In 1e, there was such a dearth of customization options for you character that you were prettymuch defined by your stats (like that 18/00 strength that seemed to appear a lot more often than the statistical 1:21,600) and your magic items, once you got any. Magic items were given out by rolls on random tables, with less powerful items showing up pretty often and really potent ones (like that 18/00 strength), showing up only on a series of improbable rolls. What magic items could do was completely arbitrary, there was no logical, mechanical, or design limit to the power of magic items, so only the need to roll several very specific numbers on percentile dice in a row 'balanced' some of the crazier ones. 1e balanced some major stuff like that - magic items, psionics, even classes - were deemed 'balanced' if you just had to make a tough roll (or series of rolls) to gain access to them. Obviously, it didn't really deliver game balance in any sense we'd think of it today, but it was fun, at the time. 2e added more options to your character, but they could still be easily overshadowed by a particularly powerful item.
3e finally started to get away from all that. Magic items were all manufacturable by PCs with the proper feats and spells, and derrived their power from the level of the creator and the spells in question. Thus and item a PC could make couldn't really overshadow him, since it was just a repository for some effect he could already produce. Magic items were still a vital part of the character, since they provided just about all of his AC, highly desireable stat-boosts, and, for non-caster, still, whatever interesting abilities you might be lucky enough to have.
4e didn't quite complete the process. 4e items are generally 'weak' enough that they won't over-shadow PC abilities, even those of the formerly-pathetic non-casters. A big part of that, of course, is that all classes have a lot of cool and powerful abilities to choose from, so they don't /need/ an extra-special magic item just to avoid sucking. Magic items remained vital sources of enhancement bonuses that were baked into encounter balance not just for AC or punching through DR, but for all your basic stats - attack, damage, AC, and other defenses. A basic kit of 3 enhancement-bonus-granting items is flat-out required. Well, unless you DM pushes the 'inherent' button - I've never seen one do it, but maybe others have (I'll have to do a poll).
3e and 4e balanced items with cost (and, for 4e, level) instead of rarity. That meant that low-level 'cheap' items could inevitably be accumlated in quantity at higher levels. In 3e, for instance, the lowly Wand of Cure Light Wounds altered the management of hit-point resources at mid-high levels in a game-changing way, while, in 3.5, the 'golf bag of weapons' syndrome reared it's ugly head to overcome DR. In 4e, there are some items that everyone seems to pick up eventually - accrobat boots and iron armbands of power and so forth. 4e dodged the WoCLW bullet by, well, eliminating it entirely, and instituting healing surges, /and/ making healing potions ineffectual at higher levels, being obviated by enourmously more expensive high-level potions.
The balancing with cost trick was probably a bad idea, it made the implied economy of the campaign world just wierd. 4e only had a small step to take: flip that inherent bonus switch on and leave it on, and, similarly, link the performance of other items to the level of the wielder, and the magic item economy could concievably have been rationalized - and magic items further prevented from overshadowing PCs. Indeed, items could have become quite rare, since they were no longer necessities, 'wonderous' for the unusual things they did rather than the numeric bonuses they granted.
For good or ill, 4e is stepping back from the precipice and stumbling back towards 1e. Balancing items by some theoreticaly 'rarity' instead of subordinating them to the character weilding them, or balancing them with enormously-increasing costs. If all goes well, it'll re-capture the feel of 1e without the extreme brokenness and let players and DMs settle on one or two really 'defining' items that really fit the character, and leave more pedestrian (if still vital) items to be made or bought. If not, well, we managed to have fun with overwhelmingly broken character-defining items before, didn't we?