smithing and potion-making in Skyrim, while indeed done "in" the game world, still bring up a menu when you use them. So, though we do see our characters smithing or mixing potions, nonetheless there is a menu in the foreground as they do so.
You're right. But this brings us back to why so many players criticized fast travel in Oblivion but not in Morrowind. I believe the reason is this: Morrowind's fast travel is initiated by the character; Oblivion's fast travel is initiated by the player. Roleplaying games, traditionally, are character-centric, not player-centric.
This is a subtle difference, but to some of us it's important. Fast travel via Silt Strider is an in-game action taken by our characters and most people felt that it was a good roleplaying mechanism; fast travel via map is an out-of-game action taken by me, the player, and I think it rubbed many roleplayers the wrong way for that reason. I feel it is the same with repairing versus upgrading. You end up with a menu in both cases, but how you get to that menu makes all the difference.
Anyway, that's the way I see it.
other games where nothing can ever break or become less effective.
There are games (Dungeon Siege is the first one that comes to mind) where so much has been stripped away or was never included in the first place that the gameplay feels primitive. I don't believe that's the case here. If Bethesda had removed degradation without adding crafting I'd be pretty upset. But I have so much more fun crafting items than I ever did repairing items that, assuming we have to pick between one or the other, I'm happy they removed degradation.
Every weapon, armor and jewelry my last character used she made for herself, out of materials she gathered through mining or skinning. I have to say that gave me a wonderful feeling of acheivement. Personally, I felt no sense of acheivement when I repaired gear.
But having said all that - and having thought about it a little more - I think what Bethesda should have done was have
upgrades degrade. As they are used weapons and armor could degrade back to their original base stats, requiring us to travel to a forge or grindstone to reapply our upgrades. The item would still be usable, it just wouldn't be tempered any longer.