A tone knob is typically either a low-boost/pass, high-boost/pass or band boost/pass (for bass, treble and mid respectively). They're basically like EQ bands, but they're a lot wider.

As for the point of using FX... it's just to get more sounds out. Adding a subtle hint of a modulation effect (phaser, chorus, flanger, tremolo etc) can just add a little depth to the sound and lift it out of the mix.

Not using effects isn't bad, and using effects isn't necessarily good. It's down to how you want to sound.