Klarman, Fink and Grantham and the Threat to American Capitalism

An extreme, utopian political and economic philosophy has been embraced in America by a network of highly influential and well-placed apostles. Like an equally extreme and utopian philosophy before it – Communism – this philosophy has, to its core believers, strong appeal in theory but cannot work in practice. And just as Communism ultimately brought about the collapse of the regime that established it in its most extreme form, the Soviet Union, this new extreme philosophy threatens to bring about the collapse of American capitalism.

That is my very liberal reading of the undercurrent beneath a number of much-discussed recent documents: a new book by veteran journalist Steven Pearlstein, Can American Capitalism Survive?; the Q42018 letter distributed to Baupost hedge fund shareholders by its widely-respected chief executive Seth Klarman1; an article by British economist John Kay on “The Concept of the Corporation;” and recent writing by BlackRock CEO Larry Fink and GMO cofounder Jeremy Grantham.

Hardening the tip while the rest of the iceberg melts away

On September 13, 1970, The New York Times Magazine published what may be the most-cited article ever to appear in that newspaper, with more than 17,000 citations on the academic website Google scholar.

The title of the article was The Social Responsibility of Business is to Increase its Profits, and it was written by University of Chicago economist Milton Friedman.

Although the article was widely read and much-cited, it contains a fatal flaw.

In that article, Friedman begins by arguing that “…businessmen [who] speak eloquently about the ‘social responsibilities of business in a free-enterprise system,’” and who “declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends,” are “preaching pure and unadulterated socialism.”

Friedman then goes on to argue that generally the responsibility of the corporate executive is “to make as much money as possible while conforming to [the] basic rules of the society, both those embodied in law and those embodied in ethical custom.”