Chrystia Freeland

Mohamed El-Erian, PIMCO’s CEO, is #45 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. He tells Chrystia that his big idea is a “recognition that we are living in a period of major global realignment.”  This rapidly changing environment favors emerging markets, which are accustomed to periods of upheaval, as well as businesses, which have the metrics and flexibility required to make quick course corrections. The developed world has been hobbled by years of inertia, he says, and is at a disadvantage in responding to these global shifts.

In El-Erian’s eyes, being an outsider is fundamentally connected to being a top global thinker.  He credits his unconventional background — growing up in Egypt, studying four different schools of economics at Cambridge, and analyzing emerging markets for 15 year at the IMF — with his ability to spot the realignment in world economic growth towards the developing world.

El-Erian attributes PIMCO’s success to its heterodox culture — the investment giant’s motto is to be “constructively paranoid,” and once a year management invites a “shadow” investment committee to its Newport Beach offices to second-guess the portfolio managers’ investment decisions.

In FP‘s words, El-Erian belongs on the list “for reminding us just how bad things could get:”

The world’s best financial minds have closely watched the prognostications of this Oxbridge-trained economist ever since January 2007, when Mohamed El-Erian, then the head of Harvard University’s endowment, bet $1.6 billion of the school’s money that global markets were headed for a downturn — and turned out to be right.

It is impossible not to be fascinated by the WikiLeaks release of U.S. State Department cables this week. It is a story that has everything, ranging from insight into the U.S.-Russia relationship, to salacious tidbits like Ghaddafi’s predilection for buxom Ukrainian nurses, to raising the meaty issues of free speech, the internet and a government’s need for privacy.

But the most significant revelation isn’t what is in the documents—it is what is missing from them. The financial crisis of 2008, and its agonizing aftermath, changed the world profoundly. We now know it didn’t change the State Department. The most important take-away from the WikiLeaks data dump is that America needs a new foreign policy paradigm to deal with the post-crisis world.

The starting point for that paradigm must be to put the economy at the heart of foreign policy. Some of America’s savviest wise men are already making that point, most notably in the latest issue of Foreign Affairs, with two seminal essays on the importance of the economy for statecraft.

Robert Shiller of Yale University is #48 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. He tells Chrystia that his big idea is that “finance can serve humanity, especially if it democratizes.” In fact, Shiller argues that the spread of finance is responsible for the super-cycle of economic growth that the world has enjoyed over the past half-century. He disputes the charge that finance is mainly beneficial to a small cabal of bankers in the world’s financial capitals.

Over half the population of the United States uses mutual funds, retirement plans and complex mortgage contracts to manage risk. And, risk-management techniques could be expanded to include more of the uncertainties of middle-class life, he says.

Professor Shiller has two big ideas in the pipeline: a book that will address the popular prejudices against finance and a book to be co-written with George Akerlof on the future of international financial regulation.

At the end of Chrystia’s interview with Dan Ariely yesterday, he revealed that his next research priority is to demonstrate how pernicious conflicts of interest really are:

My personal mission is to think about conflicts of interest. So it turns out that if I pay you lots of money to see reality in a certain way, you too will be able to do it … It turns out conflicts of interest paint us. They paint our view of the world in deep ways that we don’t understand. So imagine I pay you $5 million a year to view mortgage-backed securities as a good product. Now, I’m sure you could pretend to like them, but the question is would you really start believing that they are better products than they really are? And that’s the case. We find that people actually can change their deeply held beliefs. They would invest their own money. If something is worthwhile for you to do financially, you would convince yourself that this is also good for you. And if it’s something that is difficult and complex, it turns out it’s even easier for us to do it. And if it’s something that is remote from money — for example, in our experiments when we get people to cheat for something that is not money but a step removed from money — stock, stock options — people find an easier time doing that. So my big issue right now is to try to eliminate conflicts of interests. When you have a situation with conflicts of interest and you put good people in those conditions, you should not expect anything but failure.

As Ariely tells Chrystia, this is a problem not just limited to finance. Doctors and politicians can lose their ability to objectively see reality through their contact with drug reps and lobbyists, he says. And while he’s not wide-eyed enough to believe he could eradicate them completely, Ariely does think conflicts of interest can be dramatically reduced.

Daron Acemoglu of MIT is #88 on Foreign Policy‘s list of the 100 Top Global Thinkers of 2010.  Acemoglu tells Chrystia that his big ideas involve “the relationship between democracy and development” and “the historical roots of economic success and political success, and unfortunately also economic failure and political failure, across nations.”  Professor Acemoglu explains why he disagrees with modernization theory, which states that nations tend to democratize as they get richer. He also disagrees with the thesis of fellow FP Global Thinker Raghuram Rajan that income inequality was a root cause of the most recent financial crisis.  Acemoglu also discusses the prospects for democratization in China, and Russia’s project to replicate Silicon Valley outside Moscow.  His next big idea, he hinted, is exploring the relationship between individualism and society.

Here’s Foreign Policy‘s take on what makes him a top global thinker:

Some Nobel Prize selections are a genuine surprise. The same won’t be true if Daron Acemoglu, already at age 43 one of the world’s 20 most cited economists, eventually takes the award. Born in Turkey and educated at the London School of Economics, Acemoglu quickly made a name for himself with papers and monographs that examined how economic incentives align with political life. His specialty is the analysis of the political conditions under which markets thrive — namely, democracy. It’s a theme Acemoglu has explored in a steady stream of academic papers, textbooks, and op-eds — work that so impressed his peers that he won the John Bates Clark medal in 2005, given annually to an outstanding economist under age 40. Acemoglu’s next book, co-authored with Harvard University’s James Robinson, Why Do Nations Fail?, argues that a real “freedom agenda” will start with democratic rules rather than free markets. “You would not need armies to implement such a scheme,” Acemoglu said, “just a functioning bureaucracy.”

Dan Ariely, author of “The Upside of Irrationality,” has some (unsurprisingly) unconventional recommendations for restoring the health of the financial system and fixing Wall Street pay. He told Chrystia that the government’s effort to recapitalize the banks and restore liquidity to the financial system are half-hearted since it has done little to restore trust in the industry:

I think what is really dangerous is the feeling of mistrust and revenge towards bankers. People at AIG have told me that they’ve been punched — physically, people punched them in restaurants. There’s a deep mistrust. And what’s interesting is that people are inherently trusting creatures, but when our trust is being betrayed we get incredibly upset and willing to take revenge … Now, I think the banking industry in general, and also Washington, don’t understand how deep the trust has been betrayed. And what we need is not just to increase liquidity and not just to create sunshine policy. What we need is to restore the trust in banking, and unless we do that I don’t think things will truly recover.

Ariely mentions an experiment he calls the “trust game” that illustrates how vindictive people become once they feel betrayed. It involves two players: A and B. Player A is given $100 and is told he can either go home with the money or send the money to Player B. If he sends the money to Player B, the $100 will quadruple to $400. If the money gets to Player B, he could either go home with the $400 or split the money 50-50 with Player A.

In conjunction with her essay in Foreign Policy‘s Top Global Thinkers issue, Chrystia interviewed six of the financial luminaries that made the list:

MIT’s Daron Acemoglu, Yale’s Robert Shiller, PIMCO’s Mohamed El-Erian, Columbia’s Joseph Stiglitz, the University of Chicago’s Raghuram Rajan, and NYU’s Nouriel Roubini.

Reuters and Foreign Policy will be showing these interviews over the next coming days.  This one is a compilation of the above six global thinkers.