The two of them met in Koch’s employee cafeteria, a large and pleasant facility that was voted by one local paper as the best restaurant in Wichita. Because it was a job interview, Charles Koch took Winn to a private dining room. Almost from the moment they sat down, Charles Koch put Winn at ease. Koch was self-effacing and more eager to hear about Winn’s experiences than to talk about his own. Koch began quizzing Winn right away. He wanted to learn more about Winn’s specific field of experimental economics. Winn had studied the discipline at George Mason, under the Nobel-winning economist Vernon Smith. Experimental economics was a system to test economic theories in a laboratory setting. This idea seemed to appeal to Charles Koch—experimental economics might provide a way to prove or disprove the underlying principles of Market-Based Management.
Charles Koch asked Winn about the limitations of the experiments. Could an experimental economist run studies that revealed the best way to teach people? Could a study show whether public schools were effective?
Winn said it wasn’t as simple as that; experiments couldn’t effectively measure such large issues. But the experiments could break down smaller components of a school system and test their effectiveness. “You couldn’t do an entire educational system, but maybe features of the system,” Winn recalled saying.
Charles Koch seemed impressed. He hired Winn to become director of a new joint venture between Koch Industries and Wichita State University, an academic center that would test the veracity of MBM’s claims and pioneer new discoveries about markets and human behavior. The new partnership would be called the MBM Center at WSU. The Wichita State administration renovated several classrooms in the basement of a historic building called Clinton Hall to make room for the center back in September of 2006.
After he was hired, Winn helped design a large laboratory in the center where he could carry out his experiments. He installed a warren of computer stations, each one walled off from the other by partitions. The computers were networked together and linked to a device that Winn controlled, called the master box. His test subjects were students, many of them from the business school’s accounting and finance departments. They would be the economic guinea pigs. When an experiment got under way, the students sat at the computer stations, unable to see what their neighbors were up to because of the tall partitions. The students played complex computer games that were designed to simulate real-world economic problems, like buying a home or bargaining over a contract. The simulations were run from the master box, which tabulated the students’ responses and created databases for Winn to analyze in search of patterns.
One of Winn’s most important experiments was designed to figure out how Koch Industries could defeat its opponents. Specifically, the experiment sought the best way to overcome an economic dilemma called the “holdout problem.”
The holdout problem was commonly encountered by Koch’s pipeline division. Any given pipeline might travel hundreds or even thousands of miles in length, passing through land owned by hundreds of property owners. A pipeline company had to convince each of these property owners to sell their land (or at least grant a right-of-way through it) along the pipeline route. This was no easy thing. Landowners are inclined to make companies pay dearly for the privilege of crossing their property. The cost of assembling the property rights and leases for a new pipeline route can quickly balloon.I The real problem arose when a pipeline’s path ran across the property of a holdout, meaning that ornery breed of property owner who stubbornly refuses to sell. A single holdout had extraordinary power to slow down a pipeline project and raise costs. The most intransigent holdouts simply refused to sell at all. Winn’s experiment was designed to find a way to outmaneuver them.
The master box, in this experiment, became the pipeline company. The students, in their warren of cubicles, became the property owners. The master box was preprogrammed with buying simulations. It sent price signals to the students, who chose to accept or deny the bids. The chief aim of the experiment, as Winn and a coauthor later wrote, was to “discourage hard bargaining among the sellers.”
As the experiment got under way, the master box bombarded the students with different strategies. Roughly 140 students sat alone in their cubicles, unable to see their neighbors, watching the computers as slides flashed across the screens with various offers for their land. They clicked when the price was right. The master box ran its scenarios again and again, collecting data every time. Eventually, it gathered more than seven thousand observations about the students’ behavior.
As a result, Koch Industries developed a very rich data set that would help the company understand the holdouts and how to beat them.
* * *
Steve Hammond, a holdout, worked in a crummy little office on the second floor of the Longshoremen’s union hall in Portland, just down the street from Georgia-Pacific’s warehouse. Hammond was as surprised as anyone when he won the election to become a union official in 2008. He was also the first to admit that he had no idea how he was going to fight Koch Industries. “I was in over my head,” he recalled.
Hammond wasn’t alone. He was elected as the second in command of the local IBU chapter, a position that was known as the business agent. His new boss, the IBU regional director, was a guy named Gary Bucknum. Unfortunately, Bucknum had also just been elected to his position. He was a rookie who was also surprised to find himself as a union boss. Bucknum had run for office on a whim. He didn’t work for Georgia-Pacific but for an oil terminal company that was also represented by the IBU. When he won the election, Bucknum’s reaction was simple: “Oh, crap.”
Bucknum ran for election because he’d grown disillusioned with the union leadership. The union seemed weak. Grievance filings went nowhere. Pay and benefits were lagging. Bucknum had a stubborn streak—he complained so much to his union leadership that he’d earned the nickname “Gary the Anarchist” among the IBU workers. In spite of his militant nickname, Bucknum didn’t look like a union thug. He was thin and had large, round eyes and thick glasses. He would not look out of place at a comic book convention. His union militancy seemed almost fussy—like the stubborn refusal of an accountant to accept a spreadsheet where the numbers didn’t add up. Fair was fair. The rules were the rules. When the IBU didn’t back the rules aggressively enough for Bucknum, he made a choice. “Rather than sit there and complain about it, you put yourself out there to try and do something.”
By 2009, Hammond and Bucknum were working side by side. The IBU, while technically independent, rented the office space from the Longshoremen after the two unions became affiliated. A bright-blue IBU flag hung on the wall outside the office door. Just inside that door, there was a small meeting room with a table and chairs, some filing cabinets, and a coffee urn. On the other side of that was the cramped office where Bucknum and Hammond sat at a broad table with two computers. The big window behind them offered a sweeping view of Portland’s industrial underside: an electrical substation, a gravel parking lot pitted with large puddles, and a view of passing freight trains. This would be the IBU’s command post for a prolonged battle with Koch Industries.
The battle began in 2010, when it was time to renegotiate the labor contract for Koch Industries’ two largest distribution centers on the Willamette River, the so-called Front Avenue warehouse and the Rivergate warehouse farther downriver. These were the locations where Hammond had worked since the 1980s. This was the place that he wanted so much to change. The contract negotiation would give him the chance to finally do it.