The reason I ask this is people obviously place keywords in their content, so what purpose does it serve by placing those keywords into the WP tag system? am I missing something?
There are two main reasons. First (and foremost) WordPress uses them to collate posts between categories. For example, you might have a "Tech news" category which has all the tech news in it. That's great if someone wants news. But if they're reading a post about, say, an Android update and want to see more stuff on Android, how can they do it? You don't want to have 150 sub-categories in "news", so you tag it. They click the "Android" tag and voila, they have all the posts with the Android tag. Second, they do have a minor effect on SEO. The actual effect depends upon the search engine and, as the engines evolve, it becomes less and less. But having the same word appear across multiple pages of your blog - on pages where it actually applies to the content - is always going to carry a small benefit. If the tags are your keywords, you're standardising those tags across your entire site, which builds up the density and repetition in (to me) a more natural fashion: you're effectively declaring your keywords so that your visitors use them to find stuff, thus making them an integral part of the experience and ensuring the engines realise their importance. In absolute terms, I have no clue how much benefit they carry for SEO, but I don't see a down-side to using keywords as tags... unless you go completely mental and have 30 tags on every post!
I agree with TIEro -- there's still some small SEO effect, and keywording can be of good use for the authors themselves. It makes finding and attaching related materials much easier. Making some tag's description pages is also very beneficial, at least for those tags that coincide with your keywords