"Economics and the New Economy: The Invisible Hand Meets Creative Destruction" by Leonard I. Nakamura, in Business Review (July–Aug. 2000), Federal Reserve Bank of Philadelphia, Dept. of Research and Statistics, 10 Independence Mall, Philadelphia, Pa. 19106–1574.

For those persuaded that the United States has a "new economy," the watchword—taken, ironically, from an old economic theory—is "creative destruction," as former goods and livelihoods are replaced by new ones. Creativity, and the profits won by entrepreneurs who have it, are what make the capitalist system go, economist Joseph Schumpeter (1883–1950) thought—and the wealthy young wizards at Microsoft and elsewhere may be proving him right. But to find out if it’s really time to wave goodbye to Adam Smith’s "invisible hand" and welcome "creativity" as the engine of progress, economists must try harder to measure that elusive quality, argues Nakamura, an economic adviser in the Philadelphia Fed’s research department.

Creativity is nothing new, of course. Even when Smith was writing his Wealth of Nations (1776), Nakamura notes, inventors and other "creative" folk had an economic impact. "But the flow of payments to creative work was minuscule compared with those that flowed to the labor, land, and capital that directly produced products." Economic progress came naturally from competition and wider markets, Smith believed. Taking their lead from him, neoclassical economists celebrate perfect competition and regard creativity as beyond the scope of economic theory.

Schumpeter, however, in his masterwork, (1942), took a different view, Nakamura writes. "He argued that what is most important about a capitalist market system is precisely that it 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. Competition, if too vigorous, would deny these rewards to creators and instead pass them on to consumers, in which case firms would have scant reason to create new products." In this view, governments should encourage innovation by granting entrepreneurs temporary monopolies over the fruits of their creative efforts. That is the reasoning behind such things as patents and copyrights.

The Schumpeterian view may be "a better paradigm for the current U.S. economy," says Nakamura. Most workers are no longer engaged in direct production of goods and services, but in white-collar jobs, he points out. "Managers, professionals, and technical workers, who are increasingly involved in creative activities," now make up 33 percent of the work force, almost double the proportion in 1950. There are six times as many "creative professionals": Scientists, engineers, architects, writers, designers, artists, and entertainers now number 7.6 million.

It is "inherently difficult" to measure the economic value of creativity, Nakamura notes. Many existing economic measures implicitly assume perfect competition, in which creativity has no economic value at all. Official statistics thus "understate nominal output, savings, and profits."