where there are frequent innovations (post 1970 period), once the technology turns to an
innovation (marketable form) capital and human capital factors are no longer substitutes of
production, on the contrary becomes complimentary which on the overall effects productivity
rates reflecting to faster economic growth rates. In this respect, physical capital and human
capital complimentarity simply reflects that skilled and more skilled educated labor is more
complimentary with new technology or physical capital than low human capital endowed labor.
This also explains the wider inequality among skilled and unskilled labor wages.
Second approach looks at physical and human capital complementarity in terms of market
structure. The argument states that complementarity arise through the nature of equilibrium
interaction (Matsuyama, 1999). Although an economy may never find itself in an unstable
equilibrium suggest multiplicity of stable equilibrium position. This could well reflect presence
of complimentarity which alters the structure of equilibrium observed.
Along the market structure arguments, in time new technologies are substitutes to older
ones. But, at the same time new technologies complements to older technologies. The importance
of complementarity can be best shown by balance between inventive and productive activity
As an outcome of the second argument of complementarity, unlike Romer (1987, 1990)
argument gains from specialization for all inputs could only be true with complimentary skill and
human capital levels. In this respect, Young's argument towards complimentarity is dominated by
steady state compliments our K/H criteria in explaining existing economic growth rates.
Third approach to complementarity could be viewed as the micro foundations at a firm
level. As the skilled labor use information technology, the pace of complimentary innovation
improves (Bresnahan et al., 1999). Thus, the author conclude that skilled-biased technological
change is a function of information technology. Along the same line, Grilliches (1969) and
Berndt et al. (1994) argue that skilled-biased technological change is a function of the way goods
and services are produced. From this argument the human capital development phase at the firm
level increases in the firms information technology stock that is associated with productivity
increases where high levels of human capital is available. However, firms which implement only
one component without the others are often less productive than firms which implement none at
To sum up, classical, neoclassical and endogenous economic growth theories,
complementarity. To be modest, this complementarity component could have become more
stated earlier, given the innovation lengthy time component can create a component for higher
substitutability among factors of production. But, in times of heavy industrial technologies (e.g.
smoke-truck), which changes every other five years ( unlike 20 years in pre 1970 period) and
high technological innovations change every other two years. As a result, substitutability of
inputs becomes less important than complementarity of inputs. This is why we have literatures
around like TQM, JIT, Benchmarking etc. All this explanations reflects economic theory as, in
the classical isoquant approach continuity and slope of the isoquant showing the level of
substitutability makes isoquants more convex to the origin, longer the use of that technology.
Graph 1. Changing Structure of Isoquants in Time of Adaptation
Thus, in a dynamic sense isoquant properties change in time reflecting stronger elements
technological changes, innovations force physical and human capital complementarity converge
to achieve faster economic growth rates.
As in the case of Uzawa (1965) and Lucas (1988), there are economists incorporating k
relationship, with z (gross average product of physical capital) trying to show the scarcity of
On the contrary, our attempt hypothesis that, increasing improvements in technology and
a number of innovations is aggravating the difficulty of human capital substitutability with the
existing technology. This dynamics is expected to be a more dominant retardant of economic
growth at the growing stages of globalization. The key element that led to globalization of
market seems to be low cost of information, know-how and technology transfer among regions
this product to every production element involved in the creation of GDP. Thus, given the
increasing share of schooling, R&D and other innovative efforts in GDP in developing
countries, the gap between technological improvements and human capital creation is widening
in terms of absorption and diffusion of technological advances which are commercialized with
short time lags due to increased competition. The hypothesis put forward, if proven to be true,
seems to have the potential to explain low growth rates of developed countries. As long as
technological improvements and competition rules stays the same, any country converging in
terms of income with the developed world will face similar problems, thus will be forced to
lower their growth rates.
Traditional human capital theory incorporates, educational (formal and informal),
human capital incorporates R&D and innovation, absorption, diffusion and learning by doing
within the human capital component.
2. Recent Developments in Economic Growth Theory
Frank Ramsey’s 1928 dated publication “A Mathematical Theory of Saving” could be
aims to optimize the decision making process between different time spans. In 1950’s R.F.
Harrod and E.D. Domar had an attempt to turnaround the static Keynesian growth model to a
models and economists. 1950’s also witnessed another important contributions to growth theory
by R. M. Solow. The contribution of Solow to economic growth theory can be summarized as
diminishing marginal returns on inputs and constant returns to scale which is very typical for
production functions. Advancements in the Solow’s theory integrated with constant
saving ratios had been utilized in developing the simplified general equilibrium model.
features of the model depicts that relatively lower GDP holding countries will be
facing faster growth rates. Solow reaches to this striking result, by looking at the capital factor
which faces diminishing marginal returns. In other words, countries with low physical capital per
worker will have higher capital return ratios, thus will have higher growth rates where this
occurrence will reflect to the incomes of developed countries. This type of convergence is known
as absolute convergence in economic literature. The narrow degree of convergence stems from;
stable nature of physical capital per labor, savings rate, population growth rate and from the