Again I'm a little late on this (one day I'll make posts in a timely manner), but, last Friday, there were several blog discussions stemming from this post on Nerfbat about 'WYSIWYG' Loot. This refers to the concept that when you kill a mob wearing chain mail andwielding a sword, you're likely to find chain mail and a sword on the corpse. I've always called this idea 'Logical Loot' and it's one of my primary foundations for an excellent MMO.
The idea of Logical Loot is... well... logical! Anytime I play a game where I find a Halberd of Smiting on a rabbit, the inevitable joke comes up of, 'Where was the rabbit keeping that Halberd!'
One of the concerns brought up is about trying to 'balance' the loot. But, you know, loot balancing wouldnt be such an issue if everyone didnt make NPC vendors into gold-spewing vending machines. All it takes is a very minimal economic model and an ability to reduce and re-use 'junk' items for crafting. Two things that the venerable UO has had for years! If all you're doing is assigning some arbitrary, static value to an item, then yes, balancing this sort of system does become an issue. However, if you put some thought into how your game economy functions, and make the value of items dynamic, then any imblances that occur will quickly work themselves back into balance. Eve Online is a prime example.
Another complaint I see amongst those posting are cries of 'But I dont want to get a bunch of junk as loot'. I don't know what game these people are playing, but I haven't ever played a combat-oriented MMO where I didn't find junk on the corpses! If you don't want the 'junk', just don't pick it up! Not every mob can carry a pair of Pantyhose of Giant Strength! 'Junk' loot can be just an annoyance, if it's simply thrown in just as a means of extra gold generation (ala WoW). It can also add a lot of flavor to the game if done in a thoughtful manner, and especially if supported by other game systems (reprocessing and item decay to name a couple).
And finally, there is Psychochild referring to it as a 'useless feature'. Well, depending on how you look at it, pretty much any feature in a game is useless. Why should mobs carry loot at all? Everything is going to be useless to someone at some point. Why not just give experience points that allows players to buy the exact equipment they want? And, believe it or not, some players actually find it interesting and engaging to have game systems that make sense and attempt to emulate the world in minor ways. I'm not asking for a world that acts and behaves exactly like the real world, just one that is fun without following the rails of the typical level-up, gather loot model that we all know so well.
In summary, if you want a living, immersive world, Logical Loot is pretty much required in my opinion. Those who decry this concept, haven't put much thought into the matter, or are simply uninterested in a world-type game.