Complementarity and Substitution in the Theory of Capital

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Complementarity and Substitution in the Theory of Capital

This essay is an explanation and importance of complementarity and substitution in the theory of capital. Complementarity can be usually seen in goods with “sympathetic shifts in demand.” It is also important to realize the narrowness of the traditional treatment of complementarity.

Complementarity is analyzed in a single enterprise and also in the economic system as a whole. In the latter complementarity is analyzed in an economic system in equilibrium and also in disequilibrium. In an economic system with equilibrium all the acts of all individuals are consistent with each other and all factors of production are complementary. The system with disequilibrium on the contrary, realizes that while a factor of substitution eliminates another factor, another will be created, though possibly it might be of a different mode.

It is idealistic to think that capital structure can only exist in equilibrium, but realistically, capital structure is in a state of continuous transformation. Any major change creates a situation of instability of the capitalistic economy. A clear example of this is the accumulation of capital on profits and the inducement to invest. As capital accumulation grows, investment opportunities and the rate of profit decline.

Also, the existence of unused human or material resources provides potential complements for new productive combinations, which in result produce the changes in capital. These unused resources have two main functions in the world of dynamic change. First, they reduce the shock when disintegration exists, and second they stimulate the investment of capital goods complementary to them.

In conclusion, the theory of capital is a dynamic discipline, and is not in static equilibrium.

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