Here's how it works: The credit card companies make their money by first charging the merchants a fee on every transaction (around 2% - 3%) and then by charging interest to the cardholders (for ones that don't pay off the balance each month). They use the part of the money they make to buy miles from the airlines. The airlines are happy to sell them the miles and your credit card company would probably be happy to have you charge lots of things for your friends
(because they are making money every time you do so). As far as getting the widget store owner to charge items to your card and give you the cash when it comes in from the credit card company, yes he could do it, but he would lose money every time he did (For example, if you charge a $100 item, the credit card company takes a 2% or 3% cut and reimburses him $97 or $98).