Neoclassical economics was the new economics of the 1870's, and one of the things that was new about it was the wide role it assigned to the principles of supply and demand and market equilibrium. Economists had thought in terms of supply and demand from the first, but until the reformulation of the late 1800's, these were rough intuitive concepts and were not though suitable for any very precise and scientific economics. Neoclassical economists were able to make the intuitive ideas precise (even precise enough to begin work on statistical economics), and made them the central ideas of their new economics. Many neoclassical economists envisioned a world in which supply and demand were in equilibrium in every market, and almost everything important was determined by the equilibrium of supply and demand: relative prices and production, but also total production, the employment of labor, saving, consumption, and growth of the national economy.
After 1929, however, the real world didn't seem much like that.
What happened in 1929, of course, was the crisis that led to "the Great Depression." One of the results was a great increase in unemployment, and the unemployment was understood as an excess supply of labor. One cannot have excess supply and equilibrium at the same time,
so this was a problem for the neoclassical understanding of the economy. In an economy with unemployment, there are at least some markets -- labor markets -- in which supply and demand are not in equilibrium. Recall, the neoclassical economists had assumed:
If there is unemployment, then employment is not determined by supply and demand, since supply and demand are not in equilibrium. Then what determines employment? How could employment drop in all industries at once? It seemed to many people and some economists that, after 1929, the time had come for a new "new economics" that could answer that question.
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