In conventional economics, the concept of value creation by the public sector is largely absent. Value is created in business with the state playing a reactive role in correcting market failures to enhance economic efficiency. But a new argument is emerging which asserts public value is created by public sector actors creating and co-shaping markets to achieve public purpose.
At a glance
In a working paper from the UCL Institute for Innovation and Public Purpose, Professor Mariana Mazzucato and Josh Ryan Collins present a more ambitious and positive concept of public value. This rejects the market failure framework and puts public value at the centre of the economy, not in the periphery. Public value is created by public sector actors creating and co-shaping markets in line with public purpose. This direction-setting role enables public, private and civil society sectors to collaborate effectively to solve societal problems.
The economics of public value: fixing markets
In economics, the private sector is explicitly acknowledged as a value creator. The production function framework represents the microeconomic theory of value where businesses create value by combining capital (both tangible and intangible), labour and technology.
Within this economic theory of value creation, the public sector’s role is to
- fix market failures
- enable value creation by investing in skills, research and education which are key to the development of technology and a skilled workforce
- redistribute value through taxation.
But there is no clear role for the public sector to create value itself and the term public value does not exist in economics.
The emergence of public value management
The idea of public value first appeared in public administration/public management during the 1990s as a response to the perceived weaknesses of new public management (NPM).
NPM argued that governments should adopt strategies from the private sector to maximise value in the public sector. A key NPM concept was introducing some equivalent of the profit motive in the public sector to improve performance such as efficiency targets. Public value came to prominence through the work of Mark Moore who saw public value as more than simply importing private sector practices and market discipline.
Moore developed a strategic framework that involved the management of trade-offs between three domains:
- the identification of the public value an organisation seeks to produce
- the sources of legitimacy and support that are relied upon to authorise the organisation to take action
- the resources necessary to sustain the effort to create that value.
A number of critiques of public value have emerged. One is that it is excessively vague and ambiguous. Another argues it allows and encourages public managers to stray into the political domain, increasing their bureaucratic power in pursuit of their mandate. A further limitation is that it restricts its domain to public services and public sector management rather than the more ambitious goal of a broad policy framework.
Towards a theory of collective public value creation
A more positive theory of public value begins with the idea of public good not as a correction to market failure, but as an objective in itself. This objective can only be realised if linked to a process through which value is created.
The paper proposes that public value is collectively generated by a range of stakeholders including the market, the state and civil society. The emphasis is on value creation at the core – not just public value but value itself. In this view value is co-created rather than created inside business and only facilitated by the public sector.
A collective theory of value creation requires understanding investment and production capacity in all actors. This includes understanding the productive capacity and capabilities of the state.
The focus is therefore on the economic and political processes, institutions and conditions that enable public value creation. The role of the state is key since it is the only institution with the power to shape markets and direct economic activity in socially desirable directions so as to achieve publicly accepted outcomes.
Why it matters
The idea of collective value creates a new public value agenda. It is one which can address the production of goods and services in the economy, including public services. The public part of that production engages in questions that involve both the economic sphere as well as the organisational sphere.
The focus is on how public organisations interact with other actors to collaborate and interact widely across the economy. Value creation must involve the public sector setting a direction and public purpose for private and public actors to collaborate and innovate to solve societal problems. This is a market-shaping and market-creating role rather than a market-fixing role.
Want to read more?
Putting value creation back into ‘public value’: From market fixing to market shaping – Mariana Mazzucato and Josh Ryan-Collins, UCL Institute for Innovation and Public Purpose, Working Paper Series, 2019-05
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