What is the purpose of some airlines' policy of limiting free first class upgrades for statused passengers?

Since such upgrades are "space available", the airline should never be giving away anything of any real cost. To determine who gets these available seats, I feel the hierarchy should be as follows:

1) Paid 1st-class
2) Full-fare coach, elite
3) Full-fare coach
4) Paid upgrade
5) FF mile upgrade
6) Elite upgrade
7) Foreign airline elite upgrade
8) Airline employee

This makes the most business sense for the airline, while still allowing (theoretically) unlimited upgrades for statused passengers. Yes, I am an elite on the airline I fly, and yes -- I feel paid upgrades should go ahead of me (apparently, CO agrees). That $50 per segment is real money that goes straight to the airline's bottom line, and they need it.

So what is the reasoning behind limiting the number of upgrades for elites as AA and UA do? I've been told that both airlines "have too many elites", and therefore need restrictions, but exactly how does this policy help? If the seats are available, shouldn't elites get them?

I've been told that UA's employees frequently end up with the seats. If true, I think that's ridiculous. I'm all for giving employees perks and respect, but putting them ahead of statused passengers flies in the face of all business logic.