Regarding physics, i think that's possible. AI is the harder problem. Scripting won't cut it, but robotic simulation of characters is possible. Working on self balancing locomotion is a hobby of mine, just sadly i don't have much time for that.
The AI becomes very difficult especially on interactions involving multiple characters. Melee combat for example. That's not in reach for me yet, but there is related ML research which really looks good. Not sure how practical this already is, but seems more a matter of research than a requirement on more powerful HW.
The best implementation of those ideas I've ever played was RainWorld. The game limited its problem space by sticking to somewhat low fidelity 2D world, but within those bounds it was incredibly ambitious with how much character movement was physics driven, and how simulation-based and uncontrolled its gameplay is. Its AI is equally complex and layered. The game can be an excellent experience, although often unfair and patience-testing. I think its survival aspects and souls-like-difficulty and punishment are at odds with the incentive for experimentation. Only after people have beat the game a vouple times do they feel confortable enough to be more daring and not care about dying.
After we have this, we would need something like a real time virtual director to come up with funny action for any situation. Basically a system analyzing the player and his current environment and actions, finding opportunities to counteract or assist in amusing ways. Something to fake emergent behavior, but overcoming current limited AI approaches.
We definetly need more work and research on that area too. Left4Dead had a system literally called director, to try and adjust enemy and item spawn to try to better mold that roller-coaster rithym of High-low-high-low intesity pacing. But that scope is pretty moderate in my opinion.
The nemessis system and the random encounters in open world games are other glimpses of that type of atempt which I see slowly becoming more robust and ambitious, but they have a lot of room to grow still. Its a shame that nemessis was patented. Pretty lame practice from the dev/publisher to cling to that.