Going back to a previous point,
>How does the concentration of capital reduce demand for commodites?
I'll admit this is a personal theory I've kind of been working on. I'm not sure if anyone ever addressed it except indirectly under the misunderstood "tendency of the rate of profit to fall." My basic idea is that as an economy becomes more capital-heavy, more concentrated in its productive forces and ownership, the vast majority of people will have far less bargaining power since their ownership of real assets is reduced to personal belongings. The inability to fall back on such assets means that their employment by a large firm is now a matter of necessity rather than choice or even expediency. If a big chain operation buys out a mom and pop store the previous owners get paid. (And here we will be generous and assume that there is a buy out and not simply a long struggle in which the mom and pop store eventually fails and closes.) Even with that payout, would the small business owner use the money to start a new business? Maybe, but I doubt it, especially since they have probably been spending years working in one industry only to be out-competed by a larger concentration of capital. So what happens? The easiest option is to simply retire after the buyout and use that money for consumption.
The real problem that arises is, like I said above, the reduced bargaining power of the small businesses and those dependent upon wages for a living rather than property or assets. In the long term it seems very likely that the power held by large firms will drive down aggregate wages and reduce demand for consumer goods and other commodities. But I admit I haven't worked all of this out yet and it's kind of an ongoing theory I have
>Why wouldn’t they be reallocated to other industries? All else equal, consumers who reduce the purchases of widgets will increase the purchase of other goods.
Because the drop in demand might be due to a drop in disposable income and not a change in preference.
>Why must a commodity be dependent on one specific commodity? Every product that I know can be built with alternative resources.
That wasn't the point. It doesn't matter whether you can make houses out of wood or concrete, the fact that house building creates demand for the production of other commodities and a chain of production develops across businesses and industries is what matters.
>And how does this increase the probability of a crisis?
I'm not sure how to explain this more simply. The basic idea is that a process becomes more likely to suffer failures as it increases in complexity. Like I said, in a chain of market transactions involving specialized production, a sharp drop in demand (be it severe enough and long enough) will introduce a situation in which it will be more difficult to overcome due to the high costs of investing in specialized training and machinery.
>What are these conflicts of interest and how do they contribute to suboptimal distribution?
Can you not think of real life examples involving conflicts of interest? Is it so hard to see how the hourly wage earned by a typical worker introduces incentives different from those of a salaried manager or an owner? It's not uncommon to hear something like, "The boss keeps giving me this work because he knows I do a good job. I'm going to work more slowly so I don't get stuck with this again." In an ideal situation the workers would have an incentive to produce the most value and utilize their time the most efficiently. It doesn't happen, not even in capitalism, because the incentives aren't there.
Wage earners have an incentive to maximize their pay relative to time, whether or not value is actually being produced or work is being done. Managers (hopefully) have an incentive to ensure that work is in fact accomplished according to what's being ordered from above. The second part of that sentence is probably the most important since the job of a manger or mid-level bureaucrat depends largely upon his ability to curry favor with the higher ups and owners rather than on his own productivity. Owners simply want profit or the ability to profit from trading the assets. None of these groups are fully aligned in their interests.
From one perspective it could be said that the conflict between these groups for the final division of the "surplus value" creates transaction costs which otherwise might not be there. On a related tangent, I've personally seen many companies that were less competitive than they should have otherwise been simply because management and owners weren't affected (in a marginal sense) by inefficiencies and outdated practices. Lower management is typically too stressed to give a damn about fixing things and they probably couldn't even if they tried, since their #1 priority is usually to kiss ass and marginalize potential threats from below. But I won't go into anecdotes…