As for each NPC having a life of its own... no game has that... not even GTAV...
As someone mentioned already, Bethesda does a pretty good job at it.
What we likely speak about are "persistent NPCs". They come at a price - they are simply and relatively not possible in city simulations. GTA has the same issue, drive around a block and see bums littering a side street at night, drive around a bit, actually, just go around two corners and come back and they'll be gone or replaced by others. There's actually a "persistence mod" for at least GTA 5 that ups the radius but it takes a toll on the processing.
Given how Bethesda NPCs are set up with their own schedule and often house or point of origin, this is why you will always be ultimately limited to either:
a) seeing too many at once and / or
b) having a fixed amount of NPCs in the game itself
It's a (or the) cost of current technology limits I guess. In a nutshell you can either have a limited range of persistent and tracked NPCs and / or a huge amount that is generic and recycable, not persistent in the world. We'd likely have to wait for a few new generations of hardware and maybe additional limited AI (or high-grade algorithm) support in development or maybe as live game component before we can reach a level that is nearing reality in that sense. The ultimate "life sim" would be a game where you have a game world where a large part if not all of the NPCs you see are unique, living somewhere, doing things throughout the day, named (even if not shown on screen, meaning Guard XYZ is shown but the person actually has a name and address) and they eventually retreat to their dwelling aka homes. A simulated daily work schedule, if they have work, and maybe special activities - like unwinding somewhere occasionally. And every (or a crapload of) NPC would be tracked at once.
So far, this can at best only be mimicked to various but limited degree or be covered online by players who do this job. Think of RP games or setups with sandbox elements or sandbox building elements, to be precise, so you can literally carve out your home. Even then it's often not thousands. Or maybe, but not at a time in a given place (unless "Dual Universe" or similar future games of that design type become successful).
But those would be players, still, not NPCs.
So we remain here, waiting and pondering when (or if) we reach this level of technology giving us a "Sims on steroids" plus the usual epic plots.
We can only wait. This will require some sort of AI and higher processing power down the line. Imagine that level, however. When perhaps at one point you no longer need to voice very line, when you can branch out and dynamically have voice lines generated as if coming from a voice actor who manually voiced the line - AI can do the rest for unplanned dialogue and reactions. Voice actors give the "base line", AI can fill the rest.
You could walk up to a random house (that, through new technology, actually is 'rendered' and has an interior even if the place has no meaning for the main plot nor even a side quest), knock and ask who lives there because you look for someone, even dynamically ask for names, or, heck, even use your own voice as new dialogue.
Alright, I'm noticing this is really stuff of the future. Questionable if I get to see THAT level of depth from NPCs or AI and of course the underlying technical aspects needed, but one can dream.
To get back on topic and to close this post, it doesn't have to be purely online (meaning real player interactions) nor that crazy level with AI and dynamic NPC personalities to make pedestrians or generated NPCs somewhat more thrilling. With more processing power, we can slowly get closer to a believable realistic level and not NPCs who completely serve as filler as they pop in and quickly pop out.
Persistence for your average NPC would be a start in future games, then upping the scale of NPCs in an area or the worldspace itself. I assume we get to see notable progress within the decade or the next. Surely some big steps will be made until projected technological singularity in the upcoming 40s or 50s or so.