Tags are like a book index while folders are like a table of contents. Both are very useful, but I'd say an index is more useful as it can scale very well across multiple books. (Such an index would have its own table of contents, I think :)
You can have hierarchical tags even with a flat system, just name them "foo", "foo/bar" and so on. (And if you design a tag system nothing prevents from adding a hierarchy of tags.) But you're right tags need discipline and single source. There's no way to have a community-based tag soup without some sort of tag police.
Another problem is that all tag-based system I saw (not many) looked very much in their infancy. All they had was very basic flat tagging without hierarchy and very basic search. These are not enough to realize their potential.
You can have hierarchical tags even with a flat system, just name them "foo", "foo/bar" and so on. (And if you design a tag system nothing prevents from adding a hierarchy of tags.) But you're right tags need discipline and single source. There's no way to have a community-based tag soup without some sort of tag police.
Another problem is that all tag-based system I saw (not many) looked very much in their infancy. All they had was very basic flat tagging without hierarchy and very basic search. These are not enough to realize their potential.