The defining issue of the next political term is ... [updated]

Okay now, sober up people.  It's a new government, not a bunch of people who can work miracles.

I'll say it again: the issue that will define the next few years, and certainly the next political term, will be how the politicians react to the world's economic crisis, and what they do to make it better -- or as is far more likely, to make it worse.

There's lots of questions that you and I and they need to be able to answer if we're going to be any sort of judge of what's going on.

Are booms and busts a natural part of the market process?  Something we all have to get used to? Or the effect of something that governments do to markets?

What should be the politicians' prescription?

Should they spend more, or spend less?

Tax cuts?  Or tax hikes?

Borrow hugely? Turn on the printing presses? Or should they cut their spending coats according to their revenue cloths?

Should they support higher prices, or let prices fall to their new levels?

Should they encourage the Reserve Bank to lower interest rates and flood the country with "liquidity," or to raise interest rates to increase the pool of real savings.

All these questions and more are not political questions -- they can only be answered with some knowledge of economics.  As Murray Rothbard used to say [hat tip Anti Dismal],

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

Allow me then to make a suggestion for those who want to understand what's going on, and to be able to comment intelligently on the various political responses.  A reading suggestion.  In fact, two reading suggestions.

The first is Henry Hazlitt's Economics in One Lesson -- the first lesson being that:

"the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

And the second suggestion is Gene Callahan's Economics for Real People, a colourful, easy-to-read guide to common-sense Austrian economics -- the only school of economists who predicted the present crisis (as you can see for yourself at the Mises Institute Bailout Reader), and who can explain why the boom and consequent bust happened the way they did.  Who would have thought you could explain what happened by reference to a drinking party with too few women, and a bus trip across the Sahara?

And don't worry: neither book is expensive, but even if you're on a severe budget they're easy enough to download and read free on PDF.  See:

• Economics in One Lesson - Henry Hazlitt [PDF]
• Economics for Real People - Gene Callahan [PDF]

And if reading isn't really your thing, or you find it easier to learn in other ways, you can take advantage of these twelve video interviews with leading Austrian Economists on Hazlitt's Economics in One Lesson, with one interview for each chapter.  Enjoy. :-)

UPDATE 1:  See, here's another example of a loud and vociferous opinion on economics with knowledge based largely on what she's picked up from the popular press.   Says Phoebe Fletcher at Tumeke: "We, like the rest of the world, need to keep spending. If we stop spending, our economy will collapse."

This is just bullshit on stilts.  It is not consumer spending that keeps the economy going, and the idea that it is has been enormously destructive.  What keeps an economy going is not consumption but production -- the production of real goods and services, whose sales fund the ability to produce even more goods and services. As George Reisman points out, the amount spent on production is far and away greater than consumption expenditure, and unlike consumption expenditure the money doesn't just disappear, it produces more production and is what actually drives an economy.

Consumption spending directs productive expenditure to particular areas of the economy, but it's  productive expenditure that drives it. (George Reisman gives the antidote to Phoebe's very common view: Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending.)

UPDATE 2: "It's a new government, not a bunch of people who can work miracles."  And the economic ignorance reaches right to the top.  The Times picks up the vibrations all the way from London, reporting that Prime Minister-elect John Key, a wealthy former currency trader, is "expected to implement tax cuts and extra spending" -- what Reason magazine calls "a Bushian/Keynesian combination."

The combination denies the reality that the gap between revenue and spending must be bridged by more than just slogans and good intentions, and will impoverish producers as surely as if the funds to do so came right out of their mouths -- as they inevitably will be.