The big advantage of consoles like PS3, XBox or Wii is that their hardware doesn't change (except maybe disk capacity and other minor things). A game developer can get the maximum out of the existing hardware, because he knows exactly what hardware his game will run on. That is not the case with PC games where you'll encounter tons of different OS/Hardware combinations. This makes it much harder to optimize your game.
The operating system is another big factor. While your typical desktop OS has to deal with lots of situations and tasks, an OS for a console can be optimized to provide an ideal environment for games. For example: If a game runs, there's no need to give any other threads high priority or suddenly swap some memory to disk, while on a desktop OS this occurs rather frequently.
Therefore consoles are on par with most PC titles for a long time, just because the developer environment is stable.
At some point in time the average desktop GPU will outperform consoles, but that is usually also the point where new consoles are being released.
Overall, the graphics capabilities is just one factor. If you look at the Wii, they focused on something entirely different and had a huge success.
I doubt that the average user is going to notice if physics are "high-modulated" or there are "real-time daylight savings" in the game. A lot of stuff in games is faked or done in a way that it's fast but maybe not that realistic. Todays games still don't use the "correct" way for calculating 3D graphics, which would be Raytracing...