To me it IS silly because a game is a game. That's why we're NOT out there LARPING (at least I hope we're not, hehee). I don't want to sit and make a character swing a sword and go "hey wow look I'm now better because I keep swinging this sword!" I'm fine with my imagination and the pNp style of leveling. In fact I completely prefer it. I guess you could say this is just one more notch in the "Why I can't stand Bethesda's usual style of game" category.
Personally, I've always been a fan of the Elder Scrolls for their levelling system - it's at least something new and different. And it at least makes sense on paper - you get better at the skills you use while playing the game. The problems you are into are that it is quite easy to exploit (I've done the "tape down the sneak button" trick on some of my characters in that game, for example) and often encourages repetitive use as practice.
I think it's kind of neat that you can decide to go practice a skill in much the same way you would in real life, but I also found it a bit bothering in the extent to which it encouraged me constantly tapping on my spell button anytime I was walking anywhere.
Back to the topic at hand, I'd just as soon see the skill cap raised to 200 or 300 and Tag skills brought up to 2 per point. I thought that worked pretty well, and it effectively did cap your un-tagged skills at 100, since the cost per point went up after that. I thought it was a pretty elegant way of encouraging specialization (of which I'm a fan i roleplaying games - if your Fighter can cast Fireball, then why bother having a Mage tag along?) while also leaving the door open for more of a generalist character if that was what you were going for.
Fallout 2 worked well, I thought, in the pleasing both camps category. If you really wanted to master every skill, you could continue running around levelling until you had done so. It took a lot of work, but I think that's a good thing, hard work = sense of accomplishment, after all. And a specialist character had the upshot of getting to high skill levels earlier on in the game, with the trade-off of having some areas they weren't as competent in. (So if you lacked in Science skills, you might not kill Marvin outright for being a worthless booger...)
Fallout 3 I didn't have that choice (as much as I'd have liked.) Your ending character and preferred level of specialization and individuality has more to do with your INT than anything else. Suddenly, if I'm playing an intelligent character, it also ends up making me a min/maxing powergamer (which while I think there's nothing wrong with that - it's also something I don't find terribly compelling.)