Imagine that you have two companies producing pens, and society currently uses X pens/year. If company A can find a way to automate production, they can sell pens cheaper than B (and/or at a higher profit margin). Because A laid off people, society no longer consumes X pens, but the difference is distributed between both A and B (and other pen companies, and non-pen companies would also see a loss). Assume every company acts in their own best interest.

If company A instead uses their extra money and gives it away to their now unemployed former employees, then society would be back to using X pens/year, and demand is maintained. But that is clearly not in A's best interest, so they do not. Now we have the ability to produce more stuff as a society (not just pens, because the unemployed can be used anywhere). However, all this gets us is people who can no longer afford what they once could.

The world isn't full of Dell Computers. This year's tomatoes are grown based on last year's demand or this year's demand for out-of-season import tomatoes. There's a time delay and someone gets stuck with the risk, belly-up if demand collapses.

If automation beyond a point actually decreases demand for the outputs, then its self-limiting.

Yes, but it will grow and then self-limit into an equilibrium state where humanity has a much lower real standard of living because it can't "earn" the output it's easily capable of producing.