Dreamhost is not wordpress.com. I have a paid account at Dreamhost and use wordpress and I’ve never seen the function you describe built into the basic wordpress package without adding a plugin. I would suspect that the version of wordpress offered on wordpress.com is not a bare-bones installation but rather a customised version.
I’m really amazed at some of the complaints / comments that have been coming through the boards recently regarding these free apps Dreamhost is now offering. What do you (not you, but I mean people who are using the free apps in general) expect from a free service? If you don’t like it, then there are other free services available such as the free blogs on wordpress.com. In fact, if you like the idea of having a social aspect to your blog (followers, easy integration with other blogs, etc) wordpress and blogger are probably the way to go. Setting up a blog on DH makes your blog a bit of an island.
Dreamhost also offers a 97 day money back guarantee, so if you (again, not you you, but everyone you) want to see what you get for paying, then try it for a few weeks and then ask for your money back. No one loses anything.
I’d suggest that, if you think Dreamhost is somehow hiding some functionality, then you download LAMP/WAMP/MAMP or whatever you like, install a fresh copy of wordpress from wordpress.org, and see what the full version offers on your own local machine.
I’ve moved all my development work to my laptop (rather than a hidden subdomain) and it doesn’t take much to do it. 30 minutes top. Let us know what you find.