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Juniors of my old high school,
It has been a great pleasure to receive your letter and notice such a keen interest in economics and politics at your early age. The fact that you are already following the evolution of the presidential race and that you are asking questions about it show a great desire to learn and find out new things. I will be more than happy to share some economics pointers with you that, hopefully, will be able to fully answer some of your dilemmas.
You have clearly notice what the economic trends are for the two candidates. Indeed, Republicans, and George W. Bush is no exception in this sense, have always boasted the importance of the individual and of non-governmental intervention in the market. On the other hand, the Democrats believed that not only could the government regulate some of the less efficient economic processes on the market, but it could always intervene in things like education or health care and increase these respective branches' budgets.
The discussion on governmental intervention goes back to the time of the economist Adam Smith. His economic theory sustained the fact that there is an "invisible hand" that regulates macroeconomic and microeconomic processes. In this sense, he argued that governmental intervention was futile, because the market had its own self- regulative mechanism that allowed it to keep the most efficient economic processes and eliminate those that were not.
After the Depression, however, many economists, influenced by John Maynard Keynes, asserted that the Depression was the best example that the market could not self-regulate and that for this the government needed to intervene.
In my opinion, we need to look at the public best interest and decide how each of the two systems and methods of seeing the issue works in the public's interest.
The former president, Bill Clinton, was the person who best summarized, in my opinion, the public's best interest. The public simply wants to live well. The higher the number of people that have a high standard of living, the more successful we will say a presidency mandate was. This was probably one of the reasons why, despite the tumultuous private life, Bill Clinton was successfully re-elected for a second mandate and why his presidency is associated with the period of highest economic boost in the American history.
In economics, it is generally believed that the highest standard of living is reached when the economic processes functioning in an economy are efficient. Efficiency, in general, is associated with the best allocation of resources. We have several efficiency models, including the Kaldor- Hicks efficiency or the X-efficiency, but perhaps the best applied in our case and easiest to understand are the Paretto efficiency and the allocative efficiency.
According to the latter, efficiency is "the market condition whereby resources are allocated in a way that maximizes the net benefit attained through their use."
As such, the idea is that, either by governmental regulation and intervention or by its own forces, the market should function in such a way that it will maximize the efficiency of the way the resources are allocated, to a degree that they will be used to the highest level of possible net benefit and a higher number of people will benefit from them.
Having discussed efficiency in terms of best resource allocation, we now arrive to the question of equilibrium. Following the same source, we can define economic equilibrium as "the supply and demand balance."
Economic theoreticians following Adam Smith's ideas pointed out that the market mechanism will act as a price regulator. This means that when an excessive quantity of a certain product will be supplied on the market, a price cut will logically follow so as to stimulate demand for the respective product and this will further either decrease supply or increase demand to the equilibrium level.
In this sense, referring to your second question, we may assert that, even if the company's and individuals are driven by greed and financial profits in the market, it is more than probable that they will have to follow the price mechanism described here above, as their profits are driven by customer demand. If a price that is too high will be charged, then the demand for the products that the company is commercializing will most likely drop and, with that, profits as well.
As such, if we follow the train of thought presented here above, the companies will need to abide by the rules of the market in order to survive and remain profitable, which means that, even without the governmental intervention, they cannot act on their own (except in certain particular situations, such as cases of monopoly or oligopoly, when there are few companies on the market and little competition).
At this point, it is probably best to briefly summarized everything I have mentioned here above and the logical consequences of things. I have affirmed that, in order to increase the standard of living and attain efficiency, an optimal allocation of resources needs to be reached. An optimal allocation of resources would be theoretically accessible in a case of economic equilibrium, which is the situation where demand equals supply. There after, I have concluded that equilibrium is determined by price mechanisms and that companies, driven by financial profits, still have to look out for the way their customers respond to price strategies, otherwise in danger of a diminishing customer base.
If we look at some of the policies that the Bush administration was keen to promote and sustain during this mandate and will probably follow up on in the next one, if he is elected, we should perhaps briefly discuss the regulations related to the steel industry.
In this case, the United States of America is one of the countries imposing high import tariffs on steel and steel derivate products. The reason for this is quite simple. High import tariffs, alongside with export subventions, is one of the means used either to discourage foreign exporters on the national market (if the former is applied) or to make local products more competitive on the international markets (as the latter supports).
The high import tariffs on steel and steel derivates is a mean to ensure that the steel market reaches a certain equilibrium and that the American steel producers are able to compete more advantageously.
Let's see how the high import tariffs influences the price mechanisms I have already mentioned and discussed previously.
A steel exporter to the United States will have to add to his initial costs for producing a certain quantity of steel, the cost imposed by the U.S. government for steel imports. This means that, in order to be able to cover his total cost of production and still make a profit, he will have to charge a higher price on the American market. In this sense, the local producers, who don't pay any import taxes because they manufacture locally, are more competitive, as they may and will be able to sell at a somewhat lower price, cover their cost of production with a higher profit, and have a price competitive advantage over foreign exporters.
This is an excellent example where the Bush administration believes that governmental intervention is a necessary must. In general, the Bush administration has been constant in promoting trade regulation and governmental intervention in such issues. On one hand, this is profitable for the local American producers, on the other hand, it has been rumored that this policy was dictated by powerful businessmen supporting the Bush campaigns.
As such, perhaps part of the third answer is given by the idea that the government should intervene at times in order to protect the local industry and the local producers by imposing and regulating the tariff barriers.
In my opinion, the…[continue]
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