I'd like to hope Mr. Croshaw reads this far in the commentary; I hadn't had a chance to read this article until now. Here goes:
Personally, I sorely miss the selective difficulty that was commonplace in simulators prior to the whole FPS genre of games. *Red Baron* for example, had easy, normal and hard, but those were preset configurations of their "realism settings" page that would allow you to toggle things like flight engine complexity, frequency of gun jams, skill of opponents, mid-air collisions and so on.
In the FPS genre, this form of configurable difficulty would translate fairly easily, such as ramping up the AI of the monsters, the accuracy of snipers, toughness of heavies and bosses, the blue sense of guards (to discern your sneaking missteps from other background noise), length of time-limit countdowns and so on.
I also fantasize about the same thing applying to RTSes in which not only can the AI be customized (preferably with personality variances) but common cheating devices (bumper crops in unit manufacturing, resource bonuses, build speed adjustments, damage handicaps and peeks into the fog of war) could be individually turned on or off.
That said, many of these things could easily be adjusted on the fly, so there's no reason why not.
Around the time of Dark Forces II: Jedi Knight, there seemed to be a convention for FPS difficulty that I liked. It worked as follows:
EASY didn't require tactical savvy. One could run and gun freely and (mostly) live. Mockery of the player by the game is optional.
NORMAL required tactical savvy. One needed to use cover, exploit terrain and so on.
HARD required taking advantage of in-game bonuses such as shortcuts and secret caches of weapons (usually to get newer weapons sooner, and to replenish health and armor) to get through.
VERY HARD required speed run tactics. There isn't enough ammo to take down all the bad guys, ergo one has to find ways to evade or circumvent some of them.
IMPOSSIBLE (INSANE, NIGHTMARE, etc.) was not adequately playtested, and was not guaranteed by the developing team to even be possible. This is for someone who wanted to break the game, or break their own sanity.
It'd be cool if we returned to using a convention like this when it came to defining our difficulty levels.