Stalin's USSR, the far right and far left met.
When we consider history - and politics - we should remember that the perpetrators or those crimes were ordinary humans, not because we want to sympathize or empathize with them, or soften our view of them, but to recall that ordinary humans are capable of terrible things.
J K Galbraith - a Canadian economic advisor to John F Kennedy - made the wry comment that “While Communism is man oppressing his fellow man, capitalism is just the reverse.”
This is more than just a comment about exploitation under one system or another - in fact, there is a surprising commonality of approach between conservative “trickle down” supply-side economics, and the policies followed by Stalin in the 1930s.
Among his other crimes, in the 1930s, Stalin engineered the Holodomor - the deliberate starvation of millions of Ukrainians. It’s also important to remember that in addition to the horrors of war, pogroms mass murder and incarceration, these regimes and these countries also had people living their lives, making policy, including economic policy.
Milton Friedman’s libertarian views on the economy are surprisingly similar in both goals and policies to the stated aims of Communism.
Both state their commitment to egalitarianism and wealth for all in principle, but in practice, both are committed to concentrating wealth in the hands of a few (at the expense of many) with the long-term promise of wealth for everyone, that never materializes. Because the model - does not do what its salesmen say it will.
It’s important for people to know that when Karl Marx’s proposal for a model Communist state was modelled on the corporation. After all, corporations are not democratic, nor are they run from the floor. They are centrally planned - with Boards, CEOs, and an entire private bureaucracy of management, accounting and control.
Marx saw how effective and productive corporations were. He thought government should run like a capitalist corporation.
The Koch History in the Soviet Union
Many “trickle-down” and libertarian ideas ideas are pushed by Libertarians and think-tanks funded by wealthy conservatives like the Koch Brothers. Not many people know the Soviet origins of the Koch family fortune: still fewer realize the similarities between the economic philosophy they promote and the one Stalin used while their father was there. (There was a scandal because Koch also helped build a refinery for the Nazis).
In the 1920s, Fred Koch developed a new kind of technique for refining oil, but found that a cartel of existing companies in Texas conspired to shut him out. Instead, he went to the USSR, where he built refineries for the Soviet Union. He became disenchanted (not least after some of his business partners were murdered) and returned to the U.S. to found the John Birch Society. He was in a position to speak of the evils of Communism, having seen them first hand, although he built 15 refineries before he was fully convinced.
The irony is that the policy that the Koch brothers promote is similar to the economic policy Stalin was pursuing at the time, on the advice of his economic adviser Preobrazhansky, that resulted in the starvation of millions of Ukrainians and Russians.
The difference is that in the USSR while all the surplus ended up in the hands of the government (where it was reinvested in industrial production), while in a private sector economy, it ends up in the hands of shareholders.
“…ardent free-marketeers like Ricardo meet ultra-left wing communists like Preobrazhensky. Despite their apparent differences, both of them believed that the investible surplus should be concentrated in the hands of the investor, the capitalist class in the case of the former and the planning authority in the case of the latter, in order to maximize economic growth in the long run. This is ultimately what people have in mind when they say ‘you first have to create wealth before you can redistribute it.”
- Ha Joon Chang
This was the Soviet Union’s policy close to the time that Fred Koch was building his refineries there.
The irony is that while Fred Koch dedicated his life to condemning communism upon returning to the U.S. (a number of his colleagues were “liquidated”), Koch and his family have continued to push for trickle-down economics.
It could be argued that the Koch’s Libertarian views on concentrating wealth is the “opposite” of communism, simply because the wealth is concentrated in private hands rather than the hands of the state.
However, this is to ignore that there are other ways of structuring your economic policies (as well as business) that allows for economic growth without all the proceeds being funnelled into the hands of a few, whether in the state or the private sector. “Mixed” capitalist systems alongside social or liberal democracies manage to generate millionaires and billionaires while still allowing for decent jobs and wages for the majority. This is also the case with “stakeholder capitalism” that recognizes that there are other stakeholders in value creation who are taking risks and face costs, and who should be considered when it comes to the reward.
The “supply-side” model is wrong. It makes no practical sense in describing how entrepreneurship, innovation, or access to capital works. It is pure ideology. Economists like Mariana Mazzucato have done great work in her book “The Entrepreneurial State” that describes the positive role of public investment in driving innovation that is commercialized by the private sector.
Shareholder Value as an Engine of Inequality
Declining union membership is one of the oft-cited reasons for growing inequality. But maximizing shareholder value is one of the reasons that has been driving wage stagnation and driving down union membership.
It is critical to emphasize that "maximizing shareholder value” is not a critical component of capitalism. The fact is that corporations really do have a larger role to play beyond merely generating results for owners, because owners alone are not the only ones with a stake in the success of a company, or the only ones taking a risk to ensure a company succeeds.
This is not just horning on a company’s racket: one of the central premises and argument for the value of corporations is that their interests are aligned with the society or community where they are operating. If they are not - if they are only operating in the interests of shareholders, this undermines a central premise for the utility of the free market.
What’s more, there is nothing “free market” about the notion of maximizing shareholder value: it is a rule, and an intrusive one at that. Libertarian economics often seeks to undermine the free market in one of the most important markets there is: the labour market. Being able to haggle over the value of your work is a market transaction, just as haggling over the value of a house or car. What’s more, it is one of the most important market transaction most people can make, since the price of their labour determines, quite literally their ability to pay for everything else.
“Maximizing shareholder value” puts a thumb on the scales to tip the balance in favour of one group alone - the shareholders - who are shielded from liability in the event of things going wrong. But there is nothing to prevent liability from spreading and affecting others, including governments and citizens, who have to pick up the tab.
Recently, the liability for failure has fallen on governments: that was the case in the bailouts of GM, banks and investment banks during the Global Financial Crisis of 2008-2009. Banks around the world were nationalized or backstopped by governments in order to prevent a bank run.
In Canada, banks were guaranteed $114-billion- nearly equal to a quarter of Canada’s national debt, and bad mortgages were absorbed by a government housing agency. In the U.S., banks received billions, and were backstopped in the trillions.
The effects of these market collapses have affected not just “taxpayers” but citizens around the world who have lost pensions and their jobs, while also suffering substantial cutbacks and austerity due to the financial uncertainty and economic slump.
The idea that government has no role to play in the market is a serious problem.
It should be obvious that without property and contract rights, and an entire system for the enforcement of civil and criminal law, there can be no markets. There is also a difference between regulation to minimize harm and maximize effectiveness - lawful freedom - as opposed to unlawful anarchy, which is more and more the norm.
When we consider the cost of market failures, and the incredibly where citizens will be bound to pay a price for the failures of others, Governments (and citizens) are justified in requiring regulation and taxation if only in self-defense and insurance against the damage a market failure can create.
Neither should we be relying on government alone to address inequality. If capitalists really believe the free market can redistribute wealth, they need to prove it.
Roger L. Martin writes that,
“Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism.”
He goes on, “…since [executives] spend most of their time trading value around rather than building it, they lose perspective on how to contribute to society through their work. Customers become marks to be exploited, employees become disposable cogs, and relationships become only the means to the end of winning a zero-sum game.”
Martin not a spokesperson for Occupy Wall Street: he is the Dean of the Rotman School of Management at the University of Toronto. His book was published by the Harvard Business Review Press, and blurbed by Paul Volcker, former chairman of the Federal Reserve under Ronald Reagan.
So, we can either find an alternative to “shareholder value,” or we can keep on defending and promoting “the dumbest idea in the world” which is what GE CEO Jack Welch called it, after applying it across his company.
The reality is that the failure of the left and the right is because they both run economies based on these same economic principles - which means the people at the top always get paid out of the pockets of the people at the bottom.
What is always missing is the option that actually works - liberal democracy, and mixed economies and working with people from the grassroots up. It’s time to speak up for it.
- DF Lamont