To articulate my original concern a little better:
When there is a general fall in the price level, that means that investment becomes less attractive across all industries. If the fall in price level is just in one industry, the resource can be reallocated to other ones.
Here's what I think you mean. Rothbard was talking about computers. The sequence of events he describes is as follow. A cheaper way has been found both to make the computers themselves as well as supplying the resources needed to make them. Those two reasons increase the supply of computers as well as decrease the price of a computer. The computer thus becomes affordable to more people. Whatever loss of profit per unit sold is more than compensated for by increased sales.
You are describing a different situation, where the loss of profit per unit has driven people out of the business of making computers. But at least they can make dog food instead, or whatever. But if prices of everything falls, making it unprofitable to make anything at all, then there is no escape. There is no way to make a buck anymore, so everything shuts down.
That's my understanding of your question. What I've seen about this question, filtered through my understanding of it, is as follows:
First, let's make sure we are describing the same situation. There is no decrease in the money supply, because that's the case Rothbard is talking about. Since you are saying Rothbard's argument won't work across a whole economy, I assume you mean that the same situation Rothbard described has happened across all industries. So that prices have gone down across the board due to increased production across the board.
Note that the purchasing power of the population has not dropped, but rather increased. Since purchasing power comes from what one produces [Say's Law], and production is up for all, so is purchasing power. And indeed that is reflected in lower prices. The same dollar buys more. So that mankind looked at as consumers have gained, not lost.
But what if we look at mankind in the role of producers? Since prices have gone down for everything, then profits must have gone down, too, right? Well, no. There are two reasons. First, because if prices of a product have gone down, that will force prices of the factors of production to go down. If someone is making gold watches, and has to sell them cheaper, he will turn around to the gold mines and say he cannot afford to pay as much for gold. Who will they sell their gold to? Everyone is in the same boat. No one else can afford to pay the same high price for gold, either. Thus the mines will have no choice but to drop the price of gold. Thus, the profits for the watchmaker are still there.
But what of the gold mines? Have they not lost? Nominally [= in name only], yes. They used to get $1,600 an ounce, now they have to settle for $1,500. But as we stated earlier, the $1,500 is worth more than it used to be worth. Indeed, it will buy as much, if not more, than the $1,600 used to. [I'm a bit shaky here. Is this a certainty, or a possibility, or something that following the assumptions about the numbers will show must be true? Not clear to me].
Bottom line, increased production for all means increased wealth for all, though it may not show up in the numbers, but rather in purchasing power.
My source for all this is primarily Rothbard's History of Economic Thought, in the chapter on J. B. Say.