It doesn't often lead to more creativity. It leaves a bunch of good ideas on the cutting room floor because of technical restraints. Better AI, more AI on the screen at once, originally when weather effects and other similar immersion effects are all things you seem to be taken for granted and ignoring that all this comes first from better hardware. There is far more creativity in terms of software due to better hardware than from lesser hardware where you are stuck with very little processing power available beyond needed to run the basics of the game.

So in other words since the hardware is so weak, developers have to hamstring their vision for a game in order to work on the underpowered hardware? How can you spin this into a good thing?

But it has to do, when you are making something that costs 200 milions and is made by 2000 people only because you need to keep up with cutting edge graphics because the console maker is pushing that specially on the marketing ("most powerful console ever", "first 4k console", "real 4k console", etc)then creativity is hard to achieve, the art is lost in the process many times, there is a lot of preassure because your game can make your company lose even hundreds of milions so you cannot take any risk, you need to repeat what once worked once and once again and follow all the trends of the market as boring as they can be sometimes  (The brown belic shooter age was annoying) and there is little space for personality on a work made by thousands of people many times allocated in different places, the magic that can be achieved with a united 100 member team is harder to achive with a team 20 times bigger but is often the shiny one the one getting most of the sales because is easier to sell a good looking game as shallow as it can be.

The whole idea is based on smoke and mirrors.

What would happen if the Switch was the strongest console on the market? The same exact thing as in every other generation. The biggest developers would push the graphics to the absolute limit in an effort to make the best looking games.

If the Wii U was the most powerful console? Same thing. If the Wii was the most powerful console? Same exact thing.

It's irrational to even suggest that, if we stopped at the Switch, people would give up on making their games look good and just focus on "innovation". In every single generation, we've had developers working to give their games a graphical edge.

You give people sports cars, they race. You give people go-carts, they race them, too.

Suda 51 claimed No More Heroes was born specifically because he knew the hardware limitations forced him to think like an indie developer and the focus of the console was it's control scheme. The console made him refocus his priorities. You are trying to turn his argument into one must be at the expense of the other but what he is saying is one encourges the other in a way that stronger hardware alone does not. It is a mindset in the developer, but weaker hardware does create a certain, "challenge" that can inspire a different kind of mental creativty.

My favorite sports series is PES on Wii because the RTS style game play is superior to anything on stronger hardware.

Starcraft and Diablo are, "possible" to play on home consoles but like Skyrim is graphically gimped on Switch to the point of not being worth it, the user interface of home consoles is so gimped and limited that porting those games is not worth it.

Basically, you are both correct because you are making two different arguments.

The video game industry is no different than most industries in life. If you are in sports you want to be competiting at the highest level against the best competition. If you are a developer you rather be pushing the cutting edge of the tech than trying to squeeze out left over juice out of a used lemon. Thats the issue Nintendo is running into is young talented developers want to work on the Uncharteds of the world and not the [insert many behind the times Nintendo IPs]. 

Rarely do developers ever use resources for better AI. The Last of Us and Final Fantasy XV are modern examples of high-production games that ran on powerful hardware with some of the same AI problems that have plagued their genres for generations. AI is CPU-bound anyway, and groundbreaking innovative techniques deal more with algorithmic optimization than hardware optimization. Many video game developers are pretty lazy though, and just proceed with the standard if-then-else scripts that they've been using for decades. 

The most immersive game for me this generation has been Undertale, a game with intentionally 8-bit visuals. Games like Super Metroid and Earthbound also have more immersive worlds than plenty of modern titles with movie-esque unrealistic scenarios and characterizations. Sure, visual fidelity can aid immersion, but only at the margins. If your game is unimersive from the start, you're not going to make it so with pretty visuals. 

And this is the problem I have with value priorities of modern video game publishers. A game is only better to them if they can say that it has more, regardless of whether or not there is a noticeable affect on the gameplay. Does it have better AI? Great! Does it make the game more than marginally better? Who cares? We can say that it has better AI! Does it have 8k textures? Great! Does it make the game more than marginally better? Who cares? Does the game have twenty modes? Great! Are any of those modes unique from the others or are all twenty of them fun to play? Who cares! It has twenty!

It is all about quantitative list checking and very rarely about a fun and cohesive full package. Often the publisher's idea of better, is better production values and assets. And while this can aid creativity for those who have some grand ideas, more often than that it aids publishers to release boring eye-candy.

So you're saying Nintendo is too incompetent to produce a game with great graphics and good gameplay?

This. As a consumer, I don't care about a game's budget. If production costs are too high, developers and publishers should think about methods to attract gamers in other ways than shiny graphics. We reached a point where graphical fidelity does not create better games anymore.