After examining his biggest traffic sources, Louis Gray has noticed that links from blogs simply aren't that important any more. I agree with his conclusions, although I don't think that the data set he uses really proves his point.
But, even without going into traffic analysis, I think that Louis is right: from a traffic perspective, direct linking between blogs just isn't that big of a deal any more. Twitter links work better: you're confined to 140 characters, and if you squeeze a link in there, people will inevitably click it. The discussion is slowly moving from blogs to FriendFeed and similar services, and lately many blogs are taking the short route and link directly to Techmeme, anyway.
So, why do we still do it? Well, links are still the glue of the Internet. Without links, there's no context; Google has a hard time positioning you in the search results and Techmeme cannot find you. There are obvious benefits which go well beyond the simple traffic bump you can get from a link.