The core division between fluff and crunch is the same as the division between "role playing" and "roll playing", or between "characters" and "power gamers." It is the same tension between the story telling and game playing that we have been discussing.
More importantly, though, you need to recognize that fluff and crunch are simply two different languages for describing the same actions. The action is managing to successfully haggle the merchant down to a reasonable price. The crunch details how that functions on a mechanical level, in which the stats of the two characters interact with the rules and the dice to generate a result, which then modifies a few other numbers and lists on the characters' sheets. The fluff details what the characters actually say to one another. In an ideal situation, the underlying causes and effects of the situation should be exactly the same. The players are able to choose to view it through the lens of the game, or the lens of the story, and allow the two interpretations to inform one another.
In the Book
In my opinion, it is extremely important to separate the fluff from the crunch in the game text. The most important reason for this is to make the rules clear. Text that is descriptive is rarely precise. "Engulfed in a huge ball of purple fire that harrows the very soul" is very evocative; the downside is that it leaves open questions like "How big is 'huge'?" and "What kind of damage is 'harrowing' anyway?" Adding the fluff text on top of the crunchy rules is awesome. Using the fluff text as the rules is destined for disaster.
And yet, I want to make it very clear that fluff is important. Not only is it deeply evocative and entertaining, but it is the context that makes the content make sense. Describing something as "burst 3; damage 3d6; fire type" is very precise and very useable in the game. But, it leaves an awful lot of the actual action wide open to interpretation.
That interpretation is important, but it is also important to recognize that it's flexible. Perhaps the single greatest innovation to come out of D&D 4e is the explicit concept of re-skinning. That is, taking a single piece of mechanics and wrapping multiple pieces of fluff around it. So, the previously described burst of fire could be a simple explosion, a swirling tornado of flame, or a sudden eruption of microwave energy. Separating the fluff from the crunch in the rules makes this re-skinning much easier.
At the Table
Once you actually sit down to play, the entire point of the game is to bring the fluff and crunch together. It is entirely possible to play an entire game using nothing but die rolls and mechanics. If you're going to do that, you might as well be playing a board game. It is also entirely possible to play an entire game without ever touching a die or referencing a character sheet. If you're going to do that, you're just writing a story together. There is absolutely nothing wrong with either activity. But both extremes are missing the target of a role playing game.
One of the most frequent objections to rules heavy systems is that they stifle creativity. The players are apt to resort to skill checks and similar rules instead of actually thinking through the situation and immersing themselves in their characters. The problem here is not the system, but lazy playing. Reducing a dinner party to a handful of Diplomacy and Sense Motive checks is exactly the same as reducing a combat to handful of attack rolls. Both are boring. But, commenters seem to be very quick to blame the boring combat on the players, and the boring dinner party on the system. The rolls for either should only ever serve as a skeleton of the action. Both require fluff to flesh them out.
One of the most common objections to rules light systems is that it is entirely too likely to end up with a plethora of interesting tactics that are actually mechanically identical. The description may be pulse pounding and hair raising, but the actual game play is boring and repetitive. As a result, all of the spice in the game is derived from negotiations with the GM. That requires a solid GM, solid players, and a solid set of common understandings. Honestly, that's a lot of pressure to put on a bunch of friends enjoying a simple hobby.
In the middle we use the story to drive the action, and the system to resolve it. Ideally speaking, decisions should be made purely for reasons that make sense in character. Those decisions should then be translated into mechanical terms and resolved. The resolution should then be translated back into story terms and applied to the characters. In reality, the interplay is more subtle and intricate than that. After all, we define our characters mechanically, so that is how we judge their strengths and weaknesses. We will also have access to other meta game knowledge which may shape our logic (whether or not it should). And, of course, the division between fluff and crunch in the mechanics is rarely going to be clean itself. So even in the act of rolling the dice, you will get some bleed between IC and OOC. The job of a player (and a GM) in a role playing game is to marry the crunch and fluff elements. As one quote I love put it, "If your rolls are not influencing your roles, and vice versa, you're doing it wrong."
The Inevitable Exception
For every rule, there is an exception. In the case of this rule, there is actually an entire class of exceptions. Recent years have seen a host of games hit the market in which the fluff is the crunch, and the crunch is full of fluff. Two I am most familiar with are FATE and PDQ.
The core of FATE is an extremely simple skill-based system. You have a skill at a certain rating, which you add to a die roll and compare to a difficulty. The sophistication and brilliance of FATE comes from Aspects. Aspects are key bits of fluff about your character, such as a battle cry or a sworn nemesis, that are explicitly listed on the character sheet. When you are doing something that is completely appropriate for your character, you can invoke an Aspect to do it better. When your character's nature might cause her to do something against your better judgement, the GM can compel the Aspect to make her give in to her impulses. (I am not doing the system justice here, but I hope you get the point.)
PDQ takes the same concept of turning fluff elements of your character into stats one step further. All of your character's traits, which is pretty much the whole character, are defined by the player using "fluffy" language. As you engage opponents and your environment, you use those traits as skills and resources. Because of the way you've defined them, the color of the action is baked into the mechanics. Further, when failure causes you to take "damage", you choose a trait to be affected. When a trait takes damage, a story hook is immediately generated (though not necessarily immediately seen) based on that trait. Or, as Fred Hicks likes to put it, you can punch Spiderman in his girlfriend.
These games take a few steps away from "traditional" games, and look to specifically remove the split between crunch and fluff. They do not do so completely, and it is still up to the people at the table to add flavor to the execution of the rules. But, adding that flavor becomes much easier and much more seamless.
When looking at fluff and crunch, it is good to remember that both serve vital, but very different, purposes in the game. The crunch is used to answer the who, what, where, and when. The fluff is used to answer the how and the why. To get the most out of your game, you need to not only use both, but find ways to make them work together.