Why is earth used for ground? Literally earth?
In a nutshell
Electricity is not supposed to flow through ground stakes in normal conditions. It doesn't mean its resistance is high, it's actually surprisingly small. That branch of the circuit is simply not closed normally.
In details
A ground is a reference point. You could litterally take any net in your circuit which is supposed to stay at a steady voltage and call it ground. After all voltage sources create a difference of potential (called a voltage) between two nets, regardless of what their potentials are - if they're both fixed externally, there will be a conflict and bad things, but if one of them is fixed the other potential will change accordingly. Generally the ground is taken such that we work with positive supplies predominantly, e.g. ground on the - terminal of a rectifier bridge. It doesn't mean all the current flow through that, it's only a reference.
The Earth has mainly a person protection role. No current is supposed to flow in the Earth because the actual supply circuit is isolated from the Earth, however what if this isolation is compromised (wires eaten by rabbits, children shoving their fingers in sockets...)? Everyone is indirectly connected to Earth (no isolation is perfect), which means that that circuit will now be closed and the only thing that will limit the current going through whatever is closing the circuit (e.g. people) is its internal resistance. Depending on the environment, that resistance can be sufficiently low to kill someone; refer to this thread about what voltages are considered safe. To prevent that, every enclosure is connected to Earth (a Earth-R-Earth circuit has a near-0A current), and the electric supply has a residual current device that compares the current going in and out, and cuts off the supply if there is a leak (through Earth).
The Earth is used for an equi[reference]potential supply The electricity provider needs to protect its people too, so the upstream supply is also referenced to Earth. Just like everywhere else. So what happens if the Earth is not a good conductor and its potential is not homogeneous? Users could be in contact with 2 different Earths, which can be a high difference of potential (=voltage). Thankfully, moist in dirt and water patches are good conductors, but above all the equivalent cross section of this fictive conductor is massive. Except during short upsets such as lightning, it has an excellent homogeneity in potential. Why use another conductor for ground which will use more copper and actually be less effective if we can use what's under our feet?
The Earth is also useful as a protection against lightning: lightning is just like any dielectric/isolator breakdown, it occurs where the resistance between the charged cloud and the Earth is minimal (see this amazing GIF). High trees, towers etc., and we can't risk relying on luck alone so highly conductive spikes are used to attract lightning, and the Earth is used to dissipate that energy. Loosely said. Normally lightning has enough current flowing to create through Earth and across human legs a voltage high enough to kill them, so it is spread out more evenly.
As usual, I'll warmly welcome anyone correcting me if not accurate.
Dirt without moisture (water content) is NOT a very good conductor and NOT a good ground. So you are right, dirt is not a very good conductor, by itself, and therefor by itself not a good ground. Dry sand & rock are poor grounds too.
Frozen earth isn't a good ground either which is why it is necessary to use grounding stakes long enough to reach below the "frost line". Ice is not a good conductor. In fact ice is approximately an insulator
In fact PURE liquid water is not a conductor at all. It's the mineral contaminates in water that conduct electricity, or rather the ions in those minerals. Salt water has lots of free moving ions, so salt water is very conductive.
Weirder still, pure dry salt doesn't conduct electricity either.
It's all about FREE MOVING ELECTRONS in a conductor and in a solution FREE MOVING IONS.
In pure water there are no free electrons and no ions.
In pure salt there are ions but Sodium Na+ and Cloride CL- ions can't move, ionically bonded to each other.
The polarity of water molecules enables water to dissolve many ionically bonded substances. So liquid salt water contains free moving Na+ and CL- ions. Any other ionic mineral dissolved in water would probably make a good conductor too, in general.
If you freeze that salty water, two things happen. First ice (solid water molecules) tend to exclude the ions Na+ and CL- from the ice crystals. Second, even if the ions are not excluded they can not move enough anymore to transfer charge. Therefore no current.
So grounding into the earth only works well when the soil is right. Often that is moist soil creating a water solution containing free moving ions.
Read this article: "Achieving an Acceptable Ground in Poor Soil" It talks about how in Hawaii the volcanic soil is a problem for creating a grounding system.
http://ecmweb.com/content/achieving-acceptable-ground-poor-soil