Starting a bit backwards.
I agree 100% on legendaries. If they aren't going to be the best items, (not even close to the best items) they should be way more common. If they are going to be good enough to spec your whole character in and crush the end game like D2, then I think the absurdly low drop rate they have implemented would be good because no one except the most dedicated folks would manage to get them all (and even that would take a long time using the AH since most people would not be selling the very few they find).
Artisans... you are totally right, but this is not a problem with the AH. This is a problem with the artisans sucking and being way too expensive. (I guess the AH makes them suck more by relativity, but even without it they would suck.) Blizzard has already basically admitted that they are bad and are making changes. There is a post about changes coming (which probably won't be drastic enough, but that is beside the point). The Jeweler is a different issue. Because gems drop up to level 8, the AH will always be flooded with level 8 gems (or at least 7s/6s) that just drop off of mobs. This means that those gems will have a market price that they settle at and every lower gem has to be worth less (and exponentially less because of how they combine). I don't honestly think the lowest tiers of gems can legitimately cost more than nothing to combine. Maybe gold prices will inflate enough to make the Jeweler costs make sense, but I highly doubt it.
Regarding crafting components costing less than you can sell the items for to vendors... O.o ...I wasn't aware of that, but I don't think that is a problem with the AH either. I think that is a problem with idiots. Given time, I would expect that to settle out to a logical place. For the short term just be happy that you found a market error that could be exploited. But... exploited to what end? You also discovered that the Blacksmith is simply useless.
On that note, I feel was the blacksmith just implemented very poorly. Now, I haven't touched it or upgraded him at all since I decided he was worthless, so maybe there is something I am missing, but from what I have heard there isn't. You are right that the AH makes the blacksmith irrelevant. I don't understand why they made the blacksmith the way they did even if there wasn't an AH. Pretend it wasn't there... people wouldn't trade as much gear as they do on the AH, but trading would still exist. It still wouldn't make sense to salvage 10s of crappy items to roll another item that is probably just going to be crappy too. (At least at the gold to materials rate that exists now.) Removing the AH here just takes you back to the frustrating rip-off artist filled ad hoc trading that we had in D2. It wouldn't fix the blacksmith, it would just make trading suck, potentially elevating the blacksmith to the less sucky of the two sucky choices.
So my opinion on the blacksmith is that he needs to provide something that is different from random drops off of mobs. If all he can do is grind random drops into more random drops with the only incentive being getting to pick the base item, I can just go kill more mobs for random drops. Trading exists no matter how hard they make it so getting more drops and finding something to trade will always be better than wasting time and money on grinding trash into more trash.
I played a Diablo 2 full conversion mod called MedianXL for quite a while a few years ago, and the crafting system that was implemented there made way more sense. Now crafting there was intended to be the ultimate end game gear, but I think the concept works even if that isn't the goal. In Median, you used different crafting materials to generate items with guaranteed stat types on an item. These bonuses were small, but they were consistent, and were generated on top of a "rare" item. If you got lucky enough to roll amazing base rare stats, with the auto-mods on top, you could get an item that was better than any rare that could drop. This was a system that worked. It gives crafting a purpose, consistency, and that slim chance to get something you can't get anywhere else (incentive). Sadly the D3 blacksmith as he exists right now seems to just be a gold sink for people who don't know any better.
Wow... I still haven't said anything about your main AH comments. Ugh.
I think you make good points about finding gear for the players 5 levels below you, selling it and buying your upgrades from the AH. I can see how that takes away the satisfaction of finding shiny new loot. I guess my own intentional avoidance of the AH has shielded me from this so far. I guess maybe this is an issue of not actually being able to find the gear that you need *right now* to survive in the area you are in, but if you could find that gear, the game would probably be too easy. (Perhaps it is since you can find it on the AH.) But if you can't find it, and you take away the AH, then what is left other than a grind fest. I guess you just get by with the gear you have like we did in D2, but hell in D2 was always incredibly frustrating until I managed to grind a sorceress up to where she was strong enough to run hell Mephisto for decent loot. I'm not sure where I was going with that point. I guess, I see that the AH makes some of the loot finding less fun than D2, but I think taking it away would just bring back some of the incredibly annoying aspects of D2. Then again, it is possible they added a feature D2 needed to a game they designed to not need it.
Holy Rambling Batman. I think I repeated the same thing a few too many times, but I need to wrap up I guess.