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HappySqurriel said:

Certainly, there are a handful of games like The Witcher 2 and Crysis 2 that push the limits of currently available hardware ... These games represent less than 1% of games that are currently being released for the PC.

With how little interest there is in pushing even very modest PC hardware at the moment, it would seem remarkably foolish to release the latest and greatest hardware in a console.

Well that's because most games are made to work on consoles and pc. CD project is taking a long time to port the witcher 2 to the 360 because they focussed on pc first. And while Crysis 2 scales up nicely in graphics, the AI wasn't any better on the pc. There aren't many pc only high budget games left.

People don't upgrade pc hardware since developers don't make a lot of games that make use of it. Developers don't make a lot of games for advanced hardware since not many people have it. Somebody needs to break the status quo to move game development forward.
All the stuff I listed can easily be done on pc already, but no developer is going to put the effort in to release it to a small subset of gamers. The only thing the extra hardware gets you now is a few graphical upgrades, nothing that would make the gameplay different from a version that has to run on consoles.

Anyway advances in gameplay will come more from cpu power and especially memory. You can always render a little less detail but to do a full scale from dust game or have naturally behaving flocks/hordes/destruction/fluids you definately need the memory and cpu power to back it up.