Economists in the UK are facing a bit of a conundrum at the moment.

The economy is experiencing falling levels of output at a time when the number of people in employment has been rising.

To some extent this reminds me of the 70s when the global economy was experiencing high inflation and limited growth.

In terms of classic economics high inflation should fuel growth. At the time academic economists came up with the concept of stagflation but this made little impact on the kind of people who work as economic advisers who stick to the old rules they learned from reading Samuelson and Lipsey in college and took most of the world into recession.

There could be some practical explanations for this economic anomaly.

One is that the number of people in work has increased because more and more people, either through choice or necessity are taking up part-time employment.

Getting a job working 20 hours a week on minimum wage in a call centre or a fast-food outlet may well boost the number of people in employment but it is not likely to be much of an engine of economic growth.

The other possibility is that full-time workers are so sick of austerity, a drop in real earnings and an uncertain future that they are simply clocking in and out without any great enthusiasm.

There is probably a degree of truth in both these arguments. But it strikes me that the biggest problem the UK economy is facing is that everybody thinks the worst is yet to come.

When Labour won its first general election in almost two decades that party was heralded into power on a landslide on the back of an anthem of Things can only get better.

In terms of economics that was certainly the case by any measurable standard.

The 2007-2008 financial crash put a bit of a blimp in economic performance both in the UK and across the globe but by and large UK limited was in pretty good shape in comparison to its competitors.

We may have had historically high national debt - but which country did not.

Our debt per head of population compared with that of the US is almost pocket change.

And that is also the case when you compare us with our European neighbours.

Importantly UK national debt is largely long-term. We do not face the crisis of many European economies of being unable to pay off short-term debt and even if we had a lot of short-term debt, which we do not, the markets are perfectly happy to lend money to the UK at interest rates that most of Europe can only dream of.

And because Gordon Brown steadfastly set his face against joining the single currency from the moment he entered Number 11 Downing Street to his departure from Number 10, if we get a bit short of the readies we can just print the stuff.

No need for us to go cap in hand to the IMF and the European Central Bank and hand over political power for a bailout.

All other things being equal we should by now be cruising along with a reasonable, if historically unimpressive growth rate or around two per cent or more.

That, after all, was around the mark the new Chancellor of the Exchequer George Osborne was promising when he assumed office.

Now I was by no means a voice in the wilderness when I suggested that his plans to do a bit of tax cutting for the rich, public service cuts for the rest of us and a period of austerity was a passport to economic stagnation.

But so it has turned out.

The other day the Governor of the Bank of England, Sir Mervyn King, downgraded the bank's forecast for growth this year to zero and he is not very positive about next year either.

For the moment in terms of monetary policy he is keeping his powder dry and waiting to see how things turn out in the next few months. He has already made it clear he is looking at further quantitative easing by the turn of the year if things do not pick up.

To be fair I tend to take Bank of England economic predictions with a very big pinch of salt these days.

Sir Mervyn may not be singing Things Can Only Get Better but he appears, with no apparent justification, to be humming Always Look On The Bright Side of Life.

At the moment the bright side of life looks about as likely for the UK economy as it did for Eric Idle's future when he sang it in Life of Brian while being impaled to a cross.

Consider this. In August last year the Bank's inflation report expressed confidence that growth would recover modestly during the second half of 2011 and beyond. The economy was actually poised on the brink of a double-dip recession from which it has yet to emerge.

Both Mr Osborne and his boss David Cameron have been ranting on about the need for austerity. The reason things are not going too well is, apparently, all the fault of Europeans.

Those Johnny Foreigners who have been living beyond their means and are now facing the consequences are upsetting the UK's trade with those people on the other side of the Channel.

There is no doubt in my mind that the slowdown in the euro zone economies was bound to hurt business here. That seems logical.

What does not strike me as logical is that with the euro zone economies registering a fall in growth of 0.2pc in the second quarter of the year how this translated into a 0.7pc fall in the UK. That fall is the same as Italy suffered and at the last count I do not recall anyone suggesting we were facing the kind of problems that Rome is having to deal with.

I am all in favour of quantitative easing as a short-term vehicle to stimulate the financial economy, but if we want sustained growth we need investment in the public sector in much needed infrastructure projects and in revitalising the public service sector.

Austerity, across the UK and Europe has been weighed in the balance and found wanting.

Why can't people just trust the theories of John Maynard Keynes?

He was not just a magnificent economist but also a man who clearly understood markets and how they functioned.

He lost what little fortune he had in the Wall Street Crash but by the time of his death in 1946 he had amassed a fortune in excess of £500,000 in spite of his moral refusal to sell stock on a falling market because it would deepen the recession.

In today's terms that is probably greater than the entire personal wealth of Mr Cameron and Mr Osborne put together.

His personal fortune included an art collection with works by Cezanne, Degas, Modigliani and Picasso.

At today's prices those works are probably worth in excess of the entire wealth of all the rich boys Mr Cameron has in his entire cabinet.

- Arthur Macdonald