National security can be described as a typical example of a public good subsidized by the government – supported by taxpayers, centrally coordinated, and traditionally not influenced by market prices. However, Ukraine’s wartime economy provides a powerful counterexample: a state-led industry using market-like incentive mechanisms that have achieved faster, cheaper, and higher quality results. As Western countries accelerate into a new era of military expansion, the key question remains how to wisely utilize these resources.
In February 2022, Russia invaded Ukraine, transforming the country’s defense industry into a decentralized engine of innovation. Startups developed lethal drones in garages, the Ministry of Digital Transformation crowdsourced battlefield software development, soldiers provided frontline feedback through applications resulting in design improvements in days instead of months. Over 500 companies produced short and long-range drones for military use, with Ukraine set to produce over 4 million drones in 2025, many without any Chinese components. The cost of Ukraine’s short-range drones is around $400 each, compared to over $100,000 for similar US drones with inferior performance. Drones have fundamentally changed modern warfare in Ukraine, with approximately half of casualties caused by drones.
In contrast, Russia’s industrial policy relies on a command and control model, depending on state-owned giants and bureaucratic procurement agencies. By 2025, Russia had six major companies. Despite Russia’s military spending far surpassing Ukraine’s – $149 billion in 2024 compared to Ukraine’s $64.7 billion – Russia still struggles to match Ukraine in drone warfare and battlefield adaptation. Why? Because Ukraine’s Ministry of Defense has shifted from a monopolistic model similar to the post-Soviet era to a buyer’s monopoly – the government remains the sole buyer but no longer the primary producer, sourcing from competitive private enterprises.
Ukraine funds open bidding, inviting diverse bidders to compete for contracts and rewarding based on battlefield performance. One pilot project rewards drone operators with points for target kills, encouraging innovative attempts and self-procurement of materials. Such initiatives stimulate innovation, lower costs, streamline production processes, avoiding bureaucratic intervention and interference inherent in centrally planned systems. As strategic needs evolve, Kyiv adjusts pricing incentives to address new priorities, with the market responding accordingly.
Crucially, Ukraine’s defense industry has been repositioned, transitioning into an industry with both domestic and export capabilities, attracting foreign investment to drive industry development. Enterprises born to meet urgent battlefield needs are now actively expanding into international buyer markets, with the Ukrainian president recently announcing new weapon development partnerships with the United States, Germany, and Denmark.
Of course, none of this would be possible without foreign aid. Funds from the US and Europe have propelled local industrial development and support Ukraine’s resistance. However, Ukraine’s approach illustrates that for defense, the key is how to utilize public funds wisely, not just the amount invested. Ukraine has not concentrated funds on a few politically connected enterprises but distributed them widely, fostering competition.
While Ukraine’s future prospects may be uncertain, its defense industry possesses advantages that can provide rearmament solutions to Europe facing uncertainty in US support and offer an alternative to supply chain systems reliant on Chinese support.
In 1961, US President Eisenhower warned of the military-industrial complex’s potential overreach. The Pentagon finds itself in the procurement maze Eisenhower recognized. The F-35 fighter jet program is projected to cost over $2.1 trillion, facing ongoing reliability and readiness issues. The Joint Systems Manufacturing Center in Ohio, the sole US factory producing Abrams tanks, has paused new tank production due to delays in its fragile supply chain, now refurbishing equipment.
Defense contractors like Lockheed Martin and Raytheon operate in their oligopolistic markets, shielded by compliance regulations and lobbying groups, free from competition. In 2024, US defense contractors spent nearly $150 million on congressional lobbying. This procurement maze poses a severe threat to US combat readiness in larger conflicts in the Indo-Pacific or the Middle East, recently halting weapon aid to Ukraine due to insufficient inventory.
However, these issues are not inevitable. The US boasts a vibrant tech industry with companies like Anduril focusing on providing AI and robotics solutions to the Department of Defense, and Palantir renowned for its big data analytics, emphasizing research and development before sales, demonstrating grassroots innovation can break entrenched market norms. While the US procurement system attracts diverse bidders, overregulation and strict compliance favor incumbents over innovators.
Like Ukraine’s Ministry of Defense, the Pentagon is the sole procurer. Unlike Ukraine, however, it often rewards risk aversion, regulatory compliance, and maintaining political relationships. Unions demand job security, while local interests lead to retaining outdated production lines, even when superior alternatives exist. Lobbyists from incumbents design compliance systems that fit their existing processes, excluding more efficient competitors. Some legislators support “pork-barrel” projects to secure jobs in their districts, prioritizing electoral influence over strategic and national interests. The result is exorbitant prices driven more by negotiation skills and bureaucratic means than market competitiveness, with mediocrity rewarded at the expense of innovators left waiting outside.
So, did Ukrainians simply adopt more efficient production methods and shortcuts out of desperation? To some extent, yes. Pressed by circumstances, they had to adapt quickly, but Ukraine’s innovative response to demand does not equate to shortsightedness. The US has ample time to emulate Ukraine’s changes prompted by necessity, using independent choice to drive progress. Eisenhower’s warning has materialized: a militarized industrial complex serving special interest groups, not the nation.
Ukraine showcases a vision of decentralized defense production models and enhanced combat capabilities, adjusting to the demands of modern warfare. Though their assessment of battlefield needs may not be perfect, it reflects a broader trend: responsive, daring, and fast-paced trial and error qualities. These are signs of a well-functioning market mechanism, even though the ultimate customers are still nations.
Nevertheless, a decentralized production model brings challenges. Russia and its allies find it easier to infiltrate multiple supply chains and small enterprises, while the risk of data collection and disruption exists in overseas component sourcing, as seen in Israel’s recent pager attack on Hezbollah in Lebanon. Ukraine has effectively tackled these issues, increasingly favoring domestic component procurement for cost-effectiveness due to economies of scale.
For Ukraine, the definition of “victory” remains unclear, and whether its people can attain positive outcomes is far from guaranteed. I do not seek to judge whether reducing the cost of war truly serves the best interests of Ukrainian or American citizens – many hope for the war to end today. However, if the goal is to enhance the efficiency of defense production, Ukraine’s approach is commendable. If the US commits annually to investing $1 trillion in public funds for defense, it should demand accelerated innovation from the military industry and strive for excellence.