National security is the textbook case of a subsidized public good — taxpayer-funded, centrally coordinated, and traditionally insulated from market prices. Ukraine’s wartime economy, however, offers a powerful counterpoint: a state-dominated sector that uses market-like incentives and achieves faster, cheaper, and higher-quality results. Western governments are rushing into a new age of rearmament — so if public funds must be spent, the most critical question is how to spend wisely.
Russia’s invasion in February 2022 has transformed Ukraine’s defense sector into an engine of decentralized innovation. Startups prototype lethal drones in garages. Battlefield software is crowdsourced by the Ministry of Digital Transformation. Soldiers use apps to provide frontline feedback, producing design tweaks in days, not months. More than 500 companies are producing short- and long-range drones for military use and Ukraine will produce more than four million drones in 2025, many without a single Chinese component. Ukrainian short-range drones cost around $400 per unit, while comparable American drones are often more than $100,000 — and deliver inferior performance. Drones in Ukraine have revolutionized warfare: about half of all casualties are now inflicted by drones.
Russia, in contrast, uses a command-and-control industrial policy beholden to state-owned giants and bureaucratic procurement agencies, with six major umbrella corporations in 2025. Despite vastly larger military expenditure — $149 billion in 2024 versus Ukraine’s $64.7 billion — Russia struggles to match Ukraine’s tempo in drone warfare and battlefield adaptation. Why? Because Ukraine’s Ministry of Defense has transitioned from a similar post-Soviet monopoly to a monopsony model — where government is the sole buyer but is no longer the main producer — and purchases from a competitive field of private firms.
Ukraine funds public competitions, invites diverse bids for contracts, and rewards battlefield results. One pilot program provides drone operators with points for kills, which encourages the operators to experiment and purchase materials as they see fit. This type of initiative unleashes innovation, reduces costs, streamlines production, and avoids the bureaucracy and interference that characterizes centralized planning. Strategic demands are continuous; and Kyiv responds by adjusting price incentives toward any new priority, and the market responds accordingly. Crucially, Ukraine’s defense firms have repositioned to become both domestic and export industries, and entice foreign investment to help build momentum. Ventures that arose to meet urgent battlefield needs are now marketing to international buyers and Ukraine’s president recently announced new arms development partnerships with the US, Germany, and Denmark.
Of course, none of this would be possible without foreign aid. American and European funding kickstarted local industry and still sustains Ukraine’s resistance. But Ukraine’s approach shows that, for defense, what matters most is how public money is spent, not just how much. Instead of concentrating funds in a few politically connected firms, Ukraine distributes capital widely, promoting competition. Ukraine’s future is bleak, but its defense industry is well-positioned to rearm an anxious Europe facing uncertain US support, and to provide an alternative to Chinese-backed supply chains.
President Eisenhower warned in 1961:
…we have been compelled to create a permanent armaments industry of vast proportions… Yet we must not fail to comprehend its grave implications… we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.
The Pentagon is ensnared in a procurement labyrinth Eisenhower would recognize. The F-35 program is projected to cost more than $2.1 trillion and continues to suffer from readiness and reliability issues. The Joint Systems Manufacturing Center, the only US plant that produces Abrams tanks, has halted new production in favor of refurbishment due to delays in its fragile supply chain.
Defense contractors such as Lockheed Martin and Raytheon operate in respective oligopolies and are shielded from competition by compliance regulations and lobbyists. In 2024, US defense contractors spent nearly $150 million lobbying Congress. This labyrinth poses grave implications for American readiness in case of a broader conflict in the Indo-Pacific or Middle East, and low stockpiles were recently cited as the reason for halting arms shipments to Ukraine.
None of this is inevitable. America has a vibrant tech sector and firms like Anduril and Palantir build first and sell later, which shows that grass-roots innovation can break into the most entrenched markets. America’s procurement system also appeals to diverse bidders; however, over-regulation and strict compliance regimes favor incumbents over innovators.
The Pentagon is a monopsony buyer just like Ukraine’s Ministry of Defense. However, unlike Ukraine, it often rewards risk aversion, compliance with documentation, and maintenance of political connections. Labor unions push for job guarantees, and local domestic concerns cause retention of outdated production lines, even when newer, better alternatives exist. Lobbyists for incumbent firms engineer compliance regimes tailored to their existing processes and lock out leaner competitors. Self-serving legislators eager to deliver jobs to their districts may champion pork-barrel projects that prioritize electoral influence ahead of strategic utility and national interest. The results are high prices that reflect negotiation savvy and bureaucratic finesse more than competitive merit. Mediocrity earns a paycheck, and innovation waits in the lobby.
So, are the Ukrainians simply desperate, and therefore inclined to be more productive and take shortcuts? Partly, sure. Necessity dictates changes be made quickly, but just because Ukraine innovates out of necessity doesn’t mean its approach is nearsighted. The US has the luxury of time, and changes Ukraine has made out of necessity, the US can pursue by choice. What Eisenhower warned of has come to pass: a socialized military-industrial complex that serves special interests, not the nation.
Ukraine offers a vision of deregulated defense production and enhanced capability, informed by modern warfare. Its evaluation of battlefield needs is not perfect, but it reflects a broader trend characterized by responsiveness, experimentation, and rapid iteration. They are the hallmarks of a functioning market, even though the ultimate customer is the state.
There are, however, some challenges that come with decentralized production. It is easier for Russia and its allies to infiltrate the numerous supply chains and small firms, and parts sourced from overseas pose data-collection and sabotage risks, as was seen in recent Israeli attacks on Hezbollah in Lebanon. Ukraine seems to be handling these issues well and increasingly sources parts domestically, as doing so becomes more efficient due to economies of scale.
What ‘victory’ looks like for Ukraine is unclear, and a positive outcome for its people is far from guaranteed. I make no judgment on whether lowering the cost of warfare is actually in the best interest of Ukrainian or American citizens — many want the war to end today. If the aim, however, is efficiency in defense production, Ukraine is doing something right. If America is committed to spending $1 trillion of public funds annually on defense, it should demand rapid innovation and the pursuit of excellence.
