Haha, this is a fun thread! Kudos Tomek!
I definitely see your main frustration (arbitrary rules make a game fun, balanced, and understandable, but rob that sense of reality and history that this type of game demands), and I would refer you to your local children's TV show...
Imagination goes a loooooong long way towards my enjoyment of the game.
* I love the feel of hitting the "Oppress The Bastards!" button, and get early images of cruelly driving loincloth-clad dudes to roll gigantic square stones on logs up hills. These blocks sometimes roll DOWNHILL too. In a somewhat less controlled manner. Whoops! Later in the game, I start feeling like the harder I work them in the cities, the more of them run off to live and work in small clandestine communities, living beyond the law in the wild places of my empire (think: Montana

).
The "Buy It Now" button involves Marlon Brando, a smoky room, and an impenetrable accent. ("'La Causa Nostra' can be 'La Causa Vostra,' ifyaknowwhatI'msain.") (Also, hooray Italian conjugations!)
* As for victory, might absolutely makes right. However, I love the "Peace, I'm out!" aspect of space race victory. I've always wanted to wait until it's almost ready to launch, and on the eve of takeoff just launch a good handful of nukes at that one really obnoxious civ (there's one in EVERY game), run to my rocket, and make rude gestures out the window as we fly off. Who cares what they do? You'll never see 'em again.
* And cultural victory makes total sense! OK, imagine all of your favourite bands, your favourite movies, your favourite books, clothes, websites, architecture, cuisine, and that one brand of shoes that fit you just right. OK? Now imagine that all of this stuff comes from one tiny region of the globe. Lets say Switzerland (cheese, chocolate, watches, and corporate corruption; hell, they're almost there already!). Got all that? Now imagine a country that's about to bomb the living snot out of Switzerland. All of the things which influence how you live are about to be reduced to a fine paste. Are you pissed at that country yet? Are you ready to get a gun and go defend rock & roll?? That's what I thought! Get out there, soldier!
Seriously, when the whole world is waiting for your citizens' new albums to drop, the LAST thing that they wanna do is come kill you. You've got 'em by the leisure, and just won't let go.
* As for unit diversity, Upgrades!
So you produce 2 Galleons, and each gets two upgrades. On one you take Flanking and Navigation (extra move and retreat). On the other you take Combat I & II. These are two very different ships in my mind! Your shipwrights have just built one faster schooner, which rides higher in the water, but is shorter and holds fewer cannon, while they made a flagship behemoth out of the other, capable of demolishing any ship it can catch!
This is very realistic for two reasons. First, each major design change (like oars --> sails --> steam) is precipitated by radical technological advancement (Galley --> Caravel), but before you discover The Next Big Thing, regional craftsmen can make smaller changes to SPECIALIZE the design, according to what there is a market for.
Second, the ability to specialize your ships comes with having knowledgeable shipwrights. Think of your Viking Trading Posts as places where carpenters from miles around congregate, look for work, share ideas, and compete with one another. This naturally leads to someone having a really good idea, which is then copied by every other carpenter, and soon every blond man with a hammer can make you a faster boat (Navigation I). A Great General (spawned in a city, because he was called from the front lines to a parade in his honour) can settle down as an adviser, and there is much historical precedence for warriors revolutionizing the equipment of their entire armies (Read Shaka's profile in the 'pedia for a good example).
Well that was longer than expected, and frequently off-topic, but I hope I've shown that the game mechanics -- like the graphics -- can be a bit simple at times, but are really just there to represent some more cumbersome system with a little colourful elegance.