I am amazed at how few guitar players have learned to use the volume knob. It's always cranked, all the time. Even the "really good" guys that come out to jams I host, they stand there blazing away at full volume all the time. If they're using my amp that I set up as you described, with the full volume set for solos and rolled back for rhythm, then they are too loud overall because they never back off for their rhythm work. And if I happen to bring in a tweed amp, that makes it even worse, because to really get the best out of tweed you HAVE to work the guitar volume. They are amazing amps when you know how to play them, they can be unforgiving when you don't.
It's hard to turn down your guitar when you need a good gritty sound, even for rhythm.... Turn it down sends less signal to your preamp or pedals and kills any drive/grit you need (or like). I have my rhythm settings all about the same volume (on all my pedals), so there is no volume increase when i change tones.... I use a boost pedal to bump it up a few notches for a solo. So turning down the guitar isn't really feasible for my situation in most cases, but I do if it's a soft part and my guitar is over-baring.
And when I say "competing with the other guitar player", I don't really mean it's a contest, I mean I have to turn up a bit to hear myself... Then he turns up to hear himself.... Then I have to turn up to hear myself. We dont do it to be louder than the otter guy, we do it to hear ourselves.
I do understand that some of you are used to playing without micing your amp... I guess I've just been spoiled by micing my amp the last 17 years and it's a shock and out of my comfort zone to not mic it. It sounds as if there's no right or wrong way to play out, just what you prefer and what you get used to doing.