After the Dragoon's Cavern thing in Ironfist, you're stuck with a flute. I've played that game 250*10^millionth power times and I've never figured out what it's for. Once I read that a piper NPC in town was looking for one but I've never encountered it, and I always look for carpenters and stone cutters from the get-go. Any idea?

IIRC some items from MM6 (and MM7) had no use and in savegame editors you could add several items which were in the game files (but not in the game itself) to your inventory.
So this could be one of the no-use items.

You could try returning flute instead a harp to questgiver.
Except that, flute has no real use besides being stuff of legends like this. :)

Traditionally, the purpose of the flute is to make people ask about the flute and then get crazy responses back about alternate endings or secret passages and stuff.
Crazy responses is so 2002, so I'm just going to say "it serves no purpose."
It probably was going to be used in a quest or something, but a lot of stuff was dropped. The quest was probably dropped but not the item.

The flute however might have actually caused an easteregg since two games later you need to find a certain item - guess what? - and use it much later to enter a secret dungeon...