So, as regards net investment, in other words the contribution to capital formation, this was more than halved as a percentage of GDP in the mid 1970s. This meant two things. First, capital growth per employee, or per hour worked, fell. For a number of years, investment dropped so much that capital per employee in the business sector actually declined. In other words, each employee worked with less capital. In order to illustrate what capital per employee means, we can take an extreme example, namely what a lone worker can accomplish when digging with a spade and iron bar compared with a hydraulic excavator. The latter represents considerably more capital per employee than just digging with a spade, as well as substantially less physical effort for the worker. Therefore, we should expect productivity growth to fall when capital per employee declines. But there is also another indirect effect. With new capital, new technology is introduced into the production process. Investment is the means for putting new technology and research into practical production. Through investment, new methods and new technology are ushered into production processes. For this reason, we should expect less technological progress in production when capital formation falls. An excavator is so much more than a large number of spades; it represents entirely new technology that affects the whole production process. Figure 1 shows that capital formation, net investment as a percentage of GDP, fell in the mid 1970s from around 15 per cent of GDP to about 5 per cent.
The higher the  BIS Review 56/2003  1  long-term sustainable rate of growth, the easier it is for us to balance aggregate demand in the economy so that it coincides with what is available for household consumption, business investment and the needs of the public sector. So monetary policy cannot raise the potential growth rate but, in a worst case scenario, as we witnessed during the 1970s and 1980s, it can worsen our chances of attaining a high potential growth rate by affecting demand in the economy in the wrong way. Consequently, on an abstract level, the “formula” for economic growth is very simple. It is the weighted sum of labour force growth and capital growth as well as technological progress. However, when we compare growth between different countries, it is not that interesting to note that a country has high growth because its labour force is growing fast. It is the standard of living that is of interest and this does not have to improve just because the population and labour force are growing. The important issue instead is how quickly a country’s production grows per capita and this leads us into concepts such as productivity in a broad sense. For productivity is just that - production per capita. It can be measured per inhabitant, per employee or per hour worked. The concepts are closely related. One interesting observation is that the United States’ rapid growth in recent years has been attributable mainly to high labour force growth.