In `A Theory of Fun`, Raph Koster writes about games being learning and teaching tools. When my brother and I would play 'soldiers' growing up, we were safely simulating, and learning from, what it would be like to be a warrior (evolutionarily, a useful identity). I always like the idea that Candyland was a game game -- it's a game to teach kids how to play games.
Raph Koster is one of a few remarkably unique minds in game design. He "gets" virtual worlds like almost nobody else does; dig around on raphkoster.com for some of his writing on the subject.
Ultima Online in 1997 was so far ahead of its time, nothing quite like it has been made since. Some games have fumbled around with elements of UO, like open PvP or player housing or crafting, but nothing has ever captured its real essence: feeling like a living world with a wide variety of people, not just fantasy hero cutouts.
You could spend months in the world without killing a single monster, just mining and blacksmithing and selling your wares to make money to buy a house. And it was fun! You could wear clothes just for aesthetic reasons, not because they gave you +1 dexterity. They got so many subtle details so right. It makes me sad that "immersion" now basically just means "pretty 3D world".
It's a really spectacular book; I learned a lot from it despite not being a game designer: http://www.amazon.com/Theory-Game-Design-Raph-Koster/dp/1932...