“How many gallons of gasoline do I need to travel 10,000 miles?”

Is there anything fundamentally different in these two questions?

Consider the following examples:

Let’s say you drive 10,000 miles in a year on an average. If you have a car that . . . → Read More: Thinking In GPM Can Overcome MPG Illusion]]> “How many miles can I drive on a gallon of gasoline?”

“How many gallons of gasoline do I need to travel 10,000 miles?”

Is there anything fundamentally different in these two questions?

Consider the following examples:

Let’s say you drive 10,000 miles in a year on an average. If you have a car that gives you 10 miles-per-gallon (MPG), then you would need
1,000 gallons of gas every year. If the price-per-gallon is $3, then you would spend $3,000 in a year on gas.

Now, if you changed to a car that gives you 20 MPG, then you would get twice as many miles per gallon, costing you 500 gallons, and so you would spend $1,500 per year on gas.  And if you bought a car that gives you 40 MPG, then you would spend $750 per year.

As you can see, changing from a car that gives 10 MPG to 20 MPG saves  you about $1500 of gas in a year, but going from 20 MPG to 40 MPG only saves you about $750.

So, if you think in terms of MPG, a car that gives 20 MPG is twice as good as the one that gives you 10 MPG, one that gives 40 is twice as good as the one that gives you 20. But when you look at it from the perspective of cost per mile, or GPM, you save significantly more when you change from 10 MPG to 20 MPG, than when you change from 20 MPG to 40 MPG.

Watch this video from The MPG Illusion guys.

“What the article says is that a lot of the economics theories that are being used today haven’t advanced at all in the past 80 years or . . . → Read More: Did Research Fundings Influence Economic Policies?]]> In my post Irrational Economics, I quoted some surprising observations from an article in The Atlantic titled “Dismal scientists: how the crash is reshaping economics.” I wrote:

“What the article says is that a lot of the economics theories that are being used today haven’t advanced at all in the past 80 years or so. While some of these could have been very relevant in 1920s and 1930s, they are probably completely out of place in today’s context.”

Today, while browsing the Freakonomics blog, a post titled On the Failure of Macroeconomists caught my eye. The author Justin Wolfers writes:

“If you took your first economics class 50 years ago, you’ll recognize all this talk about marginal propensities, multipliers, and crowding out. Fifty years later, it’s still the same debate, and it’s still unresolved. Why are we so reliant on mid-century macro for understanding our current predicament? And why haven’t we developed better answers?”

Wolfers describes what his research found: there were typically about three times the number of research papers on  monetary policy,  compared to those on fiscal policy. What does this mean? This seems to suggest that while there was a lot of study on how the government and the central bank controls the supply of money, interest rates, etc., and its outcomes, there wasn’t as much study on government spending and taxation. Why this disparity? Wolfers speculates:

“Perhaps the problem is ideology, and pro-market economists don’t like any discussion that gives government a greater role. Or perhaps there are just too many temptations for young economists — monetary policy research pays off because there’s a comfortable career path running from monetary research to the money markets.

Another possibility is research funding: there are 12 regional Federal Reserve banks subsidizing research on monetary policy, and almost no one provides similar subsidies for fiscal research.”

This is something for the economics experts to debate, and far beyond what a layperson like me can comprehend. But if this is true, this would be a good example of how skewed educational funding can lead to disastrous long-term effects on a large scale.