The closer you get to realism, the more you notice the imperfections.
I'd rather they work on more interesting stuff like real cities with thousands of NPC's in them. Notice how "cities" in open world games consist of about 100 people? Assassins Creed does a good job on this type of stuff though.
Games at this point look "good enough". I'm not even sure I want "photo realistic" games because that would make them less artistic in a way. Also, I like to use my imagination when playing.
At first I was a bit disappointed that Skyrim would be written for current-gen consoles and so would not use any real cutting edge technology. But the screen-shots look good in a non-photo realistic way and I can't wait to explore the world. I'm more excited about the improvements to NPC's, dialog and quests than the new graphics.
Like you say, one area where games haven't evolved is scale. A "city" in a computer RPG is little more than a village.
Also, Daggerfall was twice the size of Britain or something crazy like that. Skyrim will be 16 square miles. I would love to see an open-world RPG with a completely procedurally generated world the size of a small country. Transportation could be via airship or dragons or something, so you really get a sense of the scale. Plus, the world would be different each time you started a new game. I mean look at the popularity of Minecraft - and it's just a poorly coded, overrated Java game essentially made by one guy on his spare time. With modern technology, it should be possible to generate convincing and varied worlds far beyond what was possible back when Daggerfall was developed.
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