The Online Library of Liberty

A project of Liberty Fund, Inc.

• Acknowledgements
• Part One: Introduction
• Walter E. Grinder, In Pursuit of the Subjective Paradigm: Walter E. Grinder
• Austrian Economics In the Present Crisis of Economic Thought
• Part Two: Setting the Stage
• The Significance of the Austrian School of Economics In the History of Ideas
• The Role of Expectations In Economics As a Social Science
• Professor Shackle On the Economic Significance of Time
• The Science of Human Action
• Model Constructions and the Market Economy
• Part Three: the Market Process
• Some Notes On Economic Thought, 1933–1953
• Methodological Individualism and the Market Economy
• Economics As a Social Science1
• Ludwing Von Mises and the Market Process
• Part Four: Problems In Macroeconomic and Capital Theory
• Complementarity and Substitution In the Theory of Capital
• Mrs. Robinson On the Accumulation of Capital
• Sir John Hicks On Capital and Growth: (review Article)
• Sir John Hicks As a Neo-austrian: (review Article)
• A Reconsideration of the Austrian Theory of Industrial Fluctuations
• Part Five: On Economic Policy
• Causes and Consequences of the Inflation of Our Time
• The Market Economy and the Distribution of Wealth
• Cultivated Growth and the Market Economy
• Appendix: Economic Writings of Ludwig M. Lachmann

Complementarity and Substitution in the Theory of Capital

1.

Complementarity, introduced into economic dynamics by Professor Hicks in 1939,1 has since given rise to a host of bewildering and intricate problems. Soon Dr. Lange, in defending the Hicksian view of complementarity against overt criticism by Professor Machlup,2 had to warn us against confusing the effects of complementarity with those of a “sympathetic shift in demand.”3 But a few years later the same Dr. Lange relegated complementarity to a scornful footnote.4 For this he was promptly taken to task by Mr. Harrod, who told us that “in the context of the enquiry, in which we are interested in changes of the prices not of highly specific factors, but of widely employed factors or categories of factors ... the co-operant attribute predominates.”5 Mr. Harrod also expressed the view that “factors may be co-operant or alternative to one another. The latter attribute belongs to factors that are very specific. Thus if tool B becomes cheaper it may lead entrepreneurs to have no further use for tool A (which does roughly the same job).”6 This view plainly contradicts Professor Hicks's statement that “there is a tendency for factors jointly employed in the same firm to be complementary.”7 There is thus good reason to believe that this is a field in which the wise walk warily.

We may start by recognising with Professor Hicks that goods subject to “sympathetic shifts in demand” will probably be also complementary goods, that “companiable commodities will very usually be complements.”8 Where the cause of a dynamic change lies on the demand side, the effects of complementarity and companiableness may therefore be almost impossible to disentangle. It follows that if it is our aim to study the effects of complementarity on dynamic change, it will be better to choose as our standard model a case in which the change originates on the supply side. This method we shall adopt in the latter part of this paper.

Reprinted from Economica 14 (May 1947).

Next, we have to realise that the traditional treatment of factor complementarity in economic theory has been quite unduly narrow. The standard case discussed is here, of course, the labour-land-capital relationship in the distribution of incomes, Mr. Harrod's “widely employed categories of factors.” But what precisely is our criterion of classification of these categories? And why cannot complementarity exist within each category? In this paper we shall endeavour to show that it is in the theory of capital that the concept of complementarity proves a most powerful lamp to throw light into some notoriously dark corners.

2.

To reduce that heterogeneous assortment of buses, blast furnaces, telephone kiosks and hotel-room carpets that we call Capital to an intelligible order, to exhibit the design of the pattern into which all of these have to fit, is the chief task of the theory of capital. This is usually done by representing capital as a “stock” or “fund” the component parts of which are units of money value. our heterogeneous assortment is thus converted into a homogeneous aggregate by using Money value as a common denominator. As Professor Hayek has shown, this becomes impossible under conditions of dynamic change likely to cause relative value changes.

In a homogeneous aggregate each unit is a perfect substitute for every other unit, as drops of water are in a lake. Once we abandon the notion of capital as homogeneous, we should therefore be prepared to find less substitutability and more complementarity. There now emerges, at the opposite pole, a conception of capital as a structure, in which each capital good has a definite function and in which all such goods are complements. It goes without saying that these two concepts of capital, one as a homogeneous fund, each unit being a perfect substitute for every other unit, the other as a complex structure, in which each unit is a complement to every other unit, are to be regarded as ideal types, pure equilibrium concepts neither of which can be found in actual experience.

In reality we should expect individual capital instruments to be substitutes for some, and complements to some other instruments. Each locomotive, we may surmise, is complementary to a number of wagons, but at the same time a more or less perfect substitute for every other locomotive. If this is so, the next question we have to ask is whether, over the field of capital as a whole, complementarity or substitutability is the dominant relationship; or, more precisely, under what conditions we may expect one or the other to predominate. Mr. Harrod believes that among capital instruments substitutability prevails. But we should require further evidence. Enthusiasts of econometrics may well have a dreamy vision of new playgrounds to conquer and new toys to hug, for is this not precisely the kind of situation in which the harassed theorist has to “appeal to the facts”? But a little further reflection shows that here, as so often, “the facts” refuse to give a simple answer to our question.

The view that factor complementarity and substitutability are alternative modes of the relationship between factors in the same situation rests on a fallacy. There are too many instances of change, of which labour-saving invention is the most familiar, where complements are suddenly turned into substitutes; or, even more intriguingly, in which capital (our supposedly homogeneous stock!) is split into two parts one of which becomes a substitute for, while the other remains a complement to, labour. There are also cases where both relations appear to exist side by side. If a firm has four delivery vans, each delivering goods in a quarter of the town, are they complements or substitutes? According to Professor Hicks they are the former, as “factors jointly employed in the same firm”; according to Mr. Harrod they are bound to be the latter (“doing roughly the same job”). But are they not really both? Furthermore, while locomotives may be substitutes, and locomotives and wagons complements, from the point of view of the time table, the production plan for the railway system as a whole, all trains are complements. But if trains are complements, how can locomotives be substitutes?

These examples go to show that factor complementarity and substitutability are not exclusive alternatives. Factor complementarity and substitution are phenomena belonging to different provinces of the realm of action. Complementarity is a property of means employed for the same end, or a group of consistent ends. All the means jointly employed for the same end, or such ends, are necessarily complements. Factor complementarity presupposes a plan within the framework of which each factor has a function. It is therefore only with respect to a given plan that we can meaningfully speak of factor complementarity. Factors are complements insofar as they fit into a production plan and participate in a productive process.

Substitution, on the other hand, is a phenomenon of change the need for which arises whenever something has gone wrong with a prior plan. Substitutability indicates the ease with which a factor can be turned into an element of an existing plan.9 A change in plan is possible without a change of end. The importance of substitutability lies in that it is usually possible to pursue the same end (output) with a different combination of factors. The importance of complementarity lies in that “technical rigidity” (invariability of the mode of complementarity) may often make it necessary to change the end rather than the means; an existing combination of factors is used to produce a different output.

The change in question must be possible but not predictable. If it were predictable there would be no need for substitution. We should take it into account in drawing up our plan. Here, as elsewhere in the theory of action, predictable change is indistinguishable from any other known element of the situation. The designer of a motor-car is as unlikely to forget the lamps as the mudguard.

A production plan involving a large number of factors and with a complex complementarity pattern is particularly vulnerable in case any of them breaks down. We safeguard ourselves against such occurrences by keeping a reserve stock of perfect substitutes for the operating factors (spare parts). We diminish its necessary size by devices calculated to increase substitutability, like the standardisation of equipment. Where the complementarity pattern of the plan is complex, a high degree of substitutability between operating factors and factors held in reserve may be required to keep it going. We have to provide for many minor changes in order to prevent a major one.

We now understand why the locomotives in our example gave us so much trouble. In saying that each locomotive is complementary to so and so many wagons we think of a given production plan (time table). In saying that each is a more or less perfect substitute for every other we are, as it were, turning our mind to an entirely different situation, one in which our original production plan with its allocation of locomotives to trains has been modified. In the first case we think of a given situation, in the second of a change in the situation.

This is not to say, of course, that every change will turn all complements into substitutes. Most factor complementarities, to be sure, can stand up to a number of changes, some of them, like the one mentioned, may outlast almost any change. Our point is merely that every major change is bound to upset some plans and disrupt some complementarities. On the other hand, it is impossible to speak of substitutable factors without defining the kind of change we wish to provide for. One cannot help feeling that the plant bred in the rarefied atmosphere of a static world with a given system of wants, does not stand up very well to the rough climate of a dynamic world which we cannot but study in terms of plans, but in which failure and revision of plans is an every-day occurrence.

It is now clear why factors jointly employed in the same firm tend to be complementary: they are all means to the same end, elements of the same plan. Unity of management here ensures consistency of action.

3.

We shall now extend the scope of our analysis from the individual enterprise and its production plan to the economic system as a whole. Shall we now find factor complementarity throughout the system? At first sight one might think that here, where factors are employed, not in one production plan but in many, there can be little or no complementarity. But further reflection shows that this need not be so. A firm, carrying out a plan extending over a period of time, is during that period in equilibrium, as equilibrium means essentially consistency of a number of acts by different individuals, or the same individual. We may now imagine an economic system in equilibrium in the sense that the acts of all individuals, producers and consumers, are consistent with each other, hence so are all production plans. The stationary state is the simplest type of such a system, but generally foreseen change will not affect the essence of the matter. In such an economic system in equilibrium, complementarity will exist between all factors in the system in precisely the same way as in each firm. For where the production plans of all firms fit into a coherent whole, they may, of course, be regarded as elements of one large plan constituted by this whole.

Let us now assume that an unforeseen change throws our system into disequilibrium. Substitution of factors ensues. It is important to realise that while factor substitution destroys one set of complementary relations, another will be created, though possibly of a different mode. If the factor substituted is a perfect substitute for the factor displaced, nothing further need be done. We fit the spare part into the machine, and it continues to run as before. But if the factor substituted is not a perfect substitute, there may have to be an adjustment of other factors. In the former case the new factor merely joins an existing combination, in the latter the coefficients of production,10 the proportions in which the various factors are combined, will have to be altered. A change in the coefficients of production in one firm will, of course, have repercussions throughout the economic system and entail further acts of substitution in other firms. A sequence of changes will permeate the system, affecting prices, output and coefficients of production. But however many subsequent acts of substitution our first act may entail, as long as factors are used together in productive processes there will always be factor complementarity.

What we have said so far about complementarity and substitution applies to factors in general. Now, capital resources are more sensitive to unforeseen change than are either labour or permanent resources, and this marks them out for special treatment. Capital goods are products of the human mind, artefacts, produced in accordance with a plan. Capital gains and losses as effective tests of such plans will therefore affect decisions concerning capital production in a sense in which wage fluctuations, in general, do not affect the birth-rate.

Every capital instrument is designed for a purpose. Where it is highly specific, this purpose is identical with a certain kind of (anticipated) use. Where it is “versatile,”11 it may cover a wide range of uses. But in any case it is planned for some kind of use, and failure to succeed in any of them as reflected in loss of earning power will result in revision of plan. At the moment at which a new machine is installed in a factory, one production plan impinges upon another. If the second plan, in which our machine is in use, fails, there will be repercussions on the first kind of plan: fewer such machines will be produced.

4.

We have seen that if capital is to be regarded as a homogeneous aggregate, all its constituent elements have to be perfect substitutes. But the complementarity of capital resources (plant, equipment, working capital) is a fact of experience. Hence, if we are to take account of it, we have to give up the “aggregative” conception of capital in favour of a structural conception. But if capital is to be regarded as a structure, what determines its shape? We have to allow for the heterogeneity of different capital resources which now have different functions. But what determines the character of these functions?

The shape of the capital structure is determined by the network of production plans. Each production plan utilises a given combination of factors. The proportions in which factors enter a combination, the coefficients of production, express the mode of factor complementarity in it. More particularly, the proportions in which the various capital resources enter it express the mode of capital complementarity in it, what we shall call the capital coefficients. The capital coefficients in each combination are thus the ultimate determinants of the capital structure, at least in equilibrium. In disequilibrium the degree of consistency between plans is a modifying factor.

Strictly speaking, of course, a capital structure in our sense can only exist in equilibrium, where all plans are consistent with each other, and the network of plans displays the firm outline of a clear and distinguishable pattern. But in dynamic reality this structure is in a state of continuous transformation. As production plans prove inconsistent and fail, the outline of our pattern becomes inevitably blurred. Plans have to be revised, new combinations formed, old combinations disintegrate, even those which persist have to undergo an often drastic modification of their factoral composition.12 In reality the coefficients of production are ever changing. Every day the network of production plans is torn, every day it is mended anew. Under these circumstances we shall find some, at least temporarily, unutilised capital resources while others are scarce. In any case, in the world of our daily experience all unexpected change entails more or less extensive capital regrouping.13

The theory of capital has therefore every reason to occupy itself with the network of production plans. It is readily seen how failure of plans affects investment decisions and how, broadly speaking, complementarity serves as an amplifier of internal capital change. These phenomena of internal capital change the theory of capital neglects at its peril. Unfortunately, scant attention is paid to them in most of the economic thought of our time,14 which, as regards capital change, seems almost exclusively preoccupied with problems of investment, i.e., problems of external capital change. Interrelations between internal and external changes are almost completely ignored.15

We now must pause for a moment and contemplate our results against the background of traditional capital theory. We have tried to show that a theory of capital based on a notion of homogeneity is bound to miss our problem entirely. It is to a structural conception of capital that we have to look for encouragement and inspiration. But in the sphere of human action Structure implies Function, and Function, where a number of factors is involved, implies co-ordination and complementarity.

Such a structural conception of capital is to be found in the system of Böhm-Bawerk. Contrary to what appears to be a widely held view, Böhm-Bawerk's chief contribution to the theory of capital was not the introduction of time, but of complementarity over time. Here, to be sure, the “stock of real capital” becomes a flow, but not a homogeneous flow. Its elements, the individual capital goods, are not, like drops of water, perfect substitutes, but each has its place in the flow. If it is true that Böhm-Bawerk's “stock of intermediate products” is essentially a wage fund in motion, we must remember that its different elements move at different speeds.

Hides, leather, and shoes in wholesale stocks, are not just physically similar goods at different points of time, but products at different stages of processing. And “processing” requires the existence of a production plan in which complementary factors come into operation in accordance with a time schedule. Time is relevant here as the dimension of processing, the medium of complementarity. Thus, what really matters is not time, but complementarity over time. On the other hand, under the stationary conditions characteristic of Böhm-Bawerk's system all capital instruments in existence at the same point of time are necessarily complements. Thus, whatever their position in time, all capital instruments are linked together by complementarity.16

We may say that within the realm of capital complementarity is an all-pervasive fact, at least as long as equilibrium is maintained.

If we regard capital as a complex structure the pattern of which is determined by the proportions in which the various capital resources co-operate in productive processes, it follows that all capital change, including new investment, is bound to modify the structure. Under these circumstances it is difficult to see how there could be “widening,” or even “deepening” of capital. As Professor Hayek has shown, “widening,” i.e., the multiplication of existing equipment, is, for the whole economic system, impossible in the absence of unused resources, while it is possible in some industries at the expense of other industries. “For the economic system as a whole the first of these alternatives is possible only if there is a labour reserve available. But in any particular industry the required additional labour may be attracted from another industry.”17

Now, as we shall see in the next section, the existence of unemployed labour and unutilised resources is very important for the dynamics of capital, because they provide potential complements for the new productive combinations. But in their absence there can be no capital change which leaves coefficients of production unaffected. “Widening” of capital in some industries must be accompanied by disintegration of existing factor combinations elsewhere. The contrary impression is evidently due to the habit of confining our attention in matters of capital to what happens in a few expanding industries. The notion of capital “widening” is apparently an empirical generalisation of the well-known fact that the accumulation of capital as a rule takes the form of successive growth of new industries, and that at each moment a few expanding industries appear to bear the brunt of it. We may accept this empirical generalisation, but the impression that we may safely neglect what happens elsewhere, is nevertheless mistaken. Furthermore, even capital “deepening” is bound to modify not only the coefficients of production as far as labour and capital are concerned, but the capital coefficients. It is hard to imagine cases in which the proportion of capital assets to other factors increases while relative proportions of plant, machinery, tools, raw materials, etc., remain constant.

In other words, there can be no major change which leaves the existing structure and composition of capital intact. All such change tends to create situations in which there is too much of some capital assets and too little of others. In this fact lies the ultimate reason for that instability of the “capitalistic” economy which so many deplore and so few understand.

5.

We shall now test the efficiency of the analytical tools we have forged by applying them to a problem which in recent years has become a focus of economic controversy, viz., the effect of the accumulation of capital on profits and the inducement to invest. According to a powerful school of thought this effect is bound to be depressing. As more and more capital is accumulated, investment opportunities gradually become exhausted and the rate of profit declines. “Other things being equal, the marginal efficiency of capital will be lower the greater the amount of capital goods already possessed.” (Author's italics.)18 We shall endeavour to show that the accumulation of capital gives rise to processes which make it impossible for “other things” to remain equal. On the other hand, Professor Hayek has pointed out that there are cases in which investment actually raises the demand for capital.19 An obvious example would be a copper mine in Central Africa in which we could not even begin to sink capital without having first built a railway from the coast.

It is clear that the issue hinges on complementarity and substitution. The “depressionists” evidently regard capital as a homogeneous aggregate; each unit of capital is a perfect substitute for every other unit, and accumulation means essentially an addition of further units to a pre-existing homogeneous stock. It is equally evident that Professor Hayek's view is based on complementarity. The “investment that raises the demand for capital” is investment in capital goods complementary to those to be constructed later.

The question now confronting us is, which of the two rival influences, the stimulating influence of complementarity or the depressing effect of substitutability, will on balance prevail within the economic system. At first sight it might be thought that, as complementarity is all-pervasive while substitution will probably be confined to a few expanding industries in which new capital goods are installed, the former influence will prevail. But this would be a premature conclusion based on an unwarranted use of ceteris paribus assumptions. For the effect of new capital assets on the capital structure is not confined to those sectors in which they are installed and their immediate neighbourhood. By its effect on the coefficients of production, the breaking-up of existing combinations, and the formation of new ones, the accumulation of capital affects the whole economic system. But its modus operandi is gradual, depends in each case on the composition of the factor combinations affected, and is certainly very different from that usually assumed in capital theories based on the notion of homogeneity. We shall illustrate it by an example.

Let us assume that there is an increase of capital in the film20 industry. More cameras, studio equipment, etc., are produced and installed. The greater number of films produced makes it necessary to have more cinemas21 (complements). As film rentals fall cinema earnings rise. To the extent to which there is unemployed labour and unutilised resources new cinemas will be built. But this may be possible only within fairly narrow limits. The typical location of cinemas is in the central sector of urban areas where as a rule there are no empty spaces. Any considerable rise in cinema earnings, together probably with some decline in the demand for other forms of entertainment,22will thus cause existing capital equipment to be turned over to new uses. Theaters, ice rinks, dance halls, will be converted into cinemas. Existing factor combinations, house-cum-theatre, house-cum-ice rink, etc., will disintegrate. But while rents earned on such buildings will increase, considerable capital losses will be suffered on theatrical settings and costumes, freezing equipment, and musical instruments. In fact, unless these can be sold to somebody able to fit them into a new combination, they may altogether lose their capital character and become scrap. On the other hand, owners of “free” capital instruments complementary to them are now able to get them at “bargain prices” permitting large capital gains.

The accumulation of capital will therefore have what we may term a “chain reaction” effect. The initial change entails a sequence of subsequent changes as the final result of which the structure of capital becomes modified. The new capital instruments cause the disintegration of existing combinations, increase the earning power of elements complementary to them, and set free those for which they are substitutes. The latter will either lose their capital character or have to seek out other complements, new partners with whom to enter into new combinations. For this they depend on the existence of, at least temporarily, “free,” i.e., unutilised capital goods, or on the breaking-up of other existing combinations. But the disintegration of the latter, by setting free some elements, would again create the same problem. The process will continue until all discarded factors have either found their way to the scrap-heap, or found “free” partners, or found owners willing to wait and hold them until a complement turns up.

This conclusion incidentally throws new light on the vexed problem of “excess capacity.” We now realise that in a world of dynamic change unused resources have two functions. Firstly, they act as shock-absorbers when combinations disintegrate. Secondly, their existence provides an inducement to invest in those capital goods which are complementary to them.

We may therefore conclude that the production of new capital instruments will have different effects on the earnings of different existing capital resources. Those to which they are complements will earn more, those for which they are substitutes will earn less and often nothing at all. To ask what is the effect of the accumulation of capital on “the” rate of profit is to ask a meaningless question, since one of its main effects is to make rates of profit diverge. If in equilibrium it is possible to speak of “a” rate of profit, the accumulation of capital will destroy such equilibrium.

6.

We may now briefly survey the chief results of our enquiry.

Our first result, and the most general, is the inadequacy of static equilibrium methods in the theory of capital which clearly emerges as an eminently dynamic discipline. The concept of complementarity, which originated in a static three-commodity world, with a given system of wants, does not stand up well to its transplantation into the sphere of dynamics, and is not very well suited to the kind of plan analysis appropriate in this sphere.23 At any rate, factor complementarity and product complementarity cannot be treated on the same level.

Secondly, it is useless to treat capital change as quantitative change in one factor under ceteris paribus conditions, when it is plain that at least some cetera will not remain paria. What is really needed is a new type of sequence analysis which enables us to follow up, sector by sector, the chain of changes set in motion by the impact of the original change. We may add that this applies at least as much to technical progress as to the accumulation of capital.

Thirdly, internal capital change, the regrouping of existing capital resources in response to unforeseen change, emerges as by far the most important topic of capital theory, although in present-day economic thought it is almost completely ignored. Undue preoccupation with mere external capital change, like investment, preferably in quantifiable money value terms, in the discussion of which internal repercussions are neglected, is seen to lead us nowhere. Furthermore, the question of the effect of the accumulation of capital on “the” rate of profit and the inducement to invest now appears as a meaningless question. Some profits will rise, some will fall. Unforeseen change always engenders capital gains and losses. It remains a question of some interest, to what extent the expectation of such gains and losses influences the inducement to invest. But in any case the installing of new capital instruments cannot meaningfully be regarded as “growth” of anything concrete or measurable. For it is bound to entail the, at least partial, destruction of some existing capital values.

Finally, if all this is important for the theory of capital, it is of equal, if not greater, importance to the theory of industrial fluctuations. Perhaps the concept of net investment pure and simple, as chief motor of economic change, has by now yielded us all that it is ever likely to yield. Between 1900 and 1915 economists like Cassel, Spiethoff, and Professor Robertson, basing their conclusions, not on alleged “psychological laws,” but on a study of the actual events of the time, laid the foundations of a theory which takes account of intersectional maladjustment as a result of disproportionate growth of different groups of capital resources. The overinvestment theories currently in fashion are now seen to be fallacious. But what are we to substitute for them? This problem of factor substitution in economic theory will, if we may hazard a guess, occupy economists for many a day to come.

NOTES

[[1]]In the realm of statics the theory of marginal productivity is, of course, a set of variations on this theme. In dynamics, on the other hand, most of Professor Hayek's work implies complementarity of different capital resources. What constituted the novelty was the explicit introduction of complementarity into dynamics.

[[2]]“Professor Hicks' Statics,” Quarterly Journal of Economics 54 (February 1940):277–97.

[[3]]Oscar Lange, “Complementarity and Interrelations of Shifts in Demand,” Review of Economic Studies 8 (October 1940): 58–63.

[[4]]Price Flexibility and Employment, 1944, p. 9n.

[[5]]R. F. Harrod, “Review of Oscar Lange's Price Flexibility and Employment,” Economic Journal 56 (March 1946): 102–7.

[[6]]Ibid.

[[7]]Value and Capital, p. 98. Cf. also J. R. Hicks, Théorie mathématique de la valeur (Paris: Hermann & Lie, 1937), p. 49.

[[8]]“The Interrelations of Shifts in Demand,” Review of Economic Studies 12 (1944):73.

[[9]]The factor in question may have to be taken out of another plan, or may be temporarily unemployed, or may be newly created for the purpose.

[[10]]Walras's “coefficients de fabrication.” Cf. his Éléments d'économie politique pure, éd. défin., 1926, pp. 211–12.

[[11]]The term is due to Dr. G. L. Shackle. Cf. F. A. Hayek, Pure Theory of Capital (London: Routledge & Kegan Paul, 1941), p. 251n.

[[12]]The revision of plans is the function of the entrepreneur, the carrying out of existing plans is the function of the manager.

[[13]]Some economic and financial aspects of capital regrouping are discussed in “Finance Capitalism?” Economica 11 (May 1944):64–73.

[[14]]Professor Hayek's work is, of course, the outstanding exception.

[[15]]For example: “The prices of existing [author's italics] assets will always adjust themselves to changes in expectation concerning the prospective value of money. The significance of such changes in expectation lies in their effect on the readiness to produce new [author's italics] assets through their reaction on the marginal efficiency of capital.” J. M. Keynes, General Theory of Employment, Interest, and Money (New York: Harcourt, Brace & World, 1936), p. 142.

In other words, changes in expectations have no significance for the regrouping of existing capital assets.

[[16]]Böhm-Bawerk's “third ground,” the higher productivity of roundabout processes, lends itself easily to interpretation in terms of complementarity over time.

[[17]]The Pure Theory of Capital, p. 286.

[[18]]J. R. Hicks, “Mr. Keynes' Theory of Employment,” Economic Journal 46 (June 1936):249.

[[19]]“Investment That Raises the Demand for Capital,” Review of Economic Statistics 19. (November 1937): 174–77. (Now reprinted in F. A. Hayek, Profits, Interest, and Investment [London: G. Routledge & Sons, 1939], pp. 73–82.)

[[20]]It is not necessary to assume that the film industry is the only expanding industry. But we have accepted the empirical generalization that at each moment current accumulation is likely to show itself prominently in a few expanding industries. What we wish to rule out, and would regard as highly unrealistic, is an increase of capital in all industries in the same proportions.

[[21]]We assume that total demand increases pari passu with total supply. It is, of course, possible to deduce the depressing effect of accumulation merely from the postulate that total demand falls short of total supply, as “the marginal propensity to consume is always less than one.” But there is no reason to believe that this is necessarily so. Cf. A. F. Burns, Economic Research and the Keynesian Thinking of Our Times (26th Annual Report of the Nat Bureau of Economic Research, June, 1946, pp. 18–19).

[[22]]That total demand increases pari passu with total supply does not entail that this will be so in every market.

[[23]]In this respect, the discovery of the fact that “sympathetic shifts,” i.e., dynamic demand changes, are liable to throw our whole system into indeterminacy, should have served us as a warning.