A century ago, the contrast between the static, convergent models of neoclassical economics and the actual dynamism of capitalist growth led Schumpeter to describe the real historical process as one of “creative destruction”. This brilliant metaphor has been highly influential, especially in recent decades. But how does it work? What are the underlying causal processes?

Schumpeter was clear that causation is endogenous, but was not systematic about the actual processes. Two particular tendencies can be discerned in his descriptive writing: what we may term the agency and the systemic views. In the agency view, entrepreneurs innovate and this leads to growth – but this begs important questions, including why a particular type of economic system generates entrepreneurs, and why modern sustained per capita growth is one result of their innovations. In the systemic view, he stressed that capitalism creates the tendency to think in certain ways, e.g. to generate innovations, but did not explain how this happens. In addition, he was unclear about capitalist specificity in relation to growth.

This paper suggests an institutional basis underlying creative destruction and growth, based on historical and other evidence. It fits well empirically, e.g. with data on the profit rate distribution.