It is a lot more complicated than that...
Small and medium-sized parties flourish, yes: you vote for the LBO Party, and lo and behold an LBO party member gets up in the legislature and makes speeches.
But does anything happen after said politician makes speeches? Probably not. You still have to assemble 51% of the vote to pass something.
Proportional representation systems have tended to lead to near gridlock: a lot of pulling and hauling among coalition partners, a lot of governments dissolved with the same old faces then showing up, reshuffled, in the next cabinet. A lot of people making speeches for the camera to cater to their particular niche of the electorate: a parliament of windbags. The phrase "parliamentary cretinism" was coined to describe legislatures elected by PR...
A lot of cynicism about politics as a result: think of Italy. Yes, you get a windbag for your vote. But that's about all you get--and you never understand why your party is or isn't in the current governing coalition.
On the other hand, first past the post systems generate either elective dictatorships (as in Britain) or elective dictatorships moderated by constitutional machinery (as in the US): if the election tips the balance from one side to another, politics *moves* and moves a lot more than in PR systems. And in order to make politics *move*, you need to compromise: PR tends to generate politicians of rigid ideological purity who make speeches, "conviction" politicans; FPTP tends to generate "elastic" politicians who make deals, "consensus" politicians.
On the third hand, first past the post systems do tend to disenfranchise minorities with strong but different interests than those that are the focus of the battle between the barely-left-of-center and the right-of-center coalitions that emerge in first past the post countries. (Thinking seriously about this was what got Lani Guinier in big trouble with the mainstream.)
Germany, France, and, recently, Israel have tried to split the difference: to get the advantages of giving minority points of view a voice *and* the advantages of making elections mean something. I think that Germany has done rather well at finding a good balance. I think France and (recently) Israel have done badly.
Brad DeLong