It works. I see that it works. It helps sustain a community. If you browse with showdead on, you don't run across a lot of dead content that doesn't deserve to be dead.
However I've personally been hellbanned by an automated script. (I think the problem was that I was posting fast enough to be mistaken for being a spammer.) But it turns out that there are people who browse with showdead on for kicks. One of them saw that I had been hellbanned, replied to me saying that I had, and told me to talk to pg about it. I sent pg an email, he confirmed that I had been hellbanned by accident, and he undid it.
Unintended mistakes happen. I am proof of it. If a mistake happens to you, it really helps if you are an established member of the community. But the automated scripts are improved over time, and I suspect that the error rate goes down over time. And I think that the mechanism on the whole does improve the site.