Wow, so many opinions, so many thoughts.
I guess I'll just go stream-of-consciousness.
First thought: Mike, you're right to an extent. Some writers are gifted enough to really know not only storytelling, but the craft of prose fiction, including all the nuts and bolts and alternators and such going on behind the scenes to create the magic that is a well-told story. Those writers are gifted, and I imagine them to be the sort of folks most editors would willing bend themselves over a counter to sign to a Big 6 deal!

LOL
But, Mike, I think we can agree that while those sorts of writers exist... there are a lot more writers who THINK they have that skill, than actually have it.
I mean, anyone with publishing experience knows the type. The least-talented folks when it comes to grammar, story-structure, pacing, etc., often have the biggest egos and are the most hesitant to accept constructive feedback, and become irate and sometimes even threatening when it's pointed out that "their masterpiece" has typos. Or a plot development that makes no sense. Or character contradictions galore. Or whatever it is that is their Achilles heel.
The truly skilled writers - the ones who actually do have "the stuff," are usually a bit less egotistical and are more open to feedback.
Are these generalizations? Sure. But they are generalizations based on ... well, at least 25 years of experience in settings as diverse as newspapers, publishing houses, Web publishing settings, and more. (So please know these impressions come from a broad range of experience, not just a couple indie novels I've read that had problems.)
Here's the real trick, though, Mike: the writers who don't have those skills? Who don't have those chops? They're like the tone-deaf kids on THE X-FACTOR or AMERICAN IDOL, who sound absolutely dreadful, but honestly don't know that they're bad... that there's a difference between Carrie Underwood and them... that they'll never be an X-FACTOR champ or an AMERICAL IDOL. That they're not even going to Hollywood. It takes them totally by shock ... and they often lapse into denial.
Writers, in a sense, *can* be the same way. Of course, not all, and not even close to all. But enough that there are some writers out there who really don't know that, yes, they're not "there yet." That their novel isn't gold. It's not even rust. And who do nothing but take offense when the truth is hinted at.
Why do I love Simon Cowell's presence on a talent show? Because he's not afraid of drawing boos by being honest and saying, "Everyone's being kind right now, and they'll tell you you're a world beater... but that performance was dreadful."
Sometimes, it needs to be said. Before the healing of a manuscript can begin, an author has to accept the possibility that it's sick and in need of life support, major surgery, whatever.
Now, again Mike Angel, don't take this the wrong way. I still agree with your basic premise that there are writers out there who can and do edit themselves well. But not every writer. And certainly not most writers. I'll suggest, broadly, that it's less than 25 percent and stop there in terms of where I think the real percentage might lay.
Here's why I think the problem exists: everyone thinks they can write a novel. But only a few have read enough good writing, and spent enough time writing themselves, to really be able to write.
But they don't know what they don't know. They have no clue that sometimes you need an editor, and it's better to do more listening to their feedback than ignoring.
Now, ultimately I think sales is one proving ground that separates the wheat from the chaff. It's not the only criteria, but it is one criteria. If someone draws enough sales, they did enough things right to, well... sell.
In the old paradigm, flawed as it was, there was a publishing structure to stand in the gap and be publishing's version of Simon Cowell:
"Sorry. This manuscript's just not good enough. Writing's not for you."
or
"You have the bones of a good story here, but your craftsmanship is dreadful. This will need a lot of editing."
or
"You're a wonderful craftsman. Like private parts to the gods are your words... you play with them for your sport. But even as far in as Chapter 12, I still had no bloody idea what the blazes was going on, or why."
or
"Retake elementary school."

LOL
Now, I know some of these things will be taken personally by someone... it always happens whenever anyone expresses a strong opinion on anything. Even though I absolutely have no one in particular in mind. But really, the point is this....
Some writers can edit themselves, sure. But they're a lot rarer than most people think.
Some writers are better off with the help of an editor. Far more common.
And some writers are just... like the tone-deaf kids on X-FACTOR and AMERICAN IDOL. Writing isn't for them, even though tons of people have encouraged them because no one had the heart to tell them, as Stephen King once wrote, "Any word you have to look up in the thesaurus is the wrong word. There are no exceptions to this rule."
To which I'd add this observation: There are writers out there who look up even simple words in the thesaurus. Or need to.
Does this mean they'll always be bad? Not necessarily. What it means is either...
A) They need a lot more writing and reading under their belt. As in, "Take five years. Read 24 great novels and 24 dreadful novels a year, every year, for the next five years, so you can learn to tell the difference." And then, "Also, during that time, write two novels a year for the whole five years, then burn all ten. Once you've done BOTH of these things... write your REAL first novel and come back."
B) Some writers will never learn, because they refuse to put in that kind of time and effort.
King said a couple other things about writing.
"Anyone who doesn't have time to write for at least four hours a day will never be great at it." Which is about work ethic, not an indictment of writers with day jobs.
He also said, "Anyone who doesn't have time to read great writing every day, doesn't have the skills to become a great writer." Which is, again, about work ethic and commitment.
Now, some inexperienced writers won't like reading that. I know it would have rubbed me the wrong way at age 18.
But by age 18, I'd written four novels and about fifty short stories, and only had one reach print. Figures that kept going up over time.
And what taught me to be half-decent was something I initially resisted: Journalism. My years in journalism taught me how to write on deadline, how to write REALLY well in the first draft so that I didn't need 50 pass-throughs to produce readable copy. (Notice I didn't say, 'pristine, never-needs-editing copy.')
So while the 18-year-old me would have been discouraged to hear that I'd be 44 before I'd publish my first novel, the 45-year-old me is actually kind of relieved that's the way it turned out, because I'm a MUCH more experienced and better writer for having so much time and writing experience under my belt. The way it worked out, I cut my teeth on a lot of novels and stories I'm glad aren't in print, and newspaper stuff. All that was necessary prep work.
But who's around today to say to a writer, "You have talent, but you need to read a lot more and you need to write a lot more, before you publish a single word."
I'm not sure who, but I'd suggest it's needed. More than we acknowledge.
Most of it, too, it to protect a raw, inexperienced writer from themselves. Not to be mean and cruel.
Each writer is a different circumstance, a different skill set.
A good editor is like a good coach: he knows who his starters are, which kids will be his starters in a couple years, and which kids just sort of fill out the roster, even though they're great, hard-working kids.
Did I mention this was going to be stream-of-consciousness? It's that time of night.
We can all think of writers who do it all themselves and are good.
We can all think of writers who do it all themselves and are bad. Or, at least, could be better.
A good editor will help you know where you fall, behind closed doors, before the general reading public tears you a new one with loads of 1-star reviews and public slap-downs.
And yet really great editors... truly honest in the Simon Cowell fashion... are often suffering the ire of self-deluded writers who thought they were the next Stephen King, when in actuality, they're the next Karl Pilkington or worse. (Look it up.)
I'm sure Julie and Lynn could tell some hair-raising tales to affirm that part. And have in the past.
====
But also, I want to say this, on a slightly different tack:
Some writers rely far too much on the editors they hire to fix all their stuff and make up for all they lack.
Maybe they haven't written enough. Maybe they don't think it's their job to know the basics, like grammar, punctuation, storycraft, etc. Maybe they refuse to read. Or maybe they're even tone deaf... who knows? Maybe they look at a success story like John Locke or Amanda Hocking and think, "If they did it, I can do it," even if they've done none of the prep work they did in their lives to prepare them for that kind of success.
But instead, they think, "I'll hire an editor and they'll fix all that stuff. After all, I'm a story-teller."
Which is kind of like saying, "You know, I don't know the first thing about wind-currents, cruising speed, rate of ascent, or how to read an instrument panel, but that's what the control tower and a co-pilot are for... I just wanna fly! I'm a pilot!"
Well, the honest truth is, the FAA would never license such an unskilled, untrained person to BE a pilot... and if they somehow got into a cockpit and up in the air... it would not be the fault of a co-pilot or the control tower if they crash-landed at Wimbledon. It would be the fault of the pilot for not really being a pilot yet.
So, why am I going on about this?
Well, I've been on both sides of the editorial desk, for one.
And I can tell you, there's a difference between a talented person who's slightly unpolished in some areas... and someone who's just not there at all. (Or, at least, not yet.)
The editor often gets the lion's share of the blame, and little of the credit, from some writers.
Someone earlier said a writer must vet an editor to make sure they know their stuff.
But if said writer doesn't know the basics, how can they properly judge an editor's skill level?
I use most of the feedback I get from editors I've worked with.
On a rare occasion, and I do mean rare, I'll ignore one or two things.
When I do, it's because I know something that editor didn't... for sure.
Example: One time, an editor encouraged me to take out a bunch of serial commas. But I knew I wanted my manuscript to be edited per the Chicago Manual of Style, which codifies the serial comma. It wasn't that the editor wasn't a good editor... but they were using the AP Libel and Style Manual as their guide (a newspaper standard) rather than the Chicago (the print-publishing/book industry standard).
Another example: In one case, an editor asked me to make a change due to unclear writing on one sentence. Once they'd pointed it out, I saw the problem they'd spotted... but their suggestion for the change wasn't quite right. So I made a change to clear things up, but changed one word to get my intended meaning across, rather than using a word they'd suggested.
See, an editor isn't the end-all, fix-all of the process. In the best examples, they're a trusted colleague who often have great feedback.
But if you yourself as the writer don't take responsibility enough to know when an editor's suggestion is off-target slightly, that's just as bad as not listening to an editor at all.
Ultimately, a published book has the author's name on the front. Yes, an editor can put a final shine on your shoes and make sure your tie's on straight... but they can't turn jeans and a t-shirt into a Joseph Abboud tuxedo. And shouldn't be expected to.
===
And one final note, just for balance:
Those who hang out shingles as editors. Some of you are great. Even some of you who don't charge an arm and a leg are very good.
But...
There is a minority of editors who are... how to say this without offending those who are NOT guilty of it? Hmmm...
There are a minority of editors who are very strict about the limits of what they are being paid to do. But not in a good way.
Now, mind you, this is a minority of editors, but it does happen...
Let me start with the good editors.
If a client comes to you with a train-wreck manuscript and all they want is proofing... many of you do the right thing: you tell the writer, "You need more than proofing. I don't care if it's with me or someone else, but I can't in good conscience JUST proofread this, and then turn it back to you like I did my job, when there's a lot of other problems here."
That's good. That's how it should be done. Bravo!
However...
There are some... most of them as inexperienced as the writers who come to them as clients, perhaps...
Who, when they receive the train-wreck manuscript... they do what they're being paid for... ONLY what they're being paid for... and turn the work back to the client as, "Done. Edited. Complete."
Which gives misguided writers the impression that they've received something more than they have. That their manuscript is now edited and flawless, when it's not. Not even close.
This is the sort of experience, and the sort of editor, that I think T.L. was speaking of.
The ones who won't even tell a client, "Look, no offense, but your manuscript's a train wreck. It needs way more than a proof-read."
Instead, they just take the money, do only what they were paid to do, and leave most of the wreck intact. Because "that's all the client wanted and that's all they were willing to pay for."
That's the wrong choice. And it gives a black eye to all the really good, legit, honest editors who WOULD point out such truths to a writer.
I personally think it's better to turn down a proofing job, in instances like that.
It's better, I think, to say something like this:
"Look, thanks for the interest in the proofing job. But after receiving your manuscript, there's more problems here than what proofing will cover. So, here's the proofing fee back. And here's my bid on the level of editing I think your manuscript actually needs to be ready for prime time. And bid it out to some other sources, too, if you wish. If you still only want a proofing job, and to ignore the other problems here, that's up to you. But I won't be the one to do it. I can't, in good conscience, take money for proofing and call it a completed job when I know there's other problems here."
Turn down work? In this economy?
Yes. Because honesty in dealings like that will ultimately draw more clients, in my opinion, than it will repel.
Because ultimately you're protecting the writer from looking bad. And the feedback is private, not a public humiliation that comes from getting 12 one-star reviews with comments like, "This book is obviously indie because it's not edited," which can turn into the sort of bad PR disputes we've seen between some readers and writers where the writer retorts back, "Hey, I paid for an editor, it is edited." When in fact, it was only proofread and the writer doesn't know the difference.
But golly... I'm long-winded tonight and probably stopped making sense a while back, so... g'night for now.
Hopefully no one took any of this personally because I really honestly have no one in mind for any of these comments... just sharing general truths and observations from 25 years of experience in various roles of writing/editing/publishing.