An Economist’s Solution to the War in Ukraine

Economics provides an easy way to arrive at a solution to the conflict in Ukraine. Let the party that has the most at stake, the most "skin in the game," determine the solution. The party with the most skin in the game is the one that has the most at risk and, therefore, is most likely to choose the option that solves the problem in the best possible way. This applies whether the issue is running a business or choosing a foreign policy.

Here’s an example of how skin in the game works. Let’s say you’re in business with a partner. You own 80 percent of the business and your partner owns 20 percent. Who should have the greater say in how to run the business? You should. You’ve got the most to gain and lose. You’ve got the most skin in the game. This is how business law works. The party with the greater ownership share, the most skin in the game, is the one that has greater control.

Now take that same example and assume that you also know more about how to run the business than your partner. With more skin in the game and more knowledge about the business, you should definitely be the one in charge.

In the Ukraine conflict the parties with the most skin in the game are the residents of the Donbas. The war is being fought right on their doorstep. Yet even though the people of the Donbas have by far the most skin in the game, they have little say in whether the war continues or not.

Elon Musk tweeted out a plan to end the war last October, writing, "[R]edo elections of annexed regions under UN supervision. Russia leaves if that is will of the people."

Musk had it right. He put the decision rights precisely where they belong, on those who live in the regions where the fighting is going on. They are the ones with the most skin in the game.

But perhaps a better question is this: "Should the fighting end today?" This frames the question in terms of what those in a war zone care most about: survival.

If "yes," then Russia and Ukraine enter into an armistice agreement like the one that ended hostilities in Korea almost 70 years ago. The line of demarcation would be the current frontier between the opposing forces.

If "no," that implies the status quo.

Some will vote "no." Those voting "no" are likely the ones more interested in being ruled by an oligarch in Kyiv than an oligarch in Moscow, or vice versa, and maintain the hope that their side will win outright.

However, my guess is that the "yes" side would win. Those voting "yes" would be the ones who would rather get on with their lives and not see what they know and love being obliterated in the war. The "yes" side might get upward of 80 or 90 percent, a return comfortably outside of the margin of fraud and manipulation.

There’s another reason the people of Eastern Ukraine are the ones best positioned to decide. As in the latter part of my business example, the people of Eastern Ukraine know far more about the consequences of continuation of the war than do Western politicians or military leaders.

The Donbas was the scene of some of the bloodiest fighting during the Second World War. The people of Eastern Ukraine know full well from parents and grandparents what it’s like to be caught in a clash between two great armies. I suspect most would not want to go through something like that.

Economics provides a simple solution to the Ukraine war. Let the people of the Donbas, who have the most skin in the game and knowledge of the consequences, make the choice between peace and war. Any takers?

James Bohn is an economist and risk analyst with thirty years of experience in business, government, and academia. Most recently he was an officer in the supervision function at the Federal Reserve Bank of Boston. He has a Ph.D. in Business Economics from Harvard University.