Tyrant, you're instigating the derailment as much as queen is. If you want the thread to get back on track, perhaps you should engage in the original discussion, perhaps a recap.Oblivion NPCs were given AI 'packages', which basically tell them what to do, where, when, and for how long. These things are not simulated while the player is away. They are transported to where they need to be, made to do what they need to be doing, and given an amount of time that they continue doing these things when the game loads the area, this is part of what is being loaded during the load screen.
Fable:TLC isn't all that dissimilar. NPCs are given village tasks, they do things at certain times. Turn the village lights on/off, kids go to school, adults go to work or clean the house, some people stock crates/cords of wood/whatever, go to the tavern and drink, go home and sleep. They interact with each other in a number of given ways and guards patrol along a given path, just as they do in Oblivion.
Though I couldn't say what happened in Fable II, I've not personally experienced that game myself and haven't examined the data files closely enough so I wouldn't know how that one is set up. But what you're talking about makes it seem like Morrowind, where NPCs typically just stand in one place and only wander around that one spot (save for the guards) except when a script tells them to do otherwise. I very much doubt that's how Fable II is set up, and I doubt even more so that this is how it will be done in Fable III.