After decades of market liberalization, in which the prevailing leitmotif was for the state to increasingly withdraw from as many areas of the economy and society as possible, the Great Financial Crisis of 2008 acted as a catalyst for questioning the dictum of the efficient market.

Since then, the primordial confidence in the market’s value-creating power has clearly waned, making way for more frequent state intervention. The Covid-19 pandemic and Ukraine war have only exacerbated this trend. However, a possible new balance between state and market still lacks a coherent new guiding principle, and so it does not come as a surprise that much of mainstream economics still bases policy recommendations on the assumption that value creation predominantly happens in the private sector, and the state should confine itself to a market-fixing capacity in the case that the allocation of resources by markets is not pareto-optimal.

In their recent contribution for the Journal of Economic Policy Reform, Mariana Mazzucato and Josh Ryan-Collins argue that existing public value concepts calling for a market-fixing role of the state fall short in acknowledging the fact that markets are co-created by private and public sectors. Instead, they make a case for a new definition of ‘public value’, one where a mission-oriented state shapes, rather than fixes markets in line with public purpose. Mazzucato and Josh Ryan-Collins argue that such a direction-setting role is crucial to enable different actors to address major present day societal challenges, including climate change, inequality, and the erosion of good jobs.

The abstract theoretical concept of market failures emerged out of neoclassical welfare economics and was not originally intended as a framework for steering policy. Yet, it has increasingly been employed by public policy makers as a justification for intervention and in doing so closely tied the role of the public sector to one of a ‘market fixer’ and ‘enabler’ for private sector value creation. In fixing and enabling, governments should adopt strategies from the private sector to maximize value in the public sector. This leaves the public sector without a clear role to create value itself. Mazzucato and Ryan-Collins argue that this narrow concept of public value ought to be rethought and extended beyond the public management and administration sphere.

In contrast to conventional economics, a mission-oriented and pro-active concept of public value creation emphasizes how public sector managers play an important part in balancing the need for efficient services with the engagement of citizens in policymaking. To arrive at such a concept of public value, the “market failure” framing needs to be rejected.

Framed this way, the public sector grows from a market fixer into a market shaper. Here, the state is viewed as having a potentially important macroeconomic role, going beyond not just the neoclassical market failure paradigm, but also beyond the simple Keynesian counter-cyclical or stabilisation function. Instead, the public sector intervenes with stronger directional push (Mazzucato et al 2020).

Such an evolution cannot be accomplished without a broader paradigmatic shift, where markets are no longer thought of as abstract phenomena working by themselves but rather conceptualized as outcomes of the interactions between public and private actors.

Beyond the conceptual shortcomings of the market failure theory of public value creation, such a shift is necessary to enable the development of new dynamic capabilities and innovations by different actors to successfully confront the challenges of modern-day capitalism, according to  Mazzucato and Ryan-Collins.

However, Mazzucato and Ryan-Collins also acknowledge that public value is inherently contested in the political arena and finding genuine ways for public actors to collectively create value with other civil society actors and the market proves challenging. Such a process still lacks a coherent new guiding principle. What should a new balance between the state and the market look like? How can state action be organized more efficiently? What alternative actors beyond the traditional administration can play a role in this?

To address some of these and other fundamental question around the role for the state, including but not limited to public value creation, the Forum New Economy is hosting a New Paradigm Workshop on May 24 and 25.