Business cycles appear to reflect predominantly the effects of changes in aggregate demand for output on real variables such as aggregate employment. The measurement of the magnitude and timing of these effects is not a trivial problem. However, recent work, for example, by Robert Hall and by Robert King, supports the impression that the response of aggregate employment to aggregate demand is prompt and large, apparently peaking within a few months of the disturbance at a level equalling or exceeding the value of the disturbance, but also temporary, giving way over time to adjustments in wages and prices. These observations suggest that cyclical fluctuations in aggregate employment are not symptoms of the familiar nonneutralities that arise in analyzing the effects of changes in the stock of money or its velocity of circulation in a Walrasian general equilibrium context. Rather, the characteristics of the relation between aggregate demand and aggregate employment suggest that the actual economy differs in significant respects from the imaginary Walrasian economy, in which exchange takes place only under market-clearing conditions that emerge from a tatonnement process conducted with all agents in possession of complete information about wages and prices. This conclusion that the Walrasian paradigm does not do justice to the real world does not seem controversial. However, research in macroeconomics has witnessed persistent disagreement about the usefulness of specific non-Walrasian paradigms for modelling the determination of aggregate employment. This disagreement reflects basic differences in perceptions of the essential characteristics of the actual economy that are responsible for the non-Walrasian behavior of aggregate employment. The discussion that follows evaluates the current state of this controversy, focusing on recent disenchantment with the popular nonmarket-clearing approach and, more positively, on the prospect that a resolution of this paradigm conflict is presently at hand. As explained below, this impending settlement involves recognition that incomplete information is the critical factor in the generation of non-Walrasian fluctuations in employment, together with explicit allowance for the implications of implicit contractual arrangements for efficient shifting and pooling of risk in labor and product markets. The present discussion is not concerned with the causes of fluctuations in aggregate demand or, in particular, with the relative importance of variations in the stock of money and its velocity of circulation. Rather, the focus is only on why such fluctuations in aggregate demand cause observed nonWalrasian fluctuations in aggregate employment, taking this causal link to be a matter of fact.
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