The obvious fact is that Nintendo had the choice to produce a more powerful console without dramatically changing the cost of the hardware and instead choose to release the Wii as it is; the Wii could (easily) be overclocked to double (or possibly tripple) the current clockspeed and all that would be required is a somewhat larger case and an improved cooling system and yet they choose this speed.
How do you reckon so? Producing a more powerful console in any way will make the system more expensive to produce. Nintendo however decided that they wanted to maximize their profits, which is quite logical.
I also find it funny how you try to downplay the cost involved with a larger case and cooling system. Especially when the only improvement would be a higher clockspeed, which wouldn't make much difference anyway.
The likely reason Nintendo choose the performance of the Wii was that in peak performance the Gamecube was approaching what could (realistically) achieved on standard definition; with the Wii there should be (almost) no polygonalization artifacts, there should (almost) be no noticeable texture artifacts, and there should be (noticeably) improved effects which should be very close to the limit of what is noticeable on standard definition displays. Certainly, there could be some improvement to the effects which are displayed but those effects are far more noticeable at higher resolutions; basically, most material effects relate to how a material's lighting change over a small area and a higher resolution allows you to see smaller areas of a surface.
If you honestly believe that Nintendo's goal was anything other than profit, you're only fooling yourself. Besides, graphical techniques such as parallax mapping, deffered shading and displacement mapping are noticable even at 480p.
My reasoning why you could see a far greater improvement in what we see from the Wii than what we will see from the XBox 360 or PS3 is how focused developers are currently on getting good performance out of each of the systems; basically, every developer is working hard to get amazing graphics out of the PS3 and XBox 360 while few developers have even tried on the Wii. All systems will see some improvements from developers understanding the hardware better and producing more optimized code, they will all see improvements from developers being more efficient when they produce graphical assets specifically for the hardware, but the Wii will also benefit from developers actually trying to see what they can produce on the Wii.
That's one way to look at things. An other would be that because the Wii features such a familiar and straightforward design, developers know it's limits and can exploit it rather quickly. There are little to no secrets about the Wii's hardware really, so I wouldn't expect any major graphical leaps. Developers should focus on producing interesting artistic designs in their games. I salute Nintendo for developing Mario Galaxy with this philosophy in mind.
The Xbox 360 and to a greater extent the Ps3 are more flexible machines, much so because a lot of console developers had hardly ever worked with pixel and vertex processing.
