So, if those who favor medals over a prize purse are correct, has running devolved so far that purely narcissistic motivations drive the masses and the race directors who cater chiefly, if not solely, to them and none give a toss about the sport?
I don't think there is a correct or incorrect answer to the question. Each race director making this decision would have to decide what the goal of the race is. Do they want the best of best from the local area even if only a hundred people show up? Do they want as many people entered as they can possibly get, including walkers, people pushing baby carriages, etc.
Anyone living in a metropolitan area has choices of which races to run. You can choose to run with the masses at races that have bands on the course, participation medals, jogglers, and clowns for the kids; you can run small, low key races where you pay a couple of bucks, the RD says here's the start, there's the finish, ready, set, go; or you can find something in the middle. I would guess that if you live, run and race in an area for a few years, you'll learn where to find the best competition and can wisely choose which races to run.
Personally I don't think making the choice to offer medals makes the RD a bad person or is dumbing down the sport in any way. I won't argue that races that cater to the masses, rather then encourage competition add to the sport of running, but I don't think they take away from the sport either.