The aesthetic component of WoW cannot be ignored, and gear that provides a certain look is of prime importance in the game. Transmogrification lends itself directly to the credibility of the importance of the form of gear. We run old instances to get the exact set of gear we want, to look like the hero we imagine.
Psychological / Epeen
Whereas the first two functions of gear provide direct and meaningful benefit, the third thing gear is used for is the psychological need to have the very best thing in the game. If you get the best gear, then you're inherently better (geared) then someone who doesn't have it.
So What is the Purpose of Gear in WoW?
While the gearing paradigm right now obviously provides for all three purposes, I feel that we're seeing a shift in Mists, which is why some hard core raiders and PvPers might be feeling the blues. We're moving away from the psychological need for gear, and more towards the form and functional aspects of it.
As Ghostcrawler has said, don't focus on the marginal upgrades -- instead look at the big picture. That's a clear refutation of the psychological factor of gear. Yes, that new trinket might provide a 0.05% DPS increase, but it's not that big of a deal, and might actually decrease your overall flexibility, thus making you less functional. This is troublesome to the hard core individual in that it's going against their makeup -- they're being told not to worry about micro-improvements, and instead are being told to focus on the big picture. This kind of change is hard, no matter if it's in a video game or in a job. It's a change that won't happen overnight, and I feel is at the root of complaints about Mists' direction (not to say that such complaints should win out in the end); "My gear means nothing, casual players can catch up so quickly, LFR makes my raids trivial." Well, yes it does in some respects, because of the changing nature of the gearing systems.
And herein lies the crux of the matter: is more powerful gear necessary because the increasing difficultly of fights demand it, or is the increasing difficultly of fights necessary because the increasing power of gear demands it? In other words, what is causing the gear grind and the point of gear -- gear itself, or the encounters?
In the first causality of gear, if gear itself is causing the gear grind and the need to get better gear, then WoW has created a paradox in which it literally creates its own problem which then feeds back onto itself. A leads to B leads to C, which leads back to A. You need gear to kill a boss to get better gear because you need gear to kill a boss to get better gear... The logic makes my head hurt.
In the second causality of gear, if the encounters are causing gear to need to be upgraded, then we have a more senseical world: I want to defeat encounter X, so I need to get my gear to level Y. This is the world view that is presented by minimal iLevel restrictions in LFR, you need a minimum amount of gear in order to kill the boss, so get it up to that level at least. The previous causality, in which gear causes itself to create the gear grind, is more of what you see in heroic raiding -- more gear leads to killing the boss to get better gear, the never ending cycle.
The difference in these two causalities might be minimal but important. In the first causality the end goal is gear, and thus we always need more of it, and never will be able to stop. We'll become naturally addicted and experience the psychological reactions therein (even if the addiction is not at a destructive/impeding level where it becomes dangerous). More importantly however, if the first causality of gear is true, then Blizzard will never be able to stop the gear grind either, without major intervention and potentially collapsing the game.
However if the second causality is true, in which gear is the means to an end instead of the end itself, then we have a much better situation where the game can focus, at its base, on aspects other than gear; and instead move towards skill-based encounters and design.
Return now to the original question: what is the ultimate point of gear? Is it function, form, or psychological? I would hope that it's a solid combination of function and form, in its ideal design. Gear should, as it stands, contribute both to the function of a character and his aesthetic form. It should not just provide a psychological boon to a player's sense of self worth. Is this what's happening now? I think in some ways it is. That might mean that a fundamental change is in order, one that shakes the very foundation of WoW to its core...
Tune in tomorrow.