Take a game and play it on an HDTV (we have a 60" 1080p TV at home) without any upscaling or smoothing and note how it looks. Now, try the same game with either setting the upscaling with the PS3 or using the game's built in progressive scan option if it has it.
You could also try looking at the old video somebody made of Final Fantasy X and how it looked before the PS3 did any upscaling and then ask that same question.
Upscaling ought to make the image look very good. The smoothing option is iffy as it makes things a little blurry to cover up jaggies. I did notice that without smoothing, a game would look the same with just upscaling as it would with it's built in progressive scan (God of War 2 and Shadow of The Colossus are the two that I tried that with).
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