If Apple keep on artificially limiting what the iPhone can do, they're going to drive away developers.

Hobby developers perhaps. But most real developers (i.e. ones that are earning their living that way) care more about:
1) Revenue. (You can expect to sell about 10,000 times as many copies of an app on iPhone as on Android for example.)
2) Quality, ease and speed of development platform and API. (Symbian OS has about half the smartphone market. But the platform is such a pain it will take much longer to develop a given app. So they are losing developers to Apple.)

There's not much evidence that a completely open platform works better than closed ones.

Linux is the most open desktop system, yet it is a tiny niche behind Windows and OSX.

All the games consoles require that games are approved by the console manufacturer. Yet they now sell more games than are sold for PCs. Various companies have promised open console systems. All have failed.

The printer market is dominated by companies that require you to buy first party ink cartridges at highly inflated prices. It is possible to buy third party refills which require a bit of effort and can be messy (which one can think of as the equivalent of hacking/jailbeaking). But it seems most people/companies buy the original cartridges.

Same for the photocopier market.

Apple decide, and some disadvantages for them are that:

1) Apple will get blamed by the press and blogosphere for any malware. Just as Microsoft gets blamed for Windows malware. But malware on a mobile phone can be much worse. It can cost you a lot of money on your phone bill.

2) Apple doesn't receive 30% of revenue if it's not sold through the App Store. Why would a company voluntarily give up revenue?

A disadvantage for the consumer is that life gets more complicated. A low price one stop shop such as the App Store is convenient. They are relieved of the concern that a better cheaper app is available elsewhere.

You know that old phrase about those who don't know their history being doomed to repeat it?

I do. But Jobs has been at Apple since day one, with an enforced break in the middle when he obviously also took a great personal interest in what Apple was doing. So he DOES know the history. History related to Apple - better than anyone on earth in fact. They HAVEN'T been in exactly the same situation before. Hardware is not the same as software. If YOU look at the history of the console you'll see that having the hardware manufacturer as a gatekeeper who gets to decide which software is published, and takes a cut of the revenue, is not a losing strategy at all. In fact the console games market is now bigger than the PC games market. No doubt you do have friends that refuse to buy an iPhone for whatever reason. But you'll also have friends who have happily bought an iPhone. I certainly have friends in both categories. But anecdotes prove nothing. Statistics do. And the relevant stats are sales figures. iPhone is doing phenomenally well, huge growth with every passing quarter. And that's against other smartphones - Symbian, Windows Mobile, etc, that have had the freedom you want for many years.

No it's not necessarily good to be given alternatives. See "The Paradox of Choice" for details. And platforms with companies that act as gatekeepers is generally not a bad business model. Look at consoles - all games need to be approved by the console manufacturer before they can be sold. This hasn't hurt the console market. And indeed the console games market is now significantly larger than the PC games market which has always been open.

The evidence from developers who have tracked apps which contact a server is that the vast majority of copies of iPhone games are pirated. And all the pirate copies are on Jailbroken phones. This doesn't imply that all jailbreakers pirate software. But it does mean that developers have good reason to be wary of the market.