If (a) is correct that looks like bad news for webmasters, BUT if (b) is also correct then – because PR is ultimately calculated over the whole of the web – every page loses out relative to every other page. In other words, there is less PR on the web as a whole and, after a sufficient number of iterations in the PR calculation, normality is restored. Is this correct?

where N is the total number of all pages on the web. The second version of the algorithm, indeed, does not differ fundamentally from the first one. Regarding the Random Surfer Model, the second version's PageRank of a page is the actual probability for a surfer reaching that page after clicking on many links. The PageRanks then form a probability distribution over web pages, so the sum of all pages' PageRanks will be one.

I always like hearing a new idea for beefing up the number of backlinks to a website. The fact is, creating backlinks is hard work. There’s always that urge to look for a better way to do things. Just keep in mind that Google is always on the lookout for anyone who might be trying to “game” the system. Google’s algorithm, especially, looks closely at how relative the content on both sites appears to be. If there’s a close match, it’s a good link. If not, the backlink may appear to be a little suspect!
btw; All those SEO’s out there probably made some monies off clients, selling the sculpting thang to them. I know some are still insisting it worked, etc, but would they say in public that it didn’t work after they already took a site’s money to sculpt? How would anyone judge if it worked or not definitively? The funny thing is, the real issues of that site could have been fixed for the long term instead of applying a band aide. Of course; knowing the state of this industry right now, band aides are the in thing anyway.
In this illustration from the “PageRank Citation Ranking” paper, the authors demonstrate how webpages pass value onto other pages. The two pages on the left have a value of 100 and 9, respectively. The page with a value of 100 has two links that point to the pages on the right. That page’s value of 100 is divided between the two links, so that each conveys a value of 50. The other page on the left has three outgoing links, each carrying one-third of the page’s value of 9. One link goes to the top page on the right, which ends up with a total value of 53. The bottom right page has no other backlinks, so its total value is 50.
Regarding nofollow on content that you don’t want indexed, you’re absolutely right that nofollow doesn’t prevent that, e.g. if someone else links to that content. In the case of the site that excluded user forums, quite a few high-quality pages on the site happened not to have links from other sites. In the case of my feed, it doesn’t matter much either way, but I chose not to throw any extra PageRank onto my feed url. The services that want to fetch my feed url (e.g. Google Reader or Bloglines) know how to find it just fine.
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NOTE: You may be curious what your site’s or your competitor’s PR score is. But Google no longer reveals the PageRank score for websites. It used to display at the top of web browsers right in the Google Toolbar, but no more. And PR data is no longer available to developers through APIs, either. Even though it’s now hidden from public view, however, PageRank remains an important ingredient in Google’s secret ranking algorithms. 

There’s a need for a skilled SEO to assess the link structure of a site with an eye to crawling and page rank flow, but I think it’s also important to look at where people are actually surfing. The University of Indiana did a great paper called Ranking Web Sites with Real User Traffic (PDF). If you take the classic Page Rank formula and blend it with real traffic you come out with some interesting ideas……
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Because of the size of the actual web, the Google search engine uses an approximative, iterative computation of PageRank values. This means that each page is assigned an initial starting value and the PageRanks of all pages are then calculated in several computation circles based on the equations determined by the PageRank algorithm. The iterative calculation shall again be illustrated by our three-page example, whereby each page is assigned a starting PageRank value of 1.

3) Some people don’t believe things have changed. In fact, if things really changed substantially a year ago, you’d think a few of the advanced SEOs out there would have noticed this and talked about it. But nada. There are lots of reasons why the change could have happened and not been spotted. Sculpting might really have been a second or third order factor, as Matt calls it — not helping things as much as some have assumed. SEOs that spotted it might have stayed quiet. Or, it didn’t change — and still hasn’t changed — and sculpting does work even better than Google thought, so it wants to put out a message that it doesn’t, in hopes of putting the genie back in the bottle. That’s probably the major conspiracy theory out there.

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Google will index this link and see that ESPN has a high authority, and there is a lot of trust in that website, but the relevancy is fairly low. After all, you are a local plumber and they are the biggest sports news website in the world. Once it has indexed your website, it can see that they do not have a lot in common. Now, Google will definitely give you credit for the link, but there is no telling how much. 

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