The gist of the issue is that 3.5E is, first and foremost, a simulationist system. It's not narrativist or gamist, it's simulationist. What's more, it's a high-fantasy-system. Therein lies the basis of the imbalance-problem. See, it is important that awesome stuff can happen, since this is high-fantasy. I mean, high-fantasy isn't that high unless awesome stuff happens. Now, because we are running this with a simulationist mindset, we have to justify how that awesome stuff happened...
It's magic. It has to be. You cannot explain a huge explosive fireball coming out of nowhere without magic, if you are dealing with a world where a well-crafted sword demonstrates the top-level technology. Alchemist's fire could be a bit stronger, yeah, but it can't be something that blows regiments out without problems. That would be weird, and that would actually be pretty high-tech, I mean, our grenades can't do it to this day. And what's more..
It can't be that powerful. If it was, everyone and their mother would be using it. Follow simple instructions and receive great power over human lifes, sign me in. Everyone isn't using magic because magic is hard, and it's ambiguous nature allows us to skip some explanations regarding it. We don't have to go into great depth to explain why or why not with magic. With technology, we do have to.
So, in short, awesome stuff needs to happen, and it needs to be explained. Only way to do that is with magic, and as a result, magic can be awesome and mundane cannot.
The options available:
A: Tone down magic - The issue with this one is that the setting loses a lot of the feeling. There will be no great magic monsters to destroy, and no cool explosions. This is doable, but leads to low-fantasy setting, which is not what 3.5E is trying to convey.
B: Restrict Access to Magic for PCs - This is more plausible, but still lame. Either this leads to "If they can do it, why I can't?", or then "If they can do it, why they haven't taken over the world, since no one else can?", if restricted to high-enough-level. In the latter case, this also assumes that player's wont reach this level, so it only limits imbalance to lower levels. In any case, this screws over the idea of simulationist system, and turns more to a gamist one, like 4E did by limiting world-shaping spells.
B: Make mundane awesome, too - This is directly against the simulationist idea. No one will ever be good enough to create dragons out of nowhere, no matter how good they are with handcrafts. Mundane can get to a pretty decent combat presence, but it'd still be limited. No man will learn to fly without magic, for example. We just cannot justify awesome with mundane means, unless we leave the realm of fantasy and venture in the world of science-fiction: See Shadowrun for an example.
C: Give everyone magic - This, however, has no real problems. In a world where dragons are commonplace, it would make sense for humans to develop "natural" magic, after all.
I'm currently toying around with this idea in a setting/system I am in the process of creating. Basically, there is sorcery, which is innate magic. Most people are using sorcery, hell, they don't even know it. It's an inner resource they can use to accomplish stuff, often tied with their skills. It takes a lot of time to learn to apply sorcery to a specific action, so to magically pick locks, you need to be pretty good at picking locks to begin with. To be able to slice walls with a sword, you'll have to be a great swordsman. To be able to turn invisible, you have to be stealthy and to charm people, you have to be a good speaker. That kind of thing.
Wizardry is an exception; It is basically borrowing the sorcery of another person, and is often based on pacts. You make a deal with someone to be able to use their lockpicking skills without them actually being there. There are costs assorted, of course, and you can only borrow your skills to a limited amount of people at a time, and logically, allowing someone to open locks with great accuracy is not something you give away for free. In my setting, there are also devils/demons/dragons/creatures with innate abilities that are like spells, like fireballs, and wizards can make pacts with them to gain access to abilities like this. You gain access to the sorcerous ability of a dragon to breathe flames, for example. Stronger the dragon, stronger the breath. Of course, your skill at wizardry determines your ability to make pacts, and to use them.
I am not sure where divine magic will be. Either it will be some kind of unreliable wizardry derived from gods, or then it will be different. I am not sure. I kind of want to distinquish it more. Flashs of insight is an idea. Another is completely screwing divinity, and saying that there are no gods, or that they don't care about you enough to give you powers. I thought about them giving gifts, like magic items or changing your physical body. A devout worshipper of a dragon god could receive wings in return for a long devotion, for an example. Currently, that is the one I like the most.
