You guys are describing how AFCIs were _supposed_ to work when the concept of requiring them was sold to the CMP. AFCIs were supposed to detect series arcs, meaning arcing connections in the circuit where the current is limited by the load.
I do not know the details of how arcing current is different from normal current flow; it simply is (somewhat) different, and with suitable signal processing you can detect the difference from normal current flow. However the problem of _reliably_ detecting this difference in a mass produced product with minimal error has not been solved. AFCIs simply cannot reliably detect series arcs and differentiate them from normal loads with intentional arcing (eg motors, switches, etc).
Instead they look for 'parallel arcs', in other words, arcing short circuits. Here the current is not limited by the load, and is only limited by circuit impedance. Parallel arcs _are_ a significant danger, and on this point AFCIs are a real improvement, because they can detect parallel arcing conditions that will not trip a normal breaker. We are talking instantaneous current levels that are well in excess of the nominal trip rating of the breaker, but which might have average current levels low enough that the breaker would take quite a while to trip. If the breaker sees current that exceeds some rather high threshold, _and_ it looks like an arc, then it opens.
Additionally, AFCIs have built in ground fault detection. This is not GFCI grade 5mA detection, but instead 50-70mA 'ground fault protection for equipment'. The idea is that any arc or fault to ground will cause the breaker to open, even with current flow far to low to cause an overcurrent condition.
Net result:
no detection of series arcs; no protection from 'glowing splices'
enhanced detection of parallel arcs; once things have failed and you do have a short circuit you get improved response
enhanced detection of short circuits to bonded metal; very low ground fault current will open the breaker.
See:
http://www.mikeholt.com/mojonewsarchive/AFCI-HTML/HTML/AFCITesterStory~20020826.htm
http://www.mikeholt.com/mojonewsarchive/AFCI-HTML/HTML/Arc_Fault_Protection~20020124.htm
-Jon