MariaNovella, you're absolutely right to say that the best way to learn a language is to live in a country where that language is spoken and immerse yourself in the culture. But a university MFL degree isn't JUST about learning to speak/read/write a foreign language; it's about learning certain thinking and analytical skills as well.
I didn't mean to imply that language learning isn't at the core of the Oxbridge MFL courses: it is! Students do spend a year of the course abroad working and/or studying, as sendsummer said. The language classes at Oxbridge are normally taught by native speakers (with a few exceptions, such as translation classes that involve translating from the foreign language into English -- these are more usually taught by native English speakers). At the end of the course, students will have a high level of fluency, in both speaking and writing.
Here's a blurb from the Oxford MFL course webpage explaining the relative emphasis on language and literature:
Language is at the centre of the Oxford course, making up around 50% of both first-year and final examinations. The course aims to teach spoken fluency in colloquial and more formal situations, as well as the ability to write essays in the foreign language, and the ability to translate into and out of the foreign language with accuracy and sensitivity to a range of vocabulary, styles and registers. You will also develop your reading skills to a high level.
The study of literature gives you an understanding of other cultures that cannot be acquired solely through learning the language. It leads you into areas such as gender studies, popular culture, theatre, aesthetics, anthropology, art history, ethics, history, philosophy, politics, psychology and theology, developing your skills as a critical reader, writer and thinker.
I'm not trying to argue that Oxford's way is the best way of doing things; it's one way of doing things. I've already said that for candidates who love MFL but don't necessarily love reading literature, the Oxford course isn't for them: they would be better off doing a different kind of uni course elsewhere.
Studying literary, philosophical and historical texts (and films) in a foreign language isn't the same as living in a foreign country, but it does give you a particular kind of 'deep' knowledge about the culture. For example, understanding the French concept of 'laicite' in contemporary culture can be enriched by studying the ideas that informed the French Revolution. Literature IS about life: it's about love, sex, families, gender, race, war, politics, refugees and so on. Also, culture is deeply embedded in language, and so reading in the original language helps you understand culture on a much more profound level than reading in translation would do. But I'm probably stating the obvious.
I dislike the 'ivory tower' phrase because it implies that people studying and working at universities are somehow cut off from real life. We're not. As I've just been saying, MFL students spend a lot of time talking and thinking about other people's lives, both now and in the past. And in addition, being at university doesn't mean you're not living. Mental health issues among university students are very pressing: they're learning how to live independently and how to deal with an intensive workload. A lot of them have complicated family backgrounds, regardless of how economically privileged they are or aren't (there's the undergrad I taught whose father was mentally ill and who committed suicide during her first year at Oxford; there's the 2nd year undergrad whose mother died of breast cancer; and so on). Being at university doesn't make them somehow immune to real life issues. The city of Oxford also has a dark side: there are big problems with homelessness and drug addiction (there have been articles about this recently in the national news). Many students volunteer in various capacities with charities around the city.
So while I'm used to hearing the term 'ivory tower', I don't think it's helpful. It all depends on what you're comparing the tower to. I suspect most of us on MN live ivory-tower existences if you think about the war in Syria, or even people in the council estates on the edge of Oxford who are trying to work out how to feed their kids on universal credit.
OK, I will get off my podium now 
But my main point is that there are loads of productive ways to learn languages and engage with other cultures. Doing an MFL course at Oxford is good, but it's not the holy grail.
sendsummer, that's a good point about Oxford MFL doing more ab initio courses like Classics (or beginners' language courses -- clearly you speak the lingo). In fact more beginners' courses are available now than in the past: for example, you can study German, Italian and Russian at Oxford now with no previous knowledge of the language. However as the courses stand you have to come in knowing one language to a high standard already, and then do the beginners' language in addition. So it's not perfect...