Comment by JohnFen

That's how it was done on the internet before DNS was developed. It's also how I still do it for a lot of the machines on my home network. As you note, it's faster and reduces network traffic.

You do give up some good stuff, though. Load-balancing can be more tricky, for instance. And if any of the machines change their IP addresses, or you add new machines to the network, then you have to distribute a new hosts file to all of the machines that aren't using DNS.