Economics and the new economy: the invisible hand meets creative destruction

Abstract

In the 18th century, Adam Smith offered his theory of the invisible hand and the view that perfect competition is the main spur to economic efficiency. The theory of the invisible hand, as it has evolved in modern economic thought, treats creative activity as being outside the scope of economic theory. In the 20th century, Joseph Schumpeter offered an alternative perspective: creativity is an economic activity. He argued that a capitalist market system rewards change by allowing those who create new products and processes to capture some of the benefits of their creations in the form of short-term monopoly profits, a situation that promotes what Schumpeter called \\"creative destruction.\\" What should the fundamental paradigm of economics be: creative destruction or the invisible hand? In this article, Leonard Nakamura offers some possible answers to this question.[Adobe Acrobat (.pdf)

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