I think there comes a point where the increased graphics capabilities may be a bad thing when it comes to game play. Too much of a game's budget will be eaten up just on the graphics, rather than focusing on game play. Final Fantasy XIII is the most obvious example of this. I like the game, but most of it really is just relatively narrow passages in comparison to the games of the SNES and PS1 in the series all of which feature plenty of exploration and non-linear area design.
This might have a possible sliver of truth if graphics developers were the ones also making the rest of the game, but they're not.
There's nothing special about modern hardware that lets you create linear experiences that are more pretty than nonlinear ones, that's always been possible, even back in the days of the NES or SNES. It was a design decision, and nothing else - that's all extra hardware does. Gives developers a wider range of choices. They're free to make any choice they wish - the developers of FFXIII have stated that the game was highly linear for story purposes, and that being able to do very fancy graphics was a side effect of that, not vice versa.
And, of course, if you had it running on better hardware you could have an open game with those graphics. No matter what your level of capability it will always be possible to push it to the limit, increased capabilities simply move that limit further back.