I'm afraid I'm having a hard time understanding how realism in paintings hinders immersion. When I think of Elmore's picture from Bloodstone Lands (with the wizard fighting the knight) I have no problem putting myself in that scene. The environment seems real enough to touch and, for me, reminds me of home (minus the mountains). I can look at the leaden sky and feel the cool but mild spring breeze on my face and hear it whisper through the boughs of the pine trees. I can look at the dead brown grass breaking through the snow and imagine the crunch under my feet. Now, obviously my experience dueling wizards IRL is limited (

) but the two figures add the fantasy element to the picture for me. I look at them and see rich detail and they just complete the scene for me (although I do agree his figures look fairly stiff most of the time). I find that a lot of the time a decent background is essential to gain the immersion factor for me and pictures that lack this lack context IMO. In the world of comic book art I find this particularly important; compare George Perez's fantastic backgrounds and detailed characters to some of the one-colour backgrounds found in other comics.
I suppose I could see where *some* of the 2e and 3e art comes off as "commerical", but for the most part I've never had a problem finding wonder in most of it. Elmore's "Dragon Slayers" piece from the 2ed AD&D PHB screams adventure to me. How about Easley's piece from the same book, the one where the female warrior has carved up a giant's equipment and is holding him by the nose ring? And I think anyone would be hard pressed to consider *any* of Brom's work "commercial"
I guess ultimately I'm in the camp that says there has been good and bad in all the editions. A lot of the 1ed art cited here is great IMO (although I've never really warmed up to Otus...the appeal is mostly lost on me). I remember finding the Fiend Folio in my elementary school library (it used to have a lot of cool books before the less-tolerant folks of my town got to it) and finding the monsters in there actually frightening (well, except the Flail Snail...although I still liked it). Flipping through it now doesn't have the same effect. 2ed had Elmore, Easley, Caldwell and Brom, but it had its share of dreck too. 3ed has Todd Lockwood (easily one of my all-time favourites), Wayne Reynolds, William O'Conner and Sean West. However it, too, has crap. I think there is inarguably a different over-all style to the art of each edition, defined by the stable of artists working at the time, but I believe that whatever you take away from the style of each edition is entirely your own. YMMV as it were.
I would also like to second the request for an example of the "mohawked, big-thighed, leather-clad, big-eared elf". Outside of some bad fan art for World of Warcraft, I can't imagine where this is coming from.