Stirling,
For a definitive answer to this, ask the same question in the Yahoo Gecko group. You will probably get an reply by THE expert, Mariss Freimanis, he is very good at explaining such problems.
As only half an expert, I think you are probably right in theory, but other factors come into the equation. Say you have a stepper with 200 full steps and a driver set at 10 microsteps and this setup yields 1000 microsteps per mm i.e. each microstep is 0.001 mm and a full step is 0.01 mm. Then if you were running in full step mode on two axes, you would generate a staircase of 0.01 steps, as you suggested. However, this would only occur on a G0 move, as at cutting speeds, the stepper will probably be in microstep mode, so your staircase steps would be too small to make any practical difference. . Mechanical inertia, cutting tool deflection and any latency in the driver and software will smooth this out. If you need a perfectly smooth finish with a stepper, then you are going to need a setup with more steps per mm.
As I understand it, a well set up servo will plot a mean path and so will not suffer the same problems.
Ian (who is still climbing the learning curve.

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