Reciprocal Links - whats the verdict?

Good content is always best. If you do want to exchange links a better strategy is (assuming you have a few 'feeder' sites on different IPs which you are likely to have if its a big SEO campaign) you get people to link to your 'money site' in exchange for a link from one of your feeeder sites. This way everyones happy, you get a one way, they get a one way and if your doing it right everyone gets a niche related link which in my experience is as good as a high PR link from an unrelated site.

I tend not to bother with reciprocal links. Do they work? Probably, but God (or Google) really knows how much.

There are much more powerful ways to boost your sites ranking other than reciprocal linking.

This is not to say that it does not work. I just don't bother with it.

Is there an argument that you should include some reciprocal links to at least give the illusion of natural link building? Or is that an old wives tale?

I really don't know to be honest. Does reciprocal links happen with natural link building? For example, if you had links to 50 sites on your website and they happened to be linking back to you, does this happening naturally? Does it look natural in the eyes of Google? I don't know. To me it doesn't seem natural.

What I would say though is that having a mish mash of all different types of links (including reciprocal) will be more beneficial than just sticking to one form of linking and thinking it will help. But I know you already know this!