Introduction

Governments face an increasingly complex task of addressing socio-technical challenges. This paradoxical tension between agility and stability has become one of the most persistent challenges in public administration theory. Vincent and Elinor Ostrom partially anticipated the focus on agility in their 1971 article on public choice, which foresaw the rise of New Public Management (NPM) in the 1990s. The authors introduce a market-shaping theory of the public sector, arguing that public organisations are proactive participants in steering the direction, pace, and composition of innovation and economic growth.

Old and new economic theories of the public sector: From the static state versus markets to dynamic interactions between state and technology

Market failure theory, founded on correcting inefficiencies, is increasingly ill-suited to address challenges of the 21st century, including demographic ageing, climate emergencies, and technological disruptions. A key challenge is the persistent confusion between static and dynamic efficiency.

The failures of market failure theory

Market failure theory justifies public intervention to fix situations where markets fail to efficiently allocate resources. Rooted in this theory, NPM reforms coalesced in the 1990s around the ‘Washington Consensus’ policies that focused on deregulation. The NPM reform waves of the 1980s and 1990s brought focus to short-term efficiencies. This led to an over-reliance on the consulting industry, resulting in a loss of in-house skills and institutional memory.

Not all systems are the same: Socio-technical system vs public service logics

Socio-technical systems and public services operate under divergent paradigms. While public expenditure is disproportionately allocated to public services, the dominant narratives of public value remain tethered to techno-economic domains. Using W. Brian Arthur’s 2009 concept of technology as a duality of solutions and problems, the authors argue that public services and socio-technical systems are interconnected features of the same ecosystem.

Market shaping theory of the public sector

The market-shaping perspective posits that value is co-produced across sectors through ongoing processes of innovation, coordination, and public investment. The authors contrast market fixing and market shaping theories across six broad areas: justification for the role of government, theory of value, justification of public services, underlying assumptions of system change, policy appraisal and evaluation, and approach to risk.

A new theory of public sector capacities and capabilities

The authors propose a layered framework comprising three interdependent layers. First, structural capacities encompass the institutional and legal architecture, resource base, and broader governance environment. Second, organisational routines refer to the day-to-day administrative, managerial, and professional processes that enable policy implementation. Third, dynamic capabilities refer to the ability of public organisations to sense emerging opportunities and risks, experiment with new forms of coordination, and reconfigure structures and strategies over time.

Conclusion: Where do we go from here?

The long-standing tension between stability and agility does not need to be understood as a zero-sum trade-off. To build structural capacity, it is recommended to secure adequate funding, institutional autonomy, and legal frameworks that empower governments to take risks and set direction. To strengthen organisational routines, it is necessary to embed practices of coordination, co-production, and iterative evaluation into everyday bureaucratic work. Governments must cultivate the structural, organisational, and dynamic capabilities required to shape just, sustainable, and purpose-driven futures.