"I wonder if the degree of integration you recommend has been achieved by Moodle. I've heard it has some of these features but I don't know much about this aspect of the software."
From the discussion on the BB-WebCT-Merger List (to subscribe go to http://home.oln.org/cgi-bin/wa?SUBED1=bb-webct-merge&A=1 ). It appears that there are institutions that are delivering a significant number of courses (over a 1000) to a significant number of students (over 20,000) with Moodle. From the discussion list it does not appear to be many but there do seem to be some. As well, it sounds like some institutions have worked out/are working on the integration of Moodle with the Enterprise software of the institution. However, it is definitely emphasized that the institutions who are doing this have significant IT support in terms of programmers and hardware specialists. These institutions are pleased that they control their software and their future, but it doesn't come cheaply to have that degree of autonomy.
"The main import of your message seems to be that advanced services that may have nothing to do with education proper..."
It is not easy to determine what is part of education proper. When I first started teaching, computers were not considered part of education proper. Today, if you are planning a post-secondary education you better have access to a computer to be able to be successful in almost any course. So are computers now part of education proper. I teach formal logic. Twenty years ago all logic courses required a teaching assistant in order to administer the number of assignments required to master the material. Today, the logic computer programs are so good that one can teach twice the number of students with no TA.
"... and very large on-line classes will be necessary for competitive and budgetary reasons. Under those conditions proprietary systems may well be the best choice. Is that wrong?"
For smaller institutions that do not have the resources to put into IT personel it probably is true. Right now smaller institutions may be better off to go the route of commercial packages if they want a completely integrated system. Here it depends upon how integrated you want it and each institution must do their own analysis to figure that out. Open source isn't a universal panacea that is going to work for everyone. Nevertheless, the better the online experience and the greater the integration the greater chance one will have to compete for the post-secondary student, whether it is with open source or commercial.
"...surely this points toward an unhappy future in which the quality of higher education is significantly degraded. In most people's experience human interaction online in asynchronous forums is quite time consuming even with small classes. So large class will have to forego what we usually think of as an essential contribution teachers have always made to the learning experience, namely, human interaction between students and teachers."
Actually I look at it differently. Large universities have always delivered certain courses in large class format; frequently introductory courses of one type or another, though large class format does not suit itself to all introductory courses. When I was an undergrad in the 60's at the University of Western Ontario I took physics, chemistry and biology in large class format, 300 to 500 students per theatre. And in chemistry, there were a total of 3 theatres. The research done on these classes does not indicate that the learning experience is degraded because of the large size. These large classes are frequently used by disciplines to offset upper division courses that have small sizes. Thus, the larger classes enabling efficient utilization rates for the disicpline, even though they do have some small class sizes.
As well, LMS courseware is significantly enhancing these large courses. I was at a conference this summer where a vice-president from Perdue University discussed how they were using WebCT Vista to track students, especially in large classes though not only large classes. Through the tracking feature of WebCT they were developing strategies for intervening on students who were not displaying the level of participation normally required to be successful in the course. They were using the tracking feature of Vista to attempt to improve retention rates. In these large courses before LMS software this information would never have been determined until way too late. There also can be far greater interaction both with the prof and with fellow students if the functions of the LMS package are setup and incorporated appropriately. So, LMS software is improving the educational experience in large classes.
I guess the basic point is that one size does not fit all. Open Source may work for some institutions but for others commercial packages may be a better solution. And, open source does not come free.