I don't really think the point of diminishing returns is about what the hardware is capable at all (although that's part.)
Let me quote youtube personality Matthewmatosis from his Wind Waker review.
"It just goes to show how sometimes a simple approach can just work brilliantly. I mean Link's face is nothing more than a tiny nose and some very simple textures representing everything else, but it conveys every emotion it would ever need to, and it does it so well that it's still putting other games to shame to this day. You could have a million polygons on a character's face and not come close to achieving something on par with Link's expressions in the Wind Waker.
...This is one of the major benefits of moving away from hyper-realistic styles because it puts an emphasis on the little touches and reduces the work load on the artists. When somebody spends hours trying to get the stubble to look right on a space marine's face, it's probably not a really worthwhile endeavor. The whole thing suffers from diminishing returns where the realistic details are necessary just to keep up with everybody else, but don't really add much to the experience.
So diminishing returns isn't (only) about graphics, but about the time a developer spent making them. I am all for developers making pretty games, but by and large with the last game that meant oppressive corridor games with level design which made no sense. Why was it this way? To force players through machine gun turrets when anyone with two brain cells would go around...and to give the engine time to load textures before you got to where they would need to be displayed.
So more power is certainly useful, but only if the developer uses it right.
