Germany without capital ships

Would Germany have been better served by abandoning capital ships for smaller ships, aircraft, and guns?

Not necessarily: capital ships tied down British resources even when they were individually outmatched.

Battleship money cannot be converted directly into aircraft or smaller ships because money, yards, machinery, and skilled labour are not perfectly interchangeable. A limited German surface force could compel British spending on battleships, carriers, reconnaissance, and distant-cover forces even when its ships were individually outmatched. Without that threat, Britain could concentrate more capital ships in the Mediterranean and Indian Ocean while beginning anti-submarine escort production earlier. Cruiser and submarine raiders would still impose costs, but they would be easier to contain without a Scharnhorst- or Bismarck-sized breakout to fear. The strategic value of the German capital ships therefore lies partly in the British resources they immobilized.