It doesn't screw up the economy if you:
1. Do not Smith
2. If you do Smith, Do not sell
Smithing should be the last item on the Development Backlog imo
Personally, I really enjoy it as is.
You're right in that you can avoid it and it's up to you to exploit it or no, but the thing is, that it being there prevents many players from understanding how game is balanced/imbalanced in other areas of economy.
If you know you can sell a javelin and solve all your problems and you do it, you then don't look for other ways to solve your financial problems, so you don't know if there are other, legitimate ways for you to get big loads of money to support your troops and garrisons.
Me myself am a clear example. I have top tier troops in my town and both castles and also nice quality troops with me. Expenditures are sometimes hitting -5-6Kper day. Now that's huge money to lose but I sell one sword and all my problems are solved for a long time.
Kingdoms constantly declare war on me, but if I can gift a sword to attacker and make peace immediately. So now I don't look for other solutions.
While it's good because I can peacefully try other aspects of game, dig more into trading (for fun, not because of profit) and for the ability to raise my trading skill to get some neat perk I am waiting, it prevents me to seek for other, more creative ways to solve my problems.