I see your point, Otherside, but I would argue that time out, whether away from the parent or sitting by the parent's side but removed from play for a period of time, can fulfil two roles.
Firstly it can give the child a chance to sit and think about what they did that resulted in the time out - I use this with my children and I do know that you can only ask them to think about it, but in my experience they do come back to me having reached a conclusion that shows some thought has happened. I do accept that this applies more to older children, though I think it's valid to start asking it of younger children - if you ask them to sit quietly and give them a guideline of what you want them to consider - ie. 'How do you think X felt when you took the toy they were playing with?', 'Why does mummy want you to share nicely with eachother?' etc.
Secondly, I do believe that a negative consequence can impress on the child that they shouldn't repeat the behaviour - if I don't share nicely I have to sit and be bored whilst everyone else has fun. I don't want that to happen again.
And like it or not, as we grow up, certain behaviours will attract negative consequences. If you break the rules in school you may get more than just a quiet talking-to by the teacher - you may miss your playtime, or, when older, get a detention. An adult who speeds may just get a lecture from a policeman but is far more likely to be slapped with a fine.
I'm not saying we should be treating toddlers like mini-adults or dishing out detentions in pre-school, but isn't it part of our job as parents to prepare our children for the realities of life - and punishment for misdeeds is a reality of life. So isn't a gradual, reasonable and proportionate introduction of punishment or negative consequences, the way to do this?