In both macroeconomic theory and political philosophy, two dominant and deeply conflicting schools of economic thought—the Austrian School and the Keynesian School—have long stood at odds, particularly over the fundamental question of the state’s role in economic coordination, intervention, and crisis response.
Yet for most observers, this conflict remains hidden beneath the surface.
To the casual observer, economic discourse is often treated as a unified body of knowledge—to them, it’s “economics” in the abstract—when in reality, it’s the site of an enduring intellectual battlefield between two paradigms, each offering radically different diagnoses and prescriptions for society’s most urgent problems.
As such, the Austrian and Keynesian schools remain the most influential forces shaping American economic policy and debate today—guiding everything from fiscal stimulus and monetary strategy to how we define recession, growth, and recovery.
To fully understand the depth of this divide, it’s worth starting with the Austrian perspective:
The Austrian school argues against government intervention, advocating that economic cycles are natural consequences of individual preferences and time-value considerations.
Austrian economists attribute recessions to credit expansions from central banks, leading to “malinvestment” (misallocation of capital), which must eventually correct itself through market-driven recessions.
And in terms of political theory, the Austrian school leans toward classical liberal or libertarian ideas, prioritizing individual liberty, property rights, and minimal state interference.
They believe that government interference, even for stabilization purposes, tends to distort markets and lead to inefficiencies or even crises.
Central to Austrian theory is the idea that the business cycle is not a natural or inevitable part of capitalism, but rather the result of artificial distortions in money and credit—primarily caused by central banks.
Austrian economists argue that when interest rates are set below their natural market level, usually through monetary expansion or government policy, it misleads entrepreneurs and investors, leading to widespread malinvestment and unsustainable booms.
Rather than “stimulating” the economy during downturns, Austrians believe recessions are the necessary correction phase—where the bad investments made during the artificially stimulated boom are liquidated, and resources are reallocated to more productive uses.
Any government interference in this corrective process—especially through deficit spending, monetary easing, or bailouts—only delays the adjustment and leads to bigger crashes later.
This school of thought emphasizes sound money, low time preference, voluntary exchange, and market-based interest rates. It rejects central planning and inflationary policies on both moral and practical grounds.
Austrian economists oppose the Keynesian use of government spending and central banking to “smooth out” the cycle, arguing that such policies create moral hazard, destroy savings, and lead to systemic capital consumption.
On the other hand, the Keynesian school is more statist-leaning, and supports a more active role for government, especially during economic downturns.
Keynesians argue that government spending can stimulate aggregate demand and pull an economy out of a recession.
They view fiscal and monetary policy as tools for achieving full employment and economic stability, advocating that without intervention, economies can remain under capacity for long periods.
Accordingly, Keynesian political theory generally supports a more centralized, interventionist state, with a social contract focused on managing demand to ensure economic stability and job security.
This aligns more with social-democratic or interventionist political ideals that advocate a significant role for government in economic and social welfare.
Central to Keynesian theory is the idea that, during economic downturns (especially during recessions), governments should use fiscal and monetary tools—like increased spending, tax cuts, or lowering interest rates—to boost aggregate demand, reduce unemployment, and prevent economic stagnation.
This theory underpinned much of the economic policy in Western countries post-World War II, but especially in the U.S., where it most significantly influenced fiscal policy, social spending, and employment programs.
Over time, Keynesian ideas evolved into Neo-Keynesian and New Keynesian frameworks, which played a huge role in central banks’ use of interest rates and policies like quantitative easing.
Keynesian principles also shaped global institutions like the IMF and World Bank, promoting counter-cyclical policies that adjust government spending based on the economic cycle, especially during crises, to maintain stability and growth.
Where Keynesians see economic stability in demand-side intervention, Austrians see long-term instability bred by monetary distortion, institutional moral hazard, and the erosion of real capital.
In contrast to Keynesian institutions like the IMF or World Bank, Austrian thought favors decentralization, hard money (like gold or Bitcoin), and a bottom-up market order based on time-tested price signals and individual choice.
For nearly 100 years, the Austrian and Keynesian schools have engaged in an enduring intellectual conflict—one largely hidden from the public, yet quietly encoded in policy debates, institutional narratives, media framing, and the ideological architecture of modern academia.
While some economists adopt a pragmatic approach by selectively integrating elements from both schools on a case-by-case basis, the Austrian tradition, as a matter of principle, advocates for minimal state intervention, self-regulating markets, individual autonomy, and a decentralized market order grounded in voluntary exchange as the ethical and functional bedrock of both economic theory and political liberty.
By contrast, the Keynesian tradition regards the state as a necessary stabilizing force—one that must actively intervene to correct market failures, mitigate unemployment and poverty, and pursue more equitable economic outcomes through fiscal and monetary policy.
It goes without saying: the Keynesians and the Austrians do not live in perfect harmony with each other.
Rather, again and again conflicts arise between them.
Their foundational assumptions—about markets, money, and the state—are not merely divergent, but irreconcilable.
And at the heart of their conflict lies a single, enduring tension: intervention versus self-correction.
One view holds that scarce capital should be directed by the state to stimulate aggregate demand through fiscal policy.
The other insists that the same capital must flow through market mechanisms, guided by real savings and individual time preferences, to support sustainable, productive investment.
But capital cannot be used for both purposes at once, so the Austrians and the Keynesians must clash.
Accordingly, the two schools offer fundamentally different definitions of what constitutes a recession—differences rooted not just in measurement, but in theory, causality, and purpose.
To make the difference clear, let’s look at how each school defines a recession:
In Austrian Economics: In Austrian business-cycle theory, a recession is seen as the necessary “bust” phase that follows an artificial credit-driven boom.
Rather than merely a decline in real gross domestic product (GDP), it’s defined by the liquidation of malinvestments and the correction of distorted resource allocations that arose from excessive monetary expansion.
In this view, loose credit and artificially low interest rates create an unsustainable boom (misallocation of capital into unproductive or “malinvestment” projects).
The recession is the curative process by which those misallocations are exposed and real wealth (the economy’s pool of productive resources) is reallocated to sustainable uses.
In short, a recession is when the economy adjusts to the “wastes and errors” of the prior boom—a painful but necessary cleansing that restores balance.
In Mainstream Keynesian (NBER) Economics: The mainstream definition, as used by the National Bureau of Economic Research (NBER), focuses on a broad, sustained decline in aggregate economic activity.
NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”.
This is typically evidenced by falling real GDP (or gross domestic income) and declines in other key indicators such as employment, real income, industrial production, and retail sales.
In practical terms, the mainstream approach looks for widespread contraction: for example, two consecutive quarters of negative real GDP is a popular rule of thumb (though not an official rule) for a recession, alongside rising unemployment and other signs of slack.
A recession begins after an economic peak and ends at the trough, with the intervening period marked by output contraction and job losses across many sectors.
The emphasis is on measurable declines in output and labor market indicators, confirmed by a committee (the NBER dating committee) only after sufficient data shows the downturn met the criteria of depth, diffusion, and duration.
How Each School Explains Causes & Indicators
Austrian School – Malinvestment and Monetary Distortion: Austrians attribute recessions to monetary causes: an expansion of money and credit at artificially low interest rates fuels a boom that “distorts” price signals and investment decisions.
Entrepreneurs mistakenly invest in too many long-term or speculative projects (e.g. a surge in high-tech or housing investments) because easy credit made them seem profitable.
This boom is built on “free money” illusions rather than real saved resources, so it inevitably unsustainably consumes real wealth (capital). When monetary policy eventually tightens (or credit can no longer expand), the error is revealed: many projects cannot be completed or yield losses.
At that point the economy must liquidate these unprofitable ventures—the recession is essentially this cleanup phase.
Key indicators for the Austrians are not just GDP, but signs of malinvestment and monetary imbalance.
They look at metrics like the growth of the money supply and credit, interest rate spreads, and the health of industries that boomed on cheap credit.
For example, a sharp slowdown or contraction in money-supply growth is seen as a leading indicator that a bust is underway, as unsustainable activities run out of new funding.
They also look at “real” economic health—e.g. if real incomes are falling or consumption of capital is occurring, that signals real wealth destruction even if GDP hasn’t officially turned negative.
In summary, the Austrian approach views recessions as policy-induced (by prior monetary excess) and diagnoses them by looking at the quality of growth (sustainable vs. artificial) rather than just the quantity of output.
Mainstream Keynesian/NBER – Output and Employment Declines: The mainstream Keynesian framework explains recessions in terms of various possible shocks or imbalances (financial crises, oil price spikes, aggressive interest-rate hikes to curb inflation, drop in demand, etc.) that lead to a broad-based decline in spending and production.
A recession in this view is evidenced by falling aggregate demand/output and rising unemployment.
The primary indicators include real GDP (a broad measure of output) contracting for more than a couple of months, employment declining (job losses, higher unemployment claims, hours cut back), and drops in real income, sales, and industrial production.
Policymakers and analysts also watch things like the unemployment rate rising significantly, corporate profits falling, and sometimes forward-looking signals like an inverted yield curve (though the latter is a predictor, not a defining criterion).
In essence, the mainstream approach uses quantitative thresholds in economic data: e.g. if real GDP falls and the labor market deteriorates substantially across many industries, we are in a recession.
It tends to downplay qualitative notions of “malinvestment” and instead focuses on measurable aggregate performance. A recession is often confirmed when multiple data series all exhibit a sustained downturn.
For example, the NBER committee will only declare an official recession after seeing significant, pervasive declines in GDP, employment, income, sales, production, etc. for several months.
Unlike the Austrians, mainstream economists do not consider a recession “necessary” or cleansing; rather, it is a problem to be avoided or mitigated, often via policy responses (e.g. stimulus, interest rate cuts) to boost demand again.
The focus is on measuring the downturn (and its causes in each case can differ), using establishment statistics like GDP and unemployment as the barometer of recession.
So, now we arrive at the original thesis that I posted on X earlier:
Has the U.S. Been in a Recession Since 2022? There are two interpretations:
Austrian Perspective: Are We in a “Correction” Phase?
Year-over-year growth of the U.S. money supply (True Money Supply in blue, and M2 in gray). The 2020–2021 period saw an unprecedented surge in money (over +35% YOY for TMS), followed by a drastic slowdown and the first sustained monetary contraction in decades by 2022–2023.
Austrian economists point out that the United States underwent an enormous monetary boom in 2020–21 (a byproduct of aggressive Federal Reserve and fiscal stimulus during the pandemic).
By their logic, this created significant malinvestments and artificially inflated asset prices.
Indeed, asset markets surged and then crashed: for example, speculative assets like cryptocurrencies and many tech stocks peaked in late 2021 and crashed in 2022, consistent with an Austrian-style boom-bust unwinding.
The key trigger was monetary tightening—in 2022 the Fed began rapidly raising interest rates and slowing its money printing.
By late 2022, money supply growth had not only slowed but turned negative year-over-year (something not seen in the U.S. since the 1990s).
In fact, the money supply (M2) shrank roughly 2–3% in 2023, and the broader “true” money supply fell even more, a decline on par with the contraction in the early Great Depression.
In the Austrian view, this is strong evidence that a recessionary correction was (and is) underway: the easy-money boom ended in 2022, and now the economy must adjust.
They note that while official real GDP figures showed modest growth through 2022–24, underlying “real wealth” has been eroding.
For example, high inflation (peaking at 9.1% in June 2022, a 40-year high outpaced wage growth), so many Americans saw real incomes fall and felt new financial strain despite positive GDP.
Austrians would argue that by their criteria, the U.S. has been experiencing a real downturn in living standards and a reallocation of resources since 2022—essentially an inflationary recession where monetary distortion masked an underlying contraction.
They might point to anecdotal signs of malinvestment being shaken out: “zombie” companies (firms that only survived on ultra-low borrowing costs) have started to stumble or go bankrupt as credit tightens, speculative sectors (tech startups, crypto ventures) have retrenched, and interest-sensitive industries like housing saw declines in 2022.
All of this suggests a corrective recessionary process. However, because of continued government spending and initial consumer spending strength post-COVID, the adjustment has been somewhat muted or delayed in official data.
Some Austrian analysts contend that if one looks past GDP to metrics like money supply, real wage declines, and unsustainable debt loads, the U.S. has effectively been in a recessionary scenario since 2022, even if it’s not labeled “officially” a recession.
Others might say the recession has been postponed or softened by policy, but the fundamental correction (cleansing of malinvestments) is still looming or ongoing.
In sum, the Austrian lens interprets the period since 2022 as one of severe monetary tightening leading to an inevitable economic adjustment—the hallmarks of a recession in their framework (real wealth being squeezed, bad investments liquidating) have been present, even if aggregate GDP hasn’t collapsed.
They would caution that the true health of the economy is questionable, because much of the apparent “growth” was an inflationary mirage, and that the real recession might be measured by how much previous wealth gains were wiped out (e.g. the stock market’s 2022 slide, the drop in real incomes, etc.) which indeed happened.
Mainstream Keynesian Perspective: No Official Recession (Post-2020)
A Fed analysis (Dallas Fed) comparing early 2022 economic trends to past recessions. In panel A, the red line (a composite index of output, income, employment, and sales for Dec 2021–June 2022) stayed above 100, meaning the economy grew slightly instead of contracting—whereas in every past recession (gray lines) such an index falls well below 100. Panel B shows the U.S. unemployment rate barely rose in early 2022 (red line near 0% change), unlike the typical spike in joblessness during recessions (gray lines). These indicated the economy did not follow a recessionary path in 2022.
From the mainstream Keynesian viewpoint, the United States has not been in a recession since the brief COVID crash of early 2020.
After that severe but short downturn, the economy rebounded strongly in 2021.
By 2022, even though inflation was high and the Fed began tightening, most broad indicators stayed positive.
It’s true that real GDP did contract slightly in the first two quarters of 2022, which led some commentators to declare a “technical recession.”
However, NBER and most mainstream economists did not classify that period as an official recession. The reason: the GDP dips were mild and other major metrics (especially employment) showed ongoing growth.
In the first half of 2022, the job market was exceptionally strong—the unemployment rate hovered around 3.5% (multi-decade lows) and payrolls continued rising fast.
Industrial production and consumer spending also increased through much of 2022.
In mainstream analysis, a true recession requires a broad synchronized decline, which simply wasn’t there: instead, the economy had mixed signals (slightly negative GDP, but very robust jobs and demand).
Revised data later showed GDP had not actually declined in Q2 2022, effectively nullifying the earlier appearance of a two-quarter technical recession.
Through 2023 and into 2024, the U.S. economy continued to expand at a moderate pace (with positive GDP growth rates), and unemployment remained low—again inconsistent with a recession.
Key indicators like real personal income, consumption, and nonfarm employment kept rising in 2022–23, whereas in a recession they would fall.
Mainstream economists thus hold that no recession occurred in 2022 or 2023: the last U.S. recession was the COVID-19 downturn in early 2020, and the next one has (as of early 2025) not yet arrived (despite many predictions).
They interpret the period since 2022 as an example of an economy slowing (from a rapid post-COVID boom to a more normal growth rate) but not contracting overall.
High inflation and rising interest rates did create headwinds—for example, 2022 saw a bear market in stocks and a cooling of the housing market—but the overall output and employment did not shrink enough to meet the recession criteria.
Instead, they argue that the economy managed a “soft landing” so far: inflation began coming down in 2023 without a crash in jobs or GDP.
Mainstream analysis relies on the fact that aggregate demand held up (consumers kept spending from savings or credit and jobs were plentiful), preventing an outright recession.
To decide if the U.S. is/was in recession, they weigh indicators like GDP, GDI, payrolls, and sales; as of 2022–24, those never showed the concurrent declines required.
Every NBER recession in history has seen employment fall and unemployment jump; in 2022–23 the opposite happened (employment hit record highs).
Thus, by the mainstream framework, the U.S. has not been in a recession during 2022–2024—though it came close to the line in early 2022 by the GDP metric, the strength in other areas kept it out of recession territory.
The “recession since 2022” idea is generally rejected in official data—but one might say the economy was cooling but not contracting.
In summary, the mainstream view uses the “official” indicators (GDP, jobs, etc.), and those indicators show the U.S. economy continued to expand, albeit slowly, rather than enter a recession after 2021.
Their focus is on the quant: as long as real GDP and employment are growing, it’s not a recession—and by that standard, the U.S. was not in recession in 2022 or 2023 (and up to the present 2025, no official recession has been declared).
Side-by-Side Comparison
- Economic Framework: The Austrian school sees recessions as real-wealth contractions caused by prior monetary excesses, whereas the mainstream sees them as broad declines in output/employment by standard metrics. Austrians emphasize the quality of growth (sustainable vs. artificial) and view the post-2020 boom as unsustainable, needing correction. Mainstream analysts emphasize the presence or absence of aggregate decline in indicators like GDP and jobs, and they saw post-2020 growth, not decline.
- Key Indicators: Austrians look at things like money supply swings, interest rate distortions, malinvestment signals (e.g. asset bubbles and crashes, “zombie” firms reliance on cheap credit) and real purchasing power. Mainstream economists track GDP changes, unemployment rates, industrial output, income, and spending data. For example, Austrians noted the historic money supply drop after 2022 as a red flag, while mainstream pointed to continued job gains as a sign of no recession.
- Recession Interpretation (2022–2024): Austrians would argue that under the hood the U.S. has been in a corrective phase—high inflation eroding wealth and rising rates exposing imbalances (a form of recessionary pain, even without official GDP decline). The mainstream view holds that the U.S. avoided a recession in this period—growth slowed but did not turn negative in a sustained, widespread way, so by the official criteria we weren’t in recession. Essentially, the Austrian framework might say “the recession is happening in real terms (or is imminent), even if the data doesn’t call it that”, whereas the mainstream framework says “if the data doesn’t show an overall decline, it’s not a recession.”
As this comparison illustrates, there exists a deep and enduring theoretical and philosophical divide between the Austrian and Keynesian schools—one that reflects not just competing economic models but opposing worldviews.
The Austrian tradition is grounded in methodological individualism, causal-realist logic, and the spontaneous order of free markets.
Keynesianism, by contrast, rests on aggregate modeling, statistical inference, and a belief in the state’s capacity to manage macroeconomic outcomes through calibrated intervention.
While many contemporary economists borrow selectively from both traditions—blending insights to address the complexities of a globalized, data-rich world—the underlying conflict between these frameworks remains unresolved.
Indeed, the Austrian-Keynesian divide continues to shape debates over policy, governance, and the nature of economic order, even if it’s rarely acknowledged in public discourse.
So, the next time you hear an “expert economist” interpret a policy decision or economic event, it’s worth asking: Which paradigm are they operating within?
Because beneath the surface of technical analysis and fancy words often lies a set of philosophical priors—assumptions about markets, power, knowledge, and responsibility—that quietly shape everything they believe to be true.
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