Right, so here's the dilemma: balancing the game around no AH -- as Diablo 2 was -- means that the game has to be relatively easy, by design. If you expect most players to rely mostly or even exclusively on items they happen to personally get as drops, then you have to tune the encounters around that. Nothing can be so difficult that only top geared people can achieve it, because being "top geared" may take years if you never trade, or only trade with a couple friends.
The consequence, for people heavily involved in trading, was that the game was far too easy. Anyone who traded aggressively for any length of time would be capable of crushing Hell Baal so easily and quickly that the only real question was how fast you could do it, to increase your farming time. It was a less-than-ideal situation, but these people were often also Diablo 2's most consistent, long term customers.
So Blizzard had to make a choice between balancing this new game around the solo/small party D2 players (who did not trade) and the social/trading/big community players (who did). Blizzard clearly chose the latter. I don't mean that to be snide: I'm just pointing out that it isn't poor design, it's just design you don't happen to personally prefer. Generally speaking, games are becoming increasingly community/social oriented, with less and less emphasis on single player experiences.
And to be clear, I'm not suggesting there is no such thing as poor design; there are things in Diablo 3, such as the limited effectiveness of summoner spells for Witch Doctors in late Hell/Inferno difficulty, that pretty much everyone would agree are bad design. But many cases aren't really a matter of "poor design" vs. "good design," but rather different designs that will please different groups of players.
Inflation is a real problem, I absolutely agree -- I have already written several posts wringing my hands about it -- but the existence of the AH is not causing it.
