I think that it is important here to compare recording live and overdubbing to the difference between a play and a full length movie shot on a set.
In a play, preperation is essential to a great production. The "moment" is going to be captured. There is no retake. If somethings goes wrong, it is wrong. No changing it.
In a movie, you can reshoot the sceen until it is done right. The right "flavor" can be achieved. Many advantages here.
But also you have to look at some of the technical difference. In a movie shot in the studio, you can hide the strings per se. You can add special effects later. You can cut and spice tape. You can even redo something if it is just not working. With a live performance, you get what you get. Obviously, having the best production can help hide some of the strings and what not. But you are still limited to what you can do on the stage. And there is the issue of no retakes.
Recording a CD using the overdub method is about the only way some artists can get across their musical vision. The ability to change the arrangement, add tracks, and the extent that tracks can be manipulated assures a much better product sonically speaking.
I will agree that live recording certainly has a more exciting feel for the most part. With some bands, it is the only way that they can get their sound across.
But let me tell you something here. It is called the Art of recording. And musicians are called Recording Artists. What does this mean?
What I think it means is that like most things in life, not everyone will achieve the highest caliber of proficiency in their endevors. In recording, I believe it takes a special something to sound great on tape. A lot of people do not have this ability. That is why there are so many lame demos out there (we have all heard them).
Not all artists posses the same skill level in recording. That is why there are bands that make great recordings, and some that don't. I currently have a client in my studio that used to sound great live, but really fell flat in the studio. Now, the table has reversed. They sound really good in the studio, but kind of suck live. Go and figure. The point I am trying to make is that how you decide to record really depends upon what you would like to get out of it. In a more "live" studio recording, you are bound to have more performance mistakes, but a better feel. In over dubbing, you will of course usually achieve better playing on the takes, but MIGHT lack some of the great feel. I say might because I have heard many great sounding recordings that were overdubbed all the way that have a great feel. In some cases, the drums were recorded last!!! They just laid down a click track and concentrated on being good musicians while tracking. I have also heard some live recordings that should never have been released. Some bands can record a great CD, but can't get a very good feel going live. Oh well.
Obviously, overdubbing allows for much better fidelity in the recording. The best equipment available at the studio can be used for every track, thus, really increasing the over all fidelity of the recording. In a lot of cases, the band may not have much more going for them than good fidelity

So in this case, overdubbing is the best way to go. Some bands just can't hang with the overdubbing route, thus, going for a more live recording may very well get their music to come across much better. The fidelity may suffer a bit, but getting the right feel is what would be important here.
Let's face it, many great recordings have been done either way. I will not subscibe to either way being superior to the other. They both server different purposes. I totally believe in the concept of just doing whatever it takes to make the song sound right. Why argue over what techniques are used to accomplish this end? If it works, then keep it!!!
That is all from me.
Ed Rei
Echo Star Studio
www.echostarstudio.com