(Disclaimer: Yes, I own an iPod video (1st gen) and an iPod touch, and use them regularly)
I noticed the same sort of behavior when I was glancing at the iPod touch pricing. $299, $399, $499 for their three models with---whaaa?? 8, 16 or 32GB of storage. The original iPod is up to 80 (or more?), which makes it fairly clear to me that they're just playing games and offering you super-expensive, shitty-sized storage now so they can go "LOOK, DOUBLE!" six months from now. To screw the early adopters, in other words.
Comparing the capacities on the hard disk and flash iPods is comparing apples (hah!) and oranges (or to use the obligatory car analogy, mileage in a 3-cylinder 2-stroke and a V12): show me a 160GB flash disk that fits in the form factor of the Touch and I'll gladly hack it in in place of the 8GB wafer in there at the moment. That said, to say that 8GB to 16GB costs the same as 16 to 32 is daylight robbery, and $99 (or £70, if you pay the non-US tax) for 16GB of flash memory is pretty steep as well.
That said, I'd have a 160GB hard disk Touch, if they made them.