First off, the answer to the question, "How do you set up desktop icons if you're using Fluxbox?" The short answer: you don't. The longer answer: there are third-party apps out there such as Idesk that can give you that functionality. The creators of Fluxbox are all about this "slit" thing, but frankly, I still haven't figured it out. I haven't had much luck with Idesk either, but I also haven't put a great amount of time and effort into it.
I can definitely see why Linux isn't more popular. Most people don't want to put that much effort into their computers. Now, one could argue that such effort is rewarded with better system performance, security and other benefits, and they might be right. But the vast majority of computer users want a computer that at least does most of what it's wanted to do out of the box (for the record, I'm glad that Linux is around for geeky tinkerers like myself).
One might think that these issues don't exist on more high-speed distros, but the fact is that they do. I tried Ubuntu on a partition of my laptop, and I had nothing but trouble getting the Bluetooth and wifi to work (for the record, I had a much easier time getting them to work in Mandriva). I know that these are controversial issues in the open source community because of the proprietary nature of those technologies, but the fact is that they are widely used enough that any OS that aspires to be competitive needs to support them. So if your principles prohibit you from working with those technologies, don't whine about why your OS isn't more popular. It's lonely at the top of the mountain. ;-)