1. Who first coined this phrase?
2. In what scale was he/she working?
I'm pondering how the 3 foot rule works in the range from Z scale or 1:1 scale.
It's a personal choice over the amount of detail you'd like to see, or the realism. As you must know, some models offer more details, and of course they cost that much more. Others have details added by someone who can do it and who appreciates the increased realism. But, there comes a point where there are diminishing returns.
If one likes model photography, as I do, one must either suspend disbelief when he sees an HO model in an otherwise good image, or he needs to increase realism by adding details until the scene 'pops'. For Z scale, one would need to have one's eyes about one foot away, and the subject would need good lighting, to see added details such as number boards, builder's plates, rivets, etc.
The human eye's ability to see details is a function of the diameter of the iris. In optical systems, of which the eye is one, the diameter of the main objective or iris sets the limit of how fine a separation of two small items set very close to one another can be detected. For example, the human eye can often tell that the North Star, or Polaris, can be seen as two objects. What isn't seen until one uses a much larger iris or objective lens, such as on binoculars, is that one of the pair is also binary in nature. So, a total of three stars comprises the North Star!
To make this perhaps more understandable, suppose you typed two periods very close to one another on an otherwise blank page. You could back up until they appear to be one elongated period, and eventually you would see only a dot if you backed up even more. Now, take a small pair of opera glasses, maybe with 4X magnification and 20 mm objective lenses up front, and you'd easily see the pair once more. You've magnified the image, yes, but you've also greatly widened the 'aperture' of your optical system with those twin 20mm objective lenses.
So, proximity to the object, separation, incident light, and the distance across the main aperture of the optical system all play a part in showing details.