I had to scim most of this thread as there were some long posts and well I was eager to get typing. This may be a little hippocritical given I going to make a large post lol.
Well the one main flaw with your arguement, where you say "cities / towns only develop where it is economically viable, where its residents can make a profit" now what you are thinking of here as others have said is how cities are formed when there already exists a civlisation with an economy to speak off, such as when America was colonised. Civ starts off with basically a newly formed tribe, their goals in life are not to make profit, to mine for gold or w.e, but to SURVIVE!, hunter gatehrer people as it were. I think the way Civ does things is fine. Settler units would be people from a tribe who decided they wanted to make a new life away from the tribe. This may happen because of disagreements within the tribe, shifts of power, or if the tribe was getting to big it may need to split its population into more areas so they could all get more food. While Civ doesn't really show this, it more shows some egomaniac wanted to build a vast empire, it is certainly sufficient as is.
However there is one thing about your idea that does make sense, notedly I didnt read it all but, why do we need settlers, for that matter why do we need cities as they are currently used. Really for the idea im going to come up with we would a much bigger map for Civ, as instead of having 1 tile made a city and all buildings made in the city. Why don't we have citizens walking around on tiles building things for the "city". Currently we have like a cultural boundary, this is basically the boundary of the city, and citizens move out into the many tiles in a boundary and build things either automated or by players command, such as farms to improove food, or a baracks to train units, or housing to attract higher amounts of citizens in the "city" This would move Civ out of cities and into the landscape, as it is doing with military units by only allowing 1 per tile. So you would have the Citizens of a city running around inside the city's border building things, thus they would all be workers if you wanted to build a barracks in your city a citizen would stop farming food to feed the city and instead build the barracks. This is an entirely different concept to what is used currently, instead of citizens getting hammers to produce things, citizens build buildings like for example how buildings are built in games like Age of Empies or Command and conquer. Then this barracks can train soldiers for your army. And the barracks would not be in the city tile, but have its own tile out on the land. If you want to "build a settler" instead what you do is simply walk a citizen out of the city, you can then move him to where you want a new city and start building, in classical times he would maybe build a chiefs hut, in modern times a town hall, the point being, this is the hub of the city, new citizens spawn here when enough food is gathered to provide more citizens, and the "culture border" or as it would now be known the city border has the town hall in the middle, from there the citizen builds whatever else the city needs. And so on and so forth, you massive empire is built, not with 1 tile cities and improvements around but the very cities themselfs spread out in the landscape.
I'm not saying this idea should be implemented in Civ 5. But it would be a good basis perhaps for the next Civ. They have done "why have all the army in one tile" in Civ 5. Now they can do "why have all the city in 1 tile" In the next Civ. This would obviously mean more space is taken up, as ideally 1 tile = 1 building, whether that be a farm or a barracks or a library. So yeah... Cities would get BIG. The landscape would need to be equally big. You could maintain 1 tile per military unit, even more so in this new landscape. But Civ 5 limits of 1 swordsman for 1 iron would have to go as the land the armies will need to fight on will be a lot bigger so will the armies. The peaceful side of things would have the game play out as a giant game of "settlers" in that everything was spread out on the landscape yes?, and then when it came to war, It would be like a giant match of total war over your hard work you put into your landscape
.
Its good I think because instead of building workers and settlers you use the very citizens themselfs. If you wish to make lots mroe cities all at once, you would basically take your frist city population wise back to being a tribe. Perhaps the military can be citizens too, by this I mean you take a citizen, put it into a barracks, commence training and a few turns later a swordsman is born. Ofcourse this Civ would have bigger maps, bigger armies, and lots more citizens then it currently has if they have to do everything. But I think it has the making of a good little game.