So, I've reached the city near the beginning of the game and it's pretty ridiculous that I can steal, for example, the blacksmiths wares and sell them right back in plain sight. I can raid the castle kitchen, steal everything, and no one bats an eyelid. I can jump onto tables, rob wall-mounted weapons, and run away with them, scot-free.

All this is pretty immersion breaking. Am I doing something wrong? Some setting I messed up? Or is this game set within a post-scarcity utopia and I just haven't been told yet?

You are entitled to everything this world has to offer. Because... Pause... GASP, you are THE GUARDIAN!!! Normally, the cheapskates should cater to each and every one of your desires and demands, since you are there to save their sorry/pathetic/pitiful asses, but the lowlives that they are, even accuse/insult you (like the priest early on, calling you names)!

You steal by using Pickpocket ability, which needs raising a lot of the Sneak skill, i think? If you fail the check and the target notices, they attack you. Also, they attack you if you get an item from a private place that you shouldn't be, like behind closed doors, locked doors and private quarters (gary the banker's house).

Before killing the final boss and ascend with the patron god on his dimension, i even killed everything living throughout the world (traversed the levels purging everything still moving). And your concern is simply using their (not so valuable, after all) valuables and helping yourself to their trinkets???