"The manipulations are not a nuisance, but the villagers altering the world would be."
Manipulation and alteration here feel like they could be used interchangeable could you at least elaborate on what you're trying to say? Perhaps with concrete examples as I have done (villagers sowing seeds, etc)
"there should never be an NPC mob that plays the game for you"
How is the NPC "playing the game for you"? There should be nothing in my line of comment that lends one to such a conclusion nor is it the intention behind the concept... do your eyes deceive you?
"I don't think you'd feel any progression from seeing a villager wearing diamond armor."
Maybe not a villager... but if it was one you had seen before on your explorations, one whose name you were familiar with... in this case you would feel like the npc, despite being a barbaric AI, had accomplished something within the game
"They don't have personality enough that I can treat them as independent people."
Look... the goal is not believable artificial intelligence... the goal is that, as you play the game and progress your own character in the world, so do the villagers improve their own standing in the world...
"it is better than your previous suggestions in that it actually seems like it has a point"
If you weigh my previous suggestions on their own merit, you will see that they are epic ideas... that is all I will say on that matter