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I think it's important for play that basic equipment is easy (but not free) to obtain. If your economy is in balance, you can put simple goods on sale in shops for slightly high prices, and also have it freely available by defeating weak opponents or exploring areas. Thus, when someone needs gear, money is a useful commodity- it saves you a little time- but not a necessity- if you're broke, you can go gather equipment yourself.
That out of the way, I think having a scale of higher-grade equipment is a fine way to motivate and reward players. On Carrion Fields, we use item limits (only so many of each "very good" item exist) to create a situation where the best equipment is rare, and therefore owning/keeping that equipment means you have to outperform other players. In a similar light, we can reward roleplaying achievements with gear- it's common for leaders of cabals to receive a good-but-not-supergood personalized weapon or other piece of equipment as part of the perks of leadership, and favored followers of a religion receive a tattoo that functions as a piece of gear that can't be stolen. Since items are transient (can be sacrificed, melted, etc.), they also make good quest rewards- it gives the person something very nice, but unlike assigning them a custom skill, it eventually goes away.
Having equipment that is finite, transient, and valuable also creates a continuing motive for exploration and action- frequent trips into dangerous areas, active bartering, and a shift of power when an enemy with powerful items is brought low. I think the problems people are citing elsewhere in this thread are the results of a poorly planned or overly simple system of equipment, and nothing inherent to the existence of an equipment system.
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