Every time a consumer decides whether to buy a good or not, they are communicating their value of the good to the businesses that produce it, together the consumers and producers determine prices. goods that are highly sought after will have high prices, and high prices are a signal to businesses that resources should be used to produce more of these goods.
The magic of free-enterprise capitalism is that prices guide producers to make goods that consumers find most valuable. As Adam Smith famously wrote, prices lead producers to use scarce resources to provide the most value for society, as if guided by an “invisible hand.”
But growth, or change, can be difficult. Economist and political scientist Joseph Schumpeter used the term “creative destruction” to refer to the continual turmoil caused by new innovation displacing old ways of doing things. Thank goodness for creative destruction, who would trade their smart phone for an old flip phone, or even worse, a phone with a cord plugged into the wall? Nevertheless, each new innovation is disruptive to old industry and the transition can be difficult, even if ultimately beneficial.
