Thanks for your TED talk, well said. Basically sums up all concerns for why water wheels wouldn't/shouldn't work. I think most folks here are on the same page: for water wheels to not be easy cheese for generating torque, fluid mechanics must change. But I think we're also limiting our imaginations by assuming what exactly "water wheel" means.
A water wheel does not just have to generate rotational energy, we can also supply rotational energy to the water wheel to turn it into a pump - take your water wheel, and combine it in the crafting grid with x number of buckets (probably water wheel in the center and 8 buckets surrounding it, because that seems like a reasonable cost), and you craft a scoop wheel. Attach the scoop wheel to a windmill, and now as long as the wind is blowing you are pumping water. Attach an aqueduct to the scoop wheel, and you can convey your water elsewhere. Plop a standard water wheel at the end of the aqueduct, and now you're generating rotational energy.
Honestly though, no matter what way you implement it, someone is going to find a way to cheese it. That's just the nature of games.
