Back in the day, Scotland had squads filled with players playing in England, but we have to remember that the likes of Ardiles and Villa at Spurs and Thijssen (spelling?) and Muhren at Ipswich were very much the exception back then. The top flight in England, which was basically dominating Europe in the late 70s were filled with home international players. Hence these guys were playing against the best in the continent in high pressure games every season and a whole host of Scottish players (from memory Allan Evans, John McGovern (who was never capped?), John Robertson, Greame Souness, Kenny Dalglish, Stevie Nicol etc etc won European Cups and that's not even taking into account guys like Jordan, McQueen, Macari, Buchan at Manchester United (amongst others) who were playing against that standard of player week in week out.
We also qualified for the 1978, 82, 86, 90 and 98 World Cups and Euro 96 when the Scottish top flight was either 10 or 12 clubs. So, while I agree that the current system doesn't particularly encourage flair or excitement from our players, or time on the ball, arguably we've had more international success under this type of system than not.