The idiot light is a response to an interface problem with gauges. The gauge is more informative for the technical user, but the average user (a.k.a. "the idiot") won't look at it or notice subtle changes, even a needle dipping into the red zone. The idiot light is indicates an exceptional condition, and is supposed to capture the (idiot) driver's attention in time for him to do something about the problem.
An ideal situation, from an informational viewpoint, would be providing both the gauge and the trouble indicator. However, most drivers are not mentally equipped to process even the minimal amount of information provided on today's dashboard.
Curiously, the immense popularity of the "... for Dummies" book series has taken much of the sting out of being an "idiot", so that the term no longer seems derogatory.