Personally I'm guessing it's asset creation (very broadly speaking, including levels, animation etc.) that's driven game development costs up. Everything else seems like it should scale kind of nicely with improvements in computing power, but the amount of detail assets get as computing power increases, I don't think that sounds like it scales well at all. Resolution in particular must be brutal, because it makes it so easy to see all the details - or lack thereof.
Of course I don't know this for sure. It would actually be interesting if anyone had any numbers or could e.g. compare the number of programmers, artists etc. in today's games vs. similar games a long time ago.
I think as far as optimization goes, it's diminishing returns beyond what the best-looking games are currently doing. I'm sure games aren't as optimized as they used to be, but that's probably due to increasing complexity and everything being so dynamic. That also includes building custom engines being increasingly less viable than before, so devs need to use general-purpose engines instead.
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