Dovster, you are assuming that the only reward is miles. Paying a lot of extra dollars simply for FF benefits may not always be effective, but in many cases the difference in fares is negligible. From TLV and on routes from certain parts of the world, unfortunately FF promotions by AA/UA are non-existant.

Randy has always been recommending concentrating your loyalty firepower for good reasons. On the other hand folks such as Joe B have been criticising mindless loyalty that airlines often use to keep fares very high for business travelers (company pays - you get the benefit; an aspect not covered in your argument).

There is a separate thread discussing how elite programs can be improved but you can see the numerous ideas for what is already being done (best practices) and what may come about in the future. Miles are the most broadly understood measurable benefits (sort of niche currency) but the others are very important (SWU and VIP03s on AA for EXP).

As other have pointed out here, status is a very tangible reward for frequent traveler. My family (including 2 young children) is primarily loyal to OneWorld. we keep getting upgraded in those rare cases I choose not to upgrade (Thanksgiving to/from Hawaii, busy seasons DFW-SJO, LAX-LHR, etc. etc.) and that is worth tens of thousands of dollars.

The benefits while getting diluted are still there for the elites. Do not forget status bonuses (100% even on many low fares for AA).
In many case the value of status bonus miles could be more than the difference in fares (very true in case of flts to Asia from North America on Star and OneWorld).

I am not sure about Israel, but if you have super-elite status in countries such as Thailand, India, etc. you almost always get op-upgraded during peak season - nearly 6 months a year(many flts have Y full and some premium cabin space available).