The distinction amounts to this. Mill, Say and Ricardo see no possibility of a generalised overproduction of commodities, because they continued to see production as being only a production of products for the purpose of consumption, either directly or via exchange. As Marx says, this corresponds not only to a condition before capitalism, but prior to money economy, i.e. to the conditions of barter. Setting out this belief Ricardo makes the comment cited earlier that Marx quotes in Theories of Surplus Value, Chapter 17. But, as Marx says, as soon as money economy intervenes, the fact that A produces and sells commodities to B, does not mean that A will use that money to buy commodities from B, or anyone else. Production does not create demand for the output, or may create demand only at a lower price and so on.
“The value supplied (but not yet realised) and the quantity of iron which is realised, do not correspond to each other. No grounds exist therefore for assuming that the possibility of selling a commodity at its value corresponds in any way to the quantity of the commodity I bring to market. For the buyer, my commodity exists, above all, as use-value. He buys it as such. But what he needs is a definite quantity of iron. His need for iron is just as little determined by the quantity produced by me as the value of my iron is commensurate with this quantity.
It is true that the man who buys has in his possession merely the converted form of a commodity—money—i.e., the commodity in the form of exchange-value, and he can act as a buyer only because he or others have earlier acted as sellers of commodities which now exist in the form of money. This, however, is no reason why he should reconvert his money into my commodity or why his need for my commodity should be determined by the quantity of it that I have produced. Insofar as he wants to buy my commodity, he may want either a smaller quantity than I supply, or the entire quantity, but below its value. His demand does not have to correspond to my supply any more than the quantity I supply and the value at which I supply it are identical.”
(Theories of Surplus Value, Chapter 20)
Whilst Ricardo, then, rejects the idea of generalised overproduction of commodities, on the basis of Say's Law, on the basis of Malthus' population theory, he arrives at a theory of overproduction of capital. Smith's explanation of the falling rate of profit is that profit exists because labour is plentiful and capital scarce. Labour produces surplus value, which under capitalism appears as profit, because its distribution between labour and capital is determined by the competition between them. Capital's price is higher than its value, because its scarce, and vice versa. However, capital accumulates faster than the growth of labour supply, and so its price falls as wages rise, and so profits continually decline.
Ricardo rejects Smith's argument. He says that labour supply expands to meet the needs of capital. But, following Malthus, he says, the consequence is that, to meet the rising demand for food and agricultural products, less fertile land has to be brought into cultivation. That means that there is diminishing returns, and so higher prices for food and agricultural products, which also means higher rents. Ricardo saw industrial productivity causing the prices of manufactured products falling, which reduces the value of labour-power, but not by enough to offset the rise in food prices. The consequence is that whilst wages rise, living standards still fall. But, rising wages squeeze profits, rising agricultural product prices also cause the rate of profit to fall, whilst rising rents also squeeze profits. He sees profits, therefore, being continually squeezed until they disappear. This is the terror that grips Ricardo.
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