Monday, 24 September 2012

Britain’s former finance minister, Norman Lamont, doesn’t understand finance.

In the Financial Times today, he tries to argue against stimulus.

He actually makes the same mistake as that made by Messers Portes and Van Reenen which I pointed out recently here.

Lamont says, “Today’s Keynsians argue that given a sufficient stimulus, the economy will jump-start self-sustaining growth. One should always be wary of mechanical analogies in economics. There is a gap in the Keynsian analysis. How is the new burst of growth going to be sustained when at some point, the stimulus will be reversed….?”

First, you’d think that as a former finance minister he’d have discovered that stimulus just isn’t reversed and never has been in the sense that the monetary base and national debt over the very long term have constantly expanded in nominal terms, or “money unit” terms.

Occasional reversals have been needed, and will doubtless be needed in the future when an economy overheats. But that’s the only valid reason for “reversing”. Moreover, when that reversal is effected, it does NOT, REPEAT NOT stop economic growth being “sustained” to use Lamont’s phraseology.

All it does (to repeat) is to stop the economy overheating: it stops inflation getting out of hand. Indeed, in that excess inflation is positively damaging and HINDERS economic growth, the “reversal” actually PROMOTES economic growth: an irony that seems to be beyond the comprehension of Britain’s leading financial experts.

P.S. (a few minutes later).
Similar nonsense is being promulgated by Messers Taylor and Gramm in the U.S. See the first paragraph of Paul Krugman’s article here. .


  1. Spending caused demand which causes investment.

    That investment occurs earlier in time than it otherwise would have improving the productivity of the economy earlier than it otherwise would have.

    I think Bill calls it the Hysteresis effect.

    1. I’m not an expert on the definition of “hysteresis”, but in economics its usually used to refer to a feed-back loop: in particular the fact that the unemployed lose skills, which makes them even less employable. I’d guess that that is what Bill was referring to, but I can’t be sure without reading the relevant article he penned.


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