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_Complementarity and Substitution in the Theory of Capital _
By: JK
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.
Word Count: 336
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