It kind of is unfair. Why should someone get preferential treatment just because you happen to know them? Also there's a difference between recommending someone for a job and "Hey this is my buddy, don't look at her resume and we can also skip most of the interview process". There's different degrees of nepotism, they are all usually a bit 'unfair'. But then, life is unfair and so you just deal with it and do the best with whatever resources you have.
Because I know what sort of work they will produce, their attitude towards work, and their general behavior/personality and whether that will fit into the team without causing disruption or loss of productivity. That's why.
Business isn't about making everyone feel loved and accepted, business is about making money as efficiently as possible by providing a product or service that your customer want/need. Anything which furthers those goals is absolutely fair, especially things which are discriminatory only on the basis of knowledge.
They try to find the best candidate through the people they already know.
It's all about risk/reward. A random candidate will most likely be a higher risk than a know candidate.
Would you rather be roomates with a random person on craigslist or a friend of a friend?