FREE ESSAY ON COMPLEMENTARITY AND SUBSTITUTION IN THE THEORY OF CAPITAL

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. It is useless to view capital change as quantitative change in one factor
and supposing that other factors remain constant. An important topic in the capital
theory is the internal capital change, which is the reorder of existing capital for
unexpected change. And finally, all that has been mentioned is not only essential in the
theory of capital, but also has a great importance in the theory of industrial
fluctuation.