This working paper advances a market-shaping theory of the public sector to address one of the most persistent tensions in public administration: how governments can be both stable and agile, while also steering complex socio-technical transformations. It argues that prevailing approaches centred on market failure correction, efficiency and managerial reform remain insufficient for guiding transitions in areas such as climate, care, digital infrastructure and industrial renewal.

The paper conceptualises public organisations as proactive shapers of markets and co-creators of public value – steering the direction, pace, and composition of innovation and economic growth. It shows that public value emerges through the interaction of structural, routine and dynamic elements, rather than any single attribute. This perspective reframes the state as an institutional system that is capable of shaping futures, not merely responding to failures. The paper develops a three-layered framework of public sector capacities and capabilities that distinguishes among:

1. structural capacities that enable governments to set and sustain direction 
2. organisational routines that translate direction into coordinated practice 
3. dynamic capabilities that allow governments to experiment, learn and reconfigure strategies under uncertainty.