LogicNinja: D&D 3.x/PF is the only game I've ever played where as the GM I have to do all of this work just to make society make sense
I did come up with a way to solve this, based on Gygax's intro to Keep on the Borderlands (he prob took it from Poul Anderson who took it from faerie myth):
The Realm of Man is narrow and constrained. Always the Forces of Chaos Press Upon Her Borders...
1. The vast bulk of Humanity lives in the Realm of Law/Realm of Law, where magic does not work, or very little (eg church rituals, holy water, possibly some spiritualism - what a typical 19th century lower middle class Victorian might believe in).
2. The 3e/PF ruleset describes the Realm of Chaos/Realm of Faerie, where magic works. This includes most big-D Dungeons, the deep wilderness etc.
3. In between are the Borderlands, site of the conflict between Law and Chaos. Here brave Men do live on the frontier, and wield magic as they battle the forces of Chaos - or turn allegiance to Chaos and fight against Law. The Borderlands ebb and flow as Chaos then Law gain the upper hand. Here, magic works, but grows more limited as you head towards the Realm of Man - perhaps 6th level spells work on the Frontier (OD&D pre-Greyhawk style) but only 1st & 2nd level spells as you approach the Realm of Law.
So PCs still get all their toys in their normal, level-appropriate play environment, but human society can be as realistic as you like.