''There are 'salad days' of economic policy,'' I said to the annual dinner of the Economic Society in Canberra, ''days when the economy outpaces even people's expectations. These are the times when poor policy looks good enough, and ordinary policy looks celestial.''

It was the third year in which the China resources boom was massively boosting payments for Australian exports. Yet the salad days would be followed by the ''dog days'', I went on to say, ''days when celestial economic policy looks ordinary, and ordinary policy diabolical. It will be wise to save much of the economic fruits of the China boom, in case the extraordinary conditions we are enjoying turn out to be temporary - as they always have in the past.'' The rest is history. Australians now have to make the best of the dog days.

This book places before Australians the fateful choice we will make in the months and years ahead about how to respond to harder times after more than two decades of extraordinary prosperity.

The Coalition's decisive 2013 election victory in the House of Representatives gives it the opportunity to take decisions in the public interest. If it uses this opportunity to occupy the centre ground in political life and govern with the welfare of the great majority of Australians in mind, it will at once conserve most of the gains in our standard of living of the past 22 years and entrench itself in power for a long period.

Alternatively, if it seeks to govern in the interests of its most powerful supporters, it will not be able to lead Australia away from rising unemployment, large falls in living standards, social tension and growing dissatisfaction with our institutions. Its lifespan is likely to be short. A new government will have to deal with the problems, and we cannot be sure at this distance that it would do better.

Neither major party took policies into the election that came to grips with the great challenges facing Australia. Both parties proposed policies that would, indeed, impede solutions.

The choice for the new Abbott government is between two radically different approaches. We can continue to conduct our public life as if the approaches that seemed good enough in the salad days will still work in harder times. If this is our choice, we will continue to live behind the veil of ignorance that has descended over our public life during the past dozen years. We will make choices within a political culture that is distorted by the intrusion of market values into areas of public policy where they have a corrupting effect and produce poor results.

Or we can restore discipline of the kind that framed public choice in the reform era from 1983 to 2000, be prepared to think hard about policy rather than shout political slogans, and be guided by clear analysis even when it requires difficult decisions.

I call these the ''business as usual'' and ''public interest'' approaches to policy. They lead to radically different outcomes. If we continue with the former, we will live in greater comfort for a short while. But sooner rather than later we will experience deep economic recession with high unemployment.

The memory of 1974 to 1983 might help older Australians to imagine this future. In some ways the starting point is more difficult than it was in 1974, and the consequences of failing to deal with problems are worse. If we choose ''business as usual'', we can expect disappointment as public services are diminished bit by bit in response to successive fiscal crises. We can expect bitter political conflict within our society, and unhappiness about our institutions.

Such tensions would be all the more dangerous because they would emerge at a time of international financial uncertainty, in a world dragged down by the overhang from the global financial crisis, and with its causes mostly still at large. They would come at a time of ideological uncertainty, with doubts growing about whether the political and economic systems of the developed world still have the capacity to deliver prosperity to most of its citizens. They would be all the more dangerous because they would be emerging at a time of strategic uncertainty, when Australians' confident presumption that might is right and on our side is challenged by the rise of the Asian superpowers.

And they would come at a time of the growing impact of climate change.

The public interest is the much harder choice, but it has better consequences. For Australia to choose this approach, many of us - enough to influence policy decisions at a high political level - will have to put aside the slogans that have replaced thought about public policy so far in the 21st century. We will have to reconsider propositions to which we have given unthinking assent. That is hard. Harder still, we will have to change our minds when the evidence supports change. The public interest approach will not be chosen unless many Australians are prepared to support policies that sometimes go against their immediate personal interests. Political leaders will have to introduce changes that disappoint their strongest supporters.

The odds favour Australians choosing ''business as usual'' - what I have been calling, since 2004 the ''great Australian complacency'' of the early 21st century. But let us at least consider alternatives to sleepwalking into a deeply troubled future as if we had no choice at all.

T

he election has been followed by a shift from talking down to talking up the economy in the New Newscorp majority press. Consumer and business confidence has continued to rise since the August cut in interest rates. There has been a lift in some of the financial markets. There is talk that increased confidence from the change of government will lift spending and economic activity, and even that the resources boom will burst back into life. That the employment and growth and budget and external payments challenges will go away.

Sorry. That is not the way the economy works.

Increased investment in any industry is shaped by calculations of expected profit. None of the purported increase in confidence and none of the high-profile election promises of the government will change profit calculations in ways that increase investment. None will help us to meet the fundamental challenge: to improve Australian competitiveness and to increase investment and activity in trade-exposed industries while keeping the budget on a path to long-term stability.

The fall in the Australian dollar so far in 2013 helps, but it is not nearly enough.

The fall in the dollar so far has occurred without a framework for turning it into a real depreciation. There will be resistance and political tension associated with every bit of the squeeze on living standards. Whether the policies can be maintained through this pressure will depend on whether the Prime Minister and his government can explain the necessity and the fairness of what is being done. In short, making this big adjustment work depends on building a new reform era.

The new Australian political culture makes a prime minister seeking to govern in the public interest vulnerable to attack from an opposition focused on unpopular developments and measures. The dog days provide exceptional opportunities for negativity. The approach of the opposition matters. Whatever it might do to its own hopes for early return to government, an opposition that offers broadly constructive support for a new reform era would improve the prospects of a successful Australian transition.

If I am right and Australia gets it right, we will endure a period of moderate falls in living standards, without any part of our society suffering badly from the adjustment. After a while, living standards will start to rise again - moderately, in line with the higher productivity growth that a new reform era has made possible. We will be in a sound position to manage any major disruption to the international economy. We will feel comfortable with our democracy, and others will see our democratic capitalism in a positive light.

If we fail to take an early opportunity to adjust down the cost levels that have hung over from the China resources boom, we can look forward to economic instability, inflation, stagnation and high unemployment. Governments will do their best to deal with parts of the problem where solutions seem to be constrained less tightly by political reality, and stir up new nests of opposition for their troubles. We will become an unlucky country, run by second-rate people who share the country's bad luck.

If our country fails the challenge, Australians would be foolish to ignore the weakness in our democracy that contributed to failure - the rise in power of private interests; the fragmentation of the national conversation about policy; increasing comfort with conflict of interest. We would be wise to heed the lessons from the political history of other resource-rich countries in which democratic institutions have been broken by the power of resource-based wealth.

It matters to Australians that the public interest wins in the great struggle to shape the aftermath of the China resources boom. At a pivotal time in the spread of modern economic development throughout the world, the fate of democratic capitalism in our ancient continent matters for others as well.

This is an edited extract from Dog Days: Australia after the Boom (Black Inc, $19.99) by Ross Garnaut. Published on Monday.