I think it's largely because the creators of Pokemon just realised that some people prefer form over function - regardless of how much more powerful Blastoise is than Squirtle, Squirtle is just so goddamn cute. People should be allowed to keep their cuddly Pokemon, while at the same time being able to kick ass with them.
There's also the fact, as others have mentioned, that certain Pokemon can only learn certain moves in the earlier evolution stages, or that some Pokemon learn certain moves faster at earlier evolution stages. There's a strategic element inherent in the option, as well.