Technologies Replacing the "Central Planner"

A fundamental challenge in optimal resource allocation and mechanism design has long been the problem of information constraints - participants have private information (like valuations, endowments etc.) that they are reluctant to truthfully reveal to a "central planner". This often results in prolonged discussions and negotiations as private information has to be gradually distilled and digested before an agreed-upon mechanism can be implemented.

In a pioneering work by Robert Townsend and Nicolas Zhang from MIT (AEA Papers and Proceedings 113, 257-62, 2023), they explore how cutting-edge cryptographic technologies can help address this information constraint, enabling sophisticated economic mechanisms without fully revealing private data to anyone, not even trusted third parties.

The core technologies leveraged are fully homomorphic encryption (FHE) and secure multi-party computation (MPC). With FHE, computations can be performed directly on encrypted data without decrypting it. And MPC allows multiple parties to jointly run private computations while only seeing encrypted inputs and outputs. Combining these, participants can engage in mechanism calculations while keeping individual inputs completely masked and confidential.

This cryptographic privacy eliminates the need to gradually reveal information through prolonged negotiations. Participants contribute encrypted inputs, private computations are run, and encrypted outputs produced - all without compromising informational advantages.

The authors further discuss how distributed ledgers can decentralize and automate the execution of such privacy-preserving mechanisms via smart contracts, eliminating the need for a trusted "central planner" intermediary.

One of their most intriguing proposals is an "exchange and contracting platform" for the IMF, based on privacy-preserving auctions between central banks. On this platform, central banks could regularly express their reserves and FX preferences in an encrypted manner. Taking the overlap of these preferences, smart contracts could then automatically coordinate currency rates and interventions in a decentralized way - essentially providing a "central planner" functionality without any single trusted party.

Through examples like this IMF platform and transformations in the music industry, Townsend and Zhang paint a vision where advanced cryptography enables sophisticated coordination mechanics to be embedded in decentralized networks at a global scale.

Their work points towards a future of economic mechanisms aligned transparently through thoughtful cryptoeconomic arrangements, restructuring markets and organizations. It blends economic theory with crypto, carrying immense potential to eliminate traditionally limiting information constraints in a secure and scalable manner. A frontier with far-reaching implications awaits.