So the original models are, when unaltered, displayed at a lower resolution than they were designed?
This comes from the confusion about what the word "upscale" means.
It means taking a low-resolution image, and scaling it (stretching it) to higher resolution.
Allow me to demonstrate with an example, an NES screenshot, which I will "upscale" using a photo editor and a bilinear transform:
First, the original:
Now, the upscaled version, to 300% size:
That's all upscaling is, that's what it means. It means resizing the image to higher resolution. Some upscalers will use a higher quality transform that looks nicer on smooth images like video. A bicubic transform would have been sharper. But either way, you're not creating new data, because that's impossible. If you look at the upscaled image here, you can tell that there are no added details. It's just the same image, but bigger.
That's what the PS3 is doing, it's taking a low-res source image (from the PS1 in that case, not the SNES), and upscaling it to a higher resolution. While this probably looks nicer than not having it done at all (or using something like nearest neighbour filtering, like the PS3 did pre-update), it doesn't add new detail.
What the high-res patch for FF7 does is NOT upscaling, it actually renders the game at a higher original resolution (1280x960), so the image is higher resolution to begin with. This means that there IS more detail.
Of course, the background tiles in FF7 are a fixed resolution, so they're still scaled using nearest-neighbour, but all the 3D models (and the battle and world modules are entirely 3D) can take advantage of the extra resolution.
